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CZECH REPUBLIC
Taxation of Nonresident Entities
Corporate Assessments and Payments
Personal Assessments and Payments
Since the January 1993 division of Czechoslovakia into two independent nations, the Czech
Republic and Slovakia, the Czech Republic is proceeding with the government's plan for
privatization. Legislation has abolished the state's monopoly in all sectors of the economy
and limited the state's participation to activities that are central to the national economy.
The government recognizes that foreign investment is essential to the development of the
Czech economy. Accordingly, foreigners may perform business activities in the Czech
Republic under the same conditions and to the same extent as Czech persons, and foreign
investments are protected by Czech law. With relatively well-developed technology and a
highly educated, highly skilled work force, the Czech Republic is poised to enter the
twenty-first century.
Deloitte & Touche, the Deloitte Touche Tohmatsu International member firm in the Czech
Republic, was established in Prague in 1990. Its initial staff of five has grown to
approximately 200 professionals. In addition to the services it provides to Western
investors and Czech enterprises, Deloitte & Touche is playing a role in helping establish
nationally acceptable auditing standards.
Auditing Services: Karel Hampl
International Services: Trevor Wallinger
Management Consulting Services: Gustav Hraska
Tax Services: Hugo van der Zee
Valuation Services: Alan Trotter
Telephone: +42 (2) 248 11 456
Telecopier: +42 (2) 232 57 00
Forms of Business Organization.The business forms that may be established in the Czech
Republic include the joint stock company, limited liability company, general commercial
partnership, limited partnership, and cooperative. Apart from the general commercial
partnership, all these entities are subject to tax as separate persons. A foreign investor may
operate through a branch or may establish a Czech entity. Effective January 1995, it is no
longer possible to register a representative office in the Czech Republic; such an office
would be registered as a branch. Enterprises with foreign participation are often referred
to as joint ventures colloquially, although no longer by law.
Effective January 1995, partners in a general commercial partnership are subject to
individual income tax; if the rate for division of the profit is not stipulated by the
memorandum of association, the profit is distributed equally among the partners. General
partners in a limited partnership are charged with respect to their individual shares of
profit.
Exchange Controls. The currency in the Czech Republic is the Czech koruna. It may be
converted internally. Limitations are not placed on the amount of foreign currency that can
be taken into the Czech Republic, but all hard currency earnings have to be offered for
exchange to the central bank. Profits and capital may be repatriated from the Czech
Republic by converting koruna at Czech banks. A branch cannot repatriate profits earned in
Czech koruny.
Local Participation or Management Requirements. Foreign participation may amount to
100%. Foreigners may trade in the Czech Republic on the same basis as Czech persons.
Foreign nationals may be employed on the same basis as Czech nationals, as long as they
have the necessary permits to stay and work.
Resident entities are subject to corporate income tax on their worldwide profits. An entity
is regarded as resident if it has its seat in the Czech Republic.
Corporate Income Tax Rate. Corporate income tax is charged at the rate of 41%.
Taxable Income. Taxable income is determined by taking the accounting profit and making
the adjustments required by the tax law.
Inventory valuation. Inventory is valued at the lower of cost or market value.
Capital gains. The tax base for corporate income tax includes capital gains. Effective
January 1995, certain investment funds are taxed at the special rate of 25% on capital gains
(with respect to ordinary income or loss).
Deductions. The deductions allowed in computing the tax base are those incurred to
generate, ensure, and maintain income.
Depreciation. Depreciation is allowed by the straight-line method or the accelerated
method. For the purposes of depreciation, assets are divided into five categories, each of
which has a prescribed period of depreciation
The rates for both straight-line and accelerated depreciation depend on the category.
Straight-line rates vary from 2.25% to 28.6% per annum; the rate in the first year is only
half the normal rate.
Interest. Loan interest is deductible, provided that thin capitalization rules are not
infringed. Under thin capitalization rules, a debt-to-equity ratio of four to one is allowable
for Czech subsidiaries. Generally, a ten-to-one debt-to-equity ratio is allowable for debts
received from unrelated foreign companies.
Directors' remuneration. Directors' remuneration is not deductible.
Bad debts. Under current law, a deduction for the write-off of bad debts is not allowed
except for debtors in bankruptcy proceedings.
Tax Treatment of Losses. Effective January 1995, losses incurred from the preceding tax
period may be carried forward for seven years. This provision can be used for losses
incurred in 1993 at the earliest. The provision cannot be used for investment funds and
share funds.
Taxation of Nonresident Entities
A legal entity with no seat in the Czech Republic is subject to tax on Czech-source income
only. Income has its source in the Czech Republic if it is derived from activities performed
in a permanent establishment in the country or from commercial, technical, or consulting
services performed there. When a double tax treaty applies, the treaty definition of
permanent