Taxation in the Czech Republic

Review

The Czech Republic is one of the most developed states of Central Europe in economic, cultural and social terms. Since joining the EU in 2004, the Czech Republic has been one of the leaders among the countries of the European space in terms of economic development. The state successfully implements the EU recommendations into national legislation and is an open country for attracting investments. Given the geographical position of the state, the Czech Republic is widely used for doing business abroad.

Corporate Income Tax

Taxation of residents and permanent establishments of foreign companies in the Czech Republic is carried out on the principle of global income. Income of non-residents is taxed only at the source of origin in the Czech Republic.

Residents are business entities registered in the Czech Republic, as well as companies whose management is located in the Czech Republic. Permanent representative offices are enterprises with a permanent place of business in the country.

The Law of the Czech Republic "On Income Tax" defines a "fixed place of business" specifically for foreign entities. It is treated as the place of business of the payer, who is not a tax resident of the Czech Republic. This could be a workshop, office, store, gas station, processing or manufacturing plant, construction site, or installation project.

For some types of activities, the law "On income tax" determines the period of activity of branches and representative offices, during which the place of business is reclassified from non-permanent to permanent. This applies to such activities as construction and installation work, as well as the provision of certain services. If the period of operation of the company exceeds 6 months out of the last 12 calendar months, then such activity is already treated as permanent, unless otherwise provided by international agreements. Companies that carry out permanent activities in the Czech Republic pay income tax to the Czech budget.

The standard income tax rate is 19%. There is a reduced corporate tax rate for underlying investment funds of 5%. There is a zero income tax rate for pension funds.

Companies investing in development can take advantage of tax incentives if they invest in the following areas:

1. industrial production;
2. technology centers;
3. software development centers;
4. data centers;
5. business support centers and call centers.

For each group, there are requirements for the minimum investment, the number of new jobs, the time of use of assets and the operation of the business.

Tax incentives are provided, for example, in the following forms:

1. exemption from income tax for up to 10 years;
2. grants for training and retraining of personnel and job creation;
3. exemption from property tax;
4. cash grants for capital expenditures.

The total cost of tax credits can cover up to 25% of the relevant costs.

Job creation grants are provided in regions with low levels of employment, and real estate tax exemption is provided in special industrial zones. There are no tax incentives for companies operating in Prague.

Research and development or R&D expenses can be treated 2 times in the calculation of taxable income for tax purposes, once as a deductible expense and the second time as a special tax credit. Deductible expenses include:

1. direct costs;
2. depreciation of assets used in R&D;
3. other operating expenses directly related to R&D.

Unused R&D tax credits are allowed to be carried forward for up to 3 years.

In the Czech Republic, the tax period for income tax purposes is 1 year. Taxpayers can choose either a calendar or another reporting period equal to 12 months. The annual report is submitted within three months after the end of the tax period and, by decision of the authorities, can be extended for another 3 months. For companies that are required to undergo an audit, the deadline for submitting an annual report is 6 months.

The terms and amounts of income tax payment depend on the tax liability of the payer for the previous year.

Компании с налоговым обязательством за предыдущий год больше 150 000 крон обязаны уплачивать авансовые взносы ежеквартально в размере 25% к 15-му дню последнего месяца квартала.

Companies with a tax liability for the previous year of more than 150,000 kroons are required to pay advance contributions quarterly in the amount of 25% by the 15th day of the last month of the quarter.

Companies with a tax liability of less than 30,000 kroons for the previous period pay income tax once a year until the deadline for submitting the annual report.

Income tax overpayment is returned within 30 days from the date of filing an application with the tax authorities or is taken into account against future liabilities.

Capital gains tax

Capital gains include gains from the sale of assets, shares and equity interests. Capital gains or Capital Gains are subject to income tax at the rate of 19%.

The financial result from the sale of shares or equity in a subsidiary located in the Czech Republic is exempt from taxation if the parent company owns at least 10% of the subsidiary for more than 1 year. In this case, the parent company must be located in the Czech Republic, the EU or the European Economic Area.

Capital gains received by a Czech parent company from the sale of shares in a non-EU subsidiary are also exempt from taxation if the following conditions are met:

1. there is a tax agreement between the Czech Republic and a third country;
2. the subsidiary has an organizational form of business comparable to that used in the Czech Republic, for example, a joint-stock company or a limited liability company;
3. the parent company owns at least 10% of the shares of the subsidiary for more than 12 months;
4. the tax rate of the third country must be more than 12% in the year of the sale of corporate rights and in the previous year.

The exemption from taxation of profits from the sale of corporate rights does not apply if, at the time of the sale of the asset:

1. the subsidiary is in the process of liquidation;
2. the parent or subsidiary company is not a payer of income tax;
3. a parent or subsidiary company may use preferential income taxation.

Non-resident income from the sale of corporate rights with origin in the Czech Republic is taxed at the standard rate, unless otherwise specified in a tax treaty.

Withholding tax at source

Dividends

The standard rate of dividend payment in favor of resident legal entities and individuals is 15%.

Companies are exempt from withholding tax when paying dividends if the Czech subsidiary pays dividends to a parent company that is a resident of the EU/EFTA (European Free Trade Association) and owns at least 10% of the subsidiary for more than 12 months, counting up to date of distribution of dividends. The same conditions apply to resident companies.

An exemption regime may be granted for the distribution of dividends by subsidiaries from third countries in favor of the Czech parent company, provided that:

1. there is a tax agreement between the Czech Republic and a third country;
2. the subsidiary has an organizational form of business comparable to that used in the Czech Republic, for example, a joint-stock company or a limited liability company;
3. the parent company owns more than 10% of the shares of the subsidiary company for more than 12 months;
4. the tax rate of the third country must be more than 12% in the year of the sale of corporate rights and in the previous year.

