Enhancing diplomatic and economic ties: Ghana-Czech Republic Double Tax Agreement to come into force in 2018

Ghana signed another Double Tax Agreement (DTA) with the Czech Republic on 11 April, 2017.

Ghana already has DTAs in force with Denmark, the United Kingdom, Belgium, Italy, South Africa, Switzerland, Netherlands, France and Germany.

DTAs with Mauritius, Singapore and the Czech Republic are in the process of being ratified by Parliament and are likely to come into force on 1 January, 2018.

As our country continues pursuing its agenda of developing into a stable and predictable (tax) environment for local and foreign investors, we believe that signing new bilateral trade agreements such as these will encourage and support foreign investment.

Further, with the proposed tax cuts in the 2017 Budget and Policy Statements, it has become imperative for the Government of Ghana to widen its tax net and seal tax loopholes. Similar to the other DTAs in force, the Ghana-Czech Republic DTA is expected to encourage foreign investment and trade exports by eliminating double taxation of income. The agreement will also serve as a basis for exchange of information between both countries with the view to collecting the correct taxes from residents.

Bilateral relationship between Ghana and the Czech Republic

The bilateral relationship between Ghana and the Czech Republic dates back to the 1960s when the Czech Embassy was set up in Ghana. Over the years, both countries have entered into various agreements to foster trade and improve security and defence.

Examples of such cooperation agreements include the 2013 Memorandum of Understanding (MOU) for the construction of a 350-megawatt gas power plant and an organic and inorganic fertiliser plant in the Western Region, financed by BIGA International Limited and the European Tool Cooperation. This project was undertaken to boost agricultural productivity and create over 1,000 new jobs in Ghana. Recently, both countries have commenced discussions to review the above-mentioned MOU in order to incorporate recent developments in areas of defence and security, industries, and the provision of modern equipment, medical supplies and training for personnel of the Ghana Armed Forces.

The Czech government has also recently expressed its readiness to support the Ministry of Trade in developing the Kumasi Shoe Factory to modern standards. The factory restarted operations in 2013 with Czech funding.

It is expected that the DTA will further improve the existing economic and diplomatic ties between the two countries.

Provisions under the DTA for Ghanaian residents. Elimination of double taxation

The Ghana-Czech DTA eliminates double taxation of income and/or capital gains earned by a Ghana tax resident person who has suffered tax on that same income in the Czech Republic. The double tax is eliminated by the granting of a foreign tax credit. The foreign tax credit to be utilised in Ghana would typically be equal to the tax already paid in the Czech Republic and should under no circumstance exceed the amount of tax due on that income in Ghana. The provisions of the agreement further ensure that, in most circumstances, the highest amount of tax payable in the two countries put together does not exceed the maximum tax payable in any one country.
It should be noted that the Ghanaian Tax laws require that only entities that are resident in a DTA country and whose ownership is made up of more than 50 per cent of residents of either named DTA country may claim the provisions of the DTA.

Taxation of business income

Profits of Ghanaian businesses carrying on business in the Czech Republic may be assessed to tax in the Czech Republic. The taxable profit, however, is limited to the profit sourced in either country through a permanent establishment (PE) of the Ghana entity in Czech Republic or vice versa.

The determination of the profits in both countries shall be carried out in conformity to the arm’s length principle set out in Article 9 of the DTA. The foreign tax credit shall be limited to the maximum amount of tax payable on that profit in Ghana, and no credit shall be carried forward in respect of that foreign tax paid.
Taxation of investment income.

A Ghanaian tax resident individual receiving dividend income from a Czech Republic resident entity shall pay tax on the dividend earned in the Czech Republic at a maximum rate of six per cent.

Interest income received by a Ghanaian tax resident person in The Czech Republic may be taxed at a maximum rate of 10 per cent. In Ghana, however, interest payments are taxed at eight per cent, meaning that the foreign tax credit received may only be relieved in Ghana up to eight per cent. Interest paid by a Ghanaian business in Czech Republic to the Government of Ghana, its subdivisions and the central bank (typically exempt from taxes), paid in connection with sale on credit of merchandise by a Ghanaian business or any loan or credit facility provided by a bank in Ghana, is, however, taxable in Ghana. Interest paid by a branch in Ghana to its parent company in Czech Republic is also exempt from tax in Ghana.

Royalty payments and payments for management, consultancy and technical service fees by a Czech resident person to a Ghanaian tax resident may be taxed in Ghana and vice versa. The maximum rate of tax applicable in these transactions is eight per cent. Ghana tax resident persons who pay tax on royalty and service fees received in The Czech Republic, to the extent that these incomes are also taxable in Ghana, can claim the foreign tax credits.

Capital gains realised from the alienation/sale of shares in a Czech entity, immovable property and movable property forming part of the property of a PE in Czech Republic, may be taxed in The Czech Republic.

Gains from the alienation of vessels (ships and aircrafts) and containers for transporting goods and merchandise in international traffic shall be subject to tax in the jurisdiction considered as the place of effective management.

Taxation of employment income and other types of service incomes

Employment income will only be taxable in the country of source, if the employee exercises his/her employment in that country. Employment income arising in either state may be exempt from tax subject to certain rules provided in the DTA.

Employment income earned from exercising employment aboard a ship or aircraft in an international traffic may be taxed in the country considered as the place of effective management.

Income earned by an independent professional service such as a board director, an entertainer, a sportsman from his/her personal activities in any of the DTA countries is taxable in the country where the activities are exercised. The above notwithstanding, income earned from such personal activities within the framework of cultural or sports exchanges agreed by both governments and carried out for non-profit making purposes are exempt from tax in both countries.