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Gov't seeks revision of Dutch agreement

Finance Ministry eyes untaxed dividends flowing to Holland

By Markéta Hulpachová
Staff Writer, The Prague Post
June 27th, 2007 issue

In a move that could amount to a financial windfall for the Czech Republic, the government is seeking to amend its double taxation avoidance agreement with the Netherlands.
The Finance Ministry is currently in its fourth round of talks with the Dutch government on changing the agreement, which prohibits the ministry from taxing dividends flowing from the Czech Republic to Dutch-based businesses. Ministry officials say the current agreement is costing the domestic market billions of crowns in taxes.
“We have initiated negotiations to change the treaty, but it’s next to impossible to redraft the entire text,” said Deputy Finance Minister Dana Trezziová.
The Czech Republic first signed the agreement in 1974. Known for its favorable trade conditions, the Netherlands has similar treaties with more than 80 countries.
Signed on a bilateral basis, the specifics of these treaties vary. In the case of the Czech Republic, the treaty exempts Dutch-based companies from paying taxes on locally earned dividends. These dividends are further protected by European Union law, which grants tax exemptions in transactions between EU companies in which one business owns at least 10 percent of the other.
While monitoring financial transactions between Dutch-based companies and their Czech subsidiaries, the Finance Ministry found that “the concerned companies are often unable to prove that their transactions weren’t carried out for the sole purpose of lowering tax requirements,” Trezziová said.
Instead of reworking the entire document, the ministry wants to alter one of the agreement’s key aspects. The current document clearly defines a limited set of income subject to taxation, while the amendment would allow the Czech government to fluidly tax more types of income, including dividends. Taxes paid domestically would then be discounted from the taxes owed by companies in the Netherlands.
Though they continue to correspond with the Netherlands, Finance Ministry officials are doubtful that the country will meet their demands.
“Even altering this one protocol is problematic,” Trezziová said. “The Netherlands wants one-sided benefits.”
While protected by a web of tax treaties, entrepreneurs with companies headquartered in the Netherlands pay a domestic flat tax of 25.5 percent on dividends.
Going Dutch
Tax benefits and favorable business conditions make the Netherlands an attractive destination for some of the most affluent Czech-owned corporations.
Large Czech-controlled companies headquartered there include PPF Financial Group, owned by the wealthiest Czech, Petr Kellner; the holding companies of energy tycoon Karel Komárek’s multinational conglomerate KKCG; and Zentiva, a leading domestic producer of generic pharmaceuticals, Slovakia and Eastern Europe.
Companies whose business activities span multiple countries are lured to the Netherlands’ vast network of international tax treaties. When a KKCG subsidiary in the Czech Republic or Russia wants to transfer dividends to its Dutch parent company, the transactions are essentially subject to the same exemptions.
“Our corporation has branches in 15 countries, so it’s logical that it’s based in Amsterdam, one of Europe’s most significant business centers,” said KKCG group spokesman Dan Plovajko.
Even when most of their business activity does not take place in the Netherlands, corporations with holdings in the country are able to reap the benefits of its laws.
“The Netherlands is a traditional jurisdiction for holdings,” said Michal Friedberger of Akont, an advisory firm that helps Czech businesses start offshore holdings. “The businesses entrepreneurs begin there become parent companies for their Czech subsidiaries.”
Aside from tax benefits, corporations are drawn to the Netherlands’ legal stability. Long established as an entrepreneurial Mecca, the Netherlands boasts a well-developed, effective legal system.
“Entrepreneurs know what to expect from Dutch authorities,” Friedberger said. “The country’s position on fiscal matters doesn’t change from one year to the next.”
Dutch-based companies with business activities in the Czech Republic are also protected by the countries’ bilateral investment protection agreement. If the Czech government damages a Dutch-based company’s investments, the agreement gives the company more legal protection than if the firm were based in the Czech Republic.
Given all the benefits, more domestic companies are considering the move to Holland, including Sekyra Group, the country’s largest real estate firm.
“Holland provides greater legal securities and a consequent emphasis on business ethics,” said Sekyra Group spokesman Radek Polák. “In [the Netherlands], you get what you’re promised.”

Markéta Hulpachová can be reached at mhulpachova@praguepost.com


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