For the purposes of these conditions, the terms “parent” and “subsidiary” are governed by Directive 2011/96/EU.

The dividend tax exemption regime is not granted if:

1. the parent or subsidiary company is exempt from income tax, or applies a zero rate;
2. the amount of payment of dividends at the source of income can be deducted from the taxable base.

The Czech Republic has tax agreements with 87 countries around the world. Their conditions take precedence over the provisions of the directives and the conditions of national legislation.

Companies registered in countries with which no tax treaties have been concluded, no exchange of tax information is carried out and it is not possible to confirm the status of the tax resident of the ultimate owner, are taxed at a rate of 35% at the source of income in the Czech Republic.

The regime of a tax credit or exemption from payment of tax already paid in another country is granted if it is provided for in tax treaties. If such a norm is not provided, then income tax paid in another country can be taken into account in tax expenses next year.

Interest and royalties

Interest and royalties paid to a non-resident are taxed at the standard rate of 15%, unless otherwise provided by a double tax treaty.

The rate of 35% is used when paying dividends to non-residents of those countries with which there are no tax agreements or there is no automatic exchange of tax information.

Reduced rates are provided for by tax treaties and mainly apply to interest payments to the state or public financial institutions.

Royalties to parent companies that are part of the EU/EEA may be exempt from tax if the parties comply with the current Parent-Subsidiary Directive. Such a procedure must be agreed in advance with the Czech tax authorities.

Interest and royalty income arising from a relationship between two Czech residents is included in the recipient’s taxable income and is taxed at the standard rate, with no withholding tax.

The following rule applies to the payment of interest and royalties. Interest and royalties transferred by a resident of the Czech Republic in favor of an EU resident are exempt from taxation under the following conditions:

• The EU resident is the ultimate owner of the income;
• the parent company owns more than 25% of the subsidiary for at least 24 months before the due date;
• the income does not belong to a permanent establishment in the Czech Republic.

Value Added Tax in the Czech Republic

Value added tax or VAT in the Czech Republic, like other EU countries, is governed by the general principles of value added taxation and the VAT Directive of the European Union, as amended by domestic legislation.

The threshold value for registration as a VAT payer is 1,000,000 kroons of taxable transactions for the last 12 months. For non-residents, there is no threshold for registration; when supplying goods and services to the Czech Republic, they are required to register for VAT.

A simplified registration procedure is used for residents who do not conduct commercial activities in the Czech Republic.

The standard rate is 21%. The reduced rate is 15% and applies to the following groups of goods and services

• food products, except for basic baby food and gluten-free food products;
• soft drinks;
• takeaway food;
• water supply;
• medical equipment for the disabled;
• child car seats;
• some domestic passenger services;
• some books, excluding e-books;
• cultural events, shows and amusement parks;
• creativity of writers and composers;
• social housing;
• renovation of private houses;
• cleaning of private households;
• some agricultural stocks;
• hotel accommodation;
• sports events;
• use of sports facilities;
• social services;
• provision of funeral services and cremation;
• medical and dental care;
• domestic help service;
• firewood;
• some pharmaceuticals;
• household waste collection and street cleaning;
• waste and waste water treatment;
• meals in restaurants and cafes;
• cut flowers and plants for ornamental use and food production.

At a rate of 10%, transactions for the supply of such groups of goods are taxed:

• a certain list of baby food;
• gluten-free food;
• newspapers and periodicals;
• some pharmaceutical products;
• some books, excluding e-books.

For deliveries within the EU, export operations and international transportation of goods, a zero tax rate is applied.

VAT reporting is submitted electronically by the 25th day of the month following the reporting month or quarter.

Distance selling и MOSS

Electronic sales to individuals or non-VAT payers are subject to VAT at the location of the buyer. This regulation has been in effect since January 1, 2015.

For non-resident companies engaged in remote sales of goods and services, a threshold of 1,140,000 kroons per year is set, after exceeding which they are required to register as a VAT payer with the tax authorities of the Czech Republic or apply the MOSS (Mini-One-Stop-Shop) regime at the place of registration.

Transfer pricing

Section 23(7) of the Czech Income Tax Act states that if the prices agreed between related parties differ from the prices agreed between parties in an unrelated general business relationship under the same or similar terms and the difference is not properly documented Therefore, the payer’s tax liability must be adjusted for the corresponding difference. Since the Czech Republic is a member of the OECD, it also applies the principles and recommendations of this organization in terms of transfer pricing

If one of the companies directly or indirectly owns 25% of the capital of another company or has a significant influence on the decision-making in it, then such companies, according to Czech law, are considered to be related parties.

There are no transfer pricing documentation requirements in the Czech Republic. When undergoing a tax audit, it is necessary to provide evidence of compliance of prices with the arm’s length principle at the request of the tax authorities within 14 days, in some cases – 30 days. If the tax authorities do not confirm the correctness of pricing, penalties will be applied in the amount of 20% of the amount of the underpaid tax liability, plus a penalty in the amount of the repo rate of the National Bank of the Czech Republic, plus 14%.

Thin capitalization

Czech tax law has provisions for thin capitalization. The following financial expenses related to loans and borrowings are not tax deductible and therefore not thin capitalized:

• loans and borrowings between related companies that have a debt-to-equity ratio of 4:1.
• loans to unrelated parties, such as bank loans;
• financial costs paid on loans participating in profits;
• mutual financing, i.e. loans between related parties through an independent intermediary, such as a bank.