International Tax Compliance Regulations
INTERNATIONAL TAX COMPLIANCE REGULATIONS IN (PART 5): Czech Republic
By Richard Jahoda, Grinex Czech Republic
The Czech Republic is one of the most developed industrialised countries in Central and Eastern Europe. Its strong industrial tradition dates to the nineteenth century, when the region was the economic motor of the Austro-Hungarian Empire. Czechoslovakia was the most prosperous country in the Eastern Bloc and after its dissolution the Czech Republic continued achieving economic success.
The country has an excellent climate for foreign and domestic investment as the government actively encourages inward investment through several investment incentives. The Czech Republic has been one of the primary recipients of foreign direct investment among Central and Eastern European countries.
Tax System
The current tax system in the Czech Republic was established in 1993. Taxes are divided into 3 basic groups – direct taxes, indirect taxes and other taxes.
Since EU accession on 01 May 2004, the system has undergone a continuous process of harmonisation with European legislation. Four EU directives have been implemented in Czech income-tax law (parent/ subsidiary directive, merger directive, royalties/interest directive, and savings directive). The VAT system of turnover tax and excise tax have been harmonised with EU directives since EU accession.
The Czech Republic also has a broad network of 88 effective double-taxation treaties with both EU and non-EU countries. These double-taxation treaties are based mainly on the OECD Model Tax Convention. The Czech Republic is party to the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting.
Forms of Business
1. Joint-stock company (akciová společnost or a.s.) is a company form in which shares are freely transferable and may be established by one or more persons, resident or non-resident, who may be either legal entities or individuals. No permission is required to establish a joint-stock company. A joint-stock company constitutes a separate legal entity whose capital is divided into shares of a certain nominal value. A minimum share capital is CZK 2 million or EUR 80,000.
2. Limited liability company (společnost s ručením omezeným or s.r.o.) is the company form in which shares are not freely transferable and the registered capital consists of investment contributions, agreed to in advance, by the company’s members.
A limited liability company may be founded by one or more resident or non-resident persons, who may be either legal entities or individuals.
3. General commercial partnership (veřejná obchodní společnost, or v.o.s.) is where the partners are liable for the obligations of the company, both jointly and severally with all their property.
4. Limited partnership (komanditní společnost. or k.s.) is where at least one of the partners bears unlimited liability for the obligations of the partnership and the liability of the remaining partners is limited to the amount of their capital contributions.
5. Cooperative (družstvo) is an association composed of an unlimited number of members (individuals and/ or legal persons), established for a common undertaking or business activity, or to satisfy the economic, social, or other goals of its members.
6. Trust (svěřenský fond) is a vehicle through which its founder (who has the quality of a settlor) transfers a part of his or her property to be administered by another party. The legislation related to the Czech trust (also referred to as a trust fund) was modified in January 2014, when the Civil Code was amended to include in the national legislation new provisions related to the incorporation of a trust. The Czech Republic is one of the few jurisdictions located in the continental Europe in which investors may incorporate this vehicle.
Types of Tax
1. Corporate income tax
This includes joint-stock company, limited liability company, the income of limited partnership attributed to limited partners, cooperatives, and business income of a trust. Resident entities are subject to corporate income tax of 19% on their worldwide income and capital gains.
The Czech Republic applies a modified classical system of taxation of corporate profits. In principle, corporate profits are taxed both at the company level and at the shareholder level. At the shareholder level, dividends are not subject to corporate income tax but only to a lower final withholding tax of 15%. An exemption from the withholding tax is available with respect to certain qualifying distributions.
Companies are treated as nonresidents for corporate income tax purposes if they do not have their legal seat or place of management in the Czech Republic. Non-resident companies are subject to corporate income tax on Czech-source income.
A special withholding tax system is applicable to certain types of income derived by non-residents (i.e., royalties, dividends, interest, rental payments, and service fees), unless such income is attributable to a Czech permanent establishment.
2. Personal income tax
An individual is considered to be a resident of the Czech Republic if he has his permanent home in the country or he stays in the country for at least 183 days in the relevant calendar year, with the exception of stays for studies or medical treatment.
Taxable net income is computed separately for each category of income by deducting allowable expenses incurred in generating and maintaining the income and is subject to a flat rate of 15%.
Certain items of passive income, including ordinary domestic dividends and certain types of interest, are not included in the aggregation but are taxed separately by way of a final withholding tax of 15%.
Non-resident individuals are subject to the individual income tax only on their income from Czech sources, which is generally taxed according to the rules applicable to residents, unless a law or a tax treaty provides otherwise.
3. Anti-avoidance rules
These have been implemented in accordance with the EU ATAD directive: Interest limitation rule, exit taxation, GAAR, CFC, hybrid mismatches. Thin capitalisation rules valid for connected parties take place as well.
4. Transfer pricing rules
Czech tax legislation contains the general arm’s length principle. It is compatible with the OECD Transfer Pricing Guidelines. The Czech tax legislation does not prescribe any obligation to maintain any transfer pricing documentation. Nevertheless, it is highly recommended that the documentation is prepared as it can be used as valuable evidence during a tax audit.
5. Investment incentive tax-relief
Investors may receive either partial (for investors who expand their existing business activities in the Czech Republic) or full tax relief (for investors who are newly commencing their business activities in the Czech Republic). Both kinds of tax relief can be utilised during ten consecutive tax periods.
6. Research and development cost allowance
Up to 100% or 110% of costs associated with the projects of research and development and incurred in a given tax year can be deducted from the tax base as a special tax allowance (this means that these costs are in fact deducted twice for tax purposes – once as a normal tax-deductible cost and then as a special tax allowance).
Czech Republic is the leading destination of foreign direct investments in the region of Central and Eastern Europe.
Grinex Czech Republic in cooperation with GGI fellow members provides services to foreign investors in doing business in the Czech Republic. The initial business environment guidance and tax and legal system overview is usually provided, together with feasibility study of the particular investment project.
The most suitable legal form is recommended and subsequently founded. The bookkeeping and reporting system is established and comprehensive tax compliance maintained. The modes of profit distribution and the eventual investment exit strategy is determined in cooperation with fellow GGI members.
Richard Jahoda
GGI member firmGrinex Czech Republic
Advisory, Auditing and Appraisals,Corporate Finance, Tax
Prague, Czech Republic
T: +420 222 516 889
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W: grinex.cz
Grinex Czech Republic provides its clients with a wide range of professional services. The firm makes comprehensive evaluations of its clients’ businesses and draws on the expertise of its professionals to offer the best solution available.
Richard Jahoda, Managing Partner at Grinex Czech Republic is a leading partner responsible for tax and transactional advisory. He has over 25 years’ experience in tax, finance, and business development. He regularly lectures at a number of international conferences.
Published: Working Together to Optimise International Tax Compliance, No. 2, Spring 2020 l Photo: Feel good studio - stock.adobe.com