Corporate Tax Guide: Czech Republic
The information is valid for the entire country except where indicated. For example, in the case of Malaysia, Labuan is part of Malaysia but has a special tax regime, so this is noted.
|The Czech Republic.
The corporate tax rate shown is the typical corporate tax rate that a domestic corporation owned by non-resident persons would pay. The tax rate does not include withholding tax on dividends, but does include a distribution tax shown separately if applicable. Certain countries have a low corporate tax rate, but charge an additional tax when a dividend is distributed. Because this tax is paid by the corporation, and not deducted from the amount of the dividend itself, it is not a dividend withholding tax. As a result, it typically cannot be reduced by an international tax treaty.
|The standard corporate income tax rate is 19%, with a reduced rate of 5% applying to income from investment funds (funds listed on a regulated stock market within the EU) and a reduced rate of 0% for pension funds. Investment income received by Czech companies from abroad forms a separate tax base that is taxed at 15%.
The basis of taxation for a corporation will typically be one of:
|World wide income.
Where non-resident corporation carries on business in a country, business profits may be subject to corporate tax. In addition, a branch profits tax may apply in lieu of dividend withholding tax. This branch profits tax applies to the after tax profits, typically at a fixed percentage. An international tax treaty may reduce the rate of branch profits tax, typically to the rate provided for dividend withholding.
|Branches are taxed at the same rate as domestic companies.
The common forms of business entity are noted. In addition, the entities which are flow through entities for U.S. tax purposes are indicated.
|The most common forms of business vehicle are the joint stock company (a.s.), limited liability company (s.r.o), limited commercial partnership (k.s.), general commercial partnership (v.o.s.), cooperative and branch of a foreign company. The Societas Europaea (SE) company form also is available.
Capital gains may be fully taxed, partially taxed or not at all. In certain countries, an exemption, called the participation exemption, will apply to exempt from tax a capital gain from disposition of a substantial holding of shares of a subsidiary. Where a participation exemption is applicable, it is noted together with a summary of the main conditions.
|No separate capital gains tax is levied in the Czech Republic. Capital gains are included in the CIT base and taxed as ordinary income in the year in which they arise.
Capital gains on the sale of shares and participations in companies resident in the EU, Iceland or Norway are exempt from tax if conditions similar to those required to qualify for the dividend exemption under the EU parent-subsidiary directive are satisfied.
Other capital gains are exempt if derived from the sale of a subsidiary that:
Certain countries allow group taxation, otherwise known as consolidated tax filing. Here the tax returns of a group of corporations in the country may be combined together, which can be useful. If group taxation is permitted, it is noted along with the main conditions.
Countries offer various kinds of special exemptions and incentives. Examples are a reduced tax rate, a tax holiday, a tax credit on the purchase of equipment, special accelerated deductions for deprecation, incentives for R&D, and various others. Here the major items are noted.
|Investment incentives in the manufacturing industry and also for support of technology centres, strategic services, data centres, and customer support centres are available to Czech entities (including Czech subsidiaries of foreign companies). Incentives include income and real estate tax relief, financial support for the creation of new jobs, financial support for training or retraining of employees, cash grant on capital expenditures, and a transfer of land at a specially reduced price.
Up to 100% of specific R&D expenses (or costs) incurred in a given tax year may be deducted from the tax base as a special tax allowance. These costs are deducted twice for tax purposes: once as a normal tax-deductible cost and then again as a special tax allowance. An additional 10% may be applied as an allowance from the difference by which the current year qualifying costs exceed those of the prior period.
Many countries have thin capitalization rules which limit or deny the deduction of interest expense in certain circumstances. For example, if debt exceeds three times equity, a proportionate amount of interest expense may not be deductible. Limitations take various forms, restricting the interest expense deduction to a percentage of profit, deeming the debt to be equity and the interest to be a payment of dividends, and various other rules which may blend of these principles. Where a country has thin capitalization rules, they are briefly described.
|Financial expenses connected with credits, loans and other debt instruments (e.g., cash-pooling) are non-deductible if:
Many countries have transfer pricing rules. They very often follow the OECD guidelines and the arms length principle. Some countries have specific rules which apply in certain cases. In addition, some countries allow for a selection of the most appropriate transfer pricing methodology in the circumstances, while other countries follow a hierarchy of methods, with the CUP method (comparable uncontrolled price) often ranking first. The transfer pricing rules are briefly explained.
|For tax purposes, prices agreed between related parties have to meet the definition of the arm's length principle, and these prices are often subject to tax audits by tax authorities. The consequences of incorrect transfer pricing adjustments are tax exposure and penalties. Generally, pricing methods as described in OECD guidelines should be followed. Although there is no legal requirement to keep transfer pricing documentation, in practice it is strongly recommended to keep it, as the taxpayer bears the burden of proof upon challenge of prices by tax authorities.
Taxpayers may request the tax administrators to issue an advance pricing agreement (APA) regarding progressing or future transactions between related parties.
11. CFC Rules
Many countries tax passive income earned in controlled foreign corporations (CFC’s) on an imputation basis while active income is not taxed. Such CFC rules are usually complex and vary significantly in what is considered passive income, and how foreign tax paid is taken into account. Some countries approach CFC rules on the basis of whether or not the foreign corporation is resident in a low tax jurisdiction or a tax haven. This may be done through a black list of countries.
The general overview of CFC rules is described in simple terms.
Profits repatriated by way of dividends from a subsidiary to a parent company are typically taxed in one of three ways:
|The following types of payments from a Czech company to its foreign shareholder may be transferred abroad freely, subject to the appropriate withholding taxes if any:
Most countries allow a foreign tax credit based on a formula, typically net foreign income over the net income times taxes payable. This limits the foreign tax credit to roughly the domestic tax otherwise applicable to the foreign income. There are numerous variations and technical rules in the details of foreign tax credit calculations. Where a foreign tax credit is allowed, the general principles are described.
|Foreign tax credits are available only under tax treaties. If credit is not available under a treaty, CIT paid abroad may be deducted as an expense in the following yea,r provided it is imposed on the income included in the Czech Republic.
Losses typically can be carried forwards for a period of years, and sometimes can be carried back. Losses may be segregated into capital losses and non capital losses.
|Tax losses may be carried forward for up to 5fiveyears. Certain change of control restrictions apply. The carry back of tax losses is not allowed.
It is not practical to list all of the tax treaties which a country has in a simple guide like this. Accordingly, a link is provided in each case to the tax treaties.
Some countries have entered into Tax Information Exchange Agreements (TIEA).
Treaties are more and more containing provisions that limit benefits (LOB provisions).
Withholding tax rates vary considerably from treaty to treaty, and countries may have domestic exemptions applicable in certain circumstances (for example copyright royalties, interest paid to arm’s length persons, etc.). A table shows the typical rates but cannot adequately summarize all of the details. The applicable treaty should be consulted.
17. Taxation Year
Some countries allow for the selection of year-end while other countries specify a particular year-end which all business entities must have. Normally the taxation year cannot exceed 12 months. Where it can exceed 12 months, this is noted.
|Calendar year or a possibility to choose an accounting year that differs from a calendar year.
This is the due date for filing a tax return. Where extensions are available, this is noted.
|Returns must be filed within three months of the end of the tax period. A three-month extension of the filing deadline is available if a taxpayer is represented by a registered tax advisor or if the tax payer is subject to statutory accounting audit.
19. Tax Instalments
The typical tax instalment requirements are noted.
|Yes, semi-annually or quarterly depending on the last known tax liability.
20. Payment of Tax
This is the date when the corporate tax owing for the year must be paid. It may be different from the tax return filing due date.
|Tax payments are due on the same day as the filing deadline.
This is the period after which the tax department cannot in normal circumstances reassess a taxation year. It is sometimes referenced to the end of the taxation year and sometimes to the date of the first assessment of that taxation year.
|Tax authorities may perform a tax audit and reassess tax for up to three years following the date on which the tax return was due. This time period is automatically extended for a new three-year period as a result of a tax audit. The time period is also automatically extended by an additional one year if, in the last 12 months, the taxpayer filed an additional tax return, the decision of the tax authorities or appeal decision was delivered to the taxpayer, or certain other circumstances occurred; nonetheless, tax cannot be re-assessed when a period of 10 years expires following the date when the tax return was due. A special time period applies for taxpayers in a tax loss position.
If a country has exchange controls, this is noted, together with the main requirements.
A VAT tax system typically provides that the supply of goods and services is classified as taxable, tax exempt, or zero rated. Where a business is engaged in an activity which is taxable, it must charge VAT on its revenue, and can claim a refund of VAT on its expenditures. Where the activity is exempt, it does not charge VAT on its revenue, and cannot claim back VAT paid. Where the entity is engaged in activities which are zero rated (typically agriculture, food services and exports), then it can claim back VAT which it has paid on its expenditures, and does not charge VAT on its revenue.
If a country has a typical VAT system, this is noted. If a country has no VAT system but a sales tax system, this is indicated. Some countries may have a mixture, and taxes may apply at different levels (federal and state for example).
|General VAT rate of VAT 21%.
Reduced VAT rate of 15% applies to certain supplies (such as groceries and accommodation, restaurant, and transport services).
Reduced VAT rate of 10% applies to specified categories of goods (some medicaments, books, and baby food).
Stamp duty, or land transfer tax, can apply on such things as the transfer of shares, land, or the issuance of bonds or debentures. This is described together with the applicable rates.
|There are no stamp duties. Certain business operations in which a notary has to be involved by operation of law are subject to notarial fee.
25. Capital Tax
If capital tax is payable, this is described. Capital tax may apply in specialized industries, such as banking and insurance, even if a country does not generally apply a capital tax to corporations.
26. Other Taxes
Where significant, other taxes are noted.
|Excise taxes, energy tax, real estate tax, real estate transfer tax, payroll taxes, social security and health insurance contributions, road tax.
Anti-Avoidance Rules take many forms, the most common ones are a general anti-avoidance rule, treaty shopping limitations, the requirement for economic substance (or a business purpose in carrying out transaction) and specific anti-avoidance rules for particular purposes. A very brief overview of the anti-avoidance rules is described.
|The general rule is the substance-over-form rule. Additionally, the Czech Supreme Administrative Court has, in principle, adopted the abuse-of-law doctrine developed by the Court of Justice of the European Union. Numerous specific anti-avoidance rules apply.
Where a non-resident person holds shares of a corporation established in the country listed, the capital gain which results may be taxable or not taxable depending on the circumstances and, possibly, the existences of an international tax treaty. The general rules are noted.
|Capital gains realized by Czech tax non-residents from the sale of shares/ownership interest in a Czech company to a Czech tax resident (or to a Czech permanent establishment of a Czech tax non-resident) represent Czech sourced income subject to Czech income tax. Nonetheless, this tax on capital is normally eliminated by the applicable double tax treaties (with certain exceptions). In addition, capital gains of parent companies, which are established or effectively managed in the Czech Republic or a tax resident of another European Union country, Norway or Iceland, realized on sale of shares and participations in their Czech subsidiaries could qualify for corporate income tax exemption if certain conditions are met.
Where a corporation is acquired through the purchase of shares, sometimes a step up is allowed so that the cost of its assets can be revalued. The main rules are briefly summarized.
|In a share deal, there is no step-up for the buyer or the target in relation to any premium over the accounting/tax value of the target’s assets.
30. Use of Rulings
In some countries, rulings are commonly used (and sometimes even required). In other countries the system is either unavailable or not commonly used except in special circumstances.
|Advance rulings may be obtained in specific cases, particularly for advance pricing agreements, the utilization of losses when there has been a significant change to the shareholding structure, and R&D projects. The rulings are binding and effective for a maximum period of three years. If there is a change in the relevant legislation or any other key circumstances within the three-year period, the advance ruling ceases to have effect.
Other important aspects of the tax system are noted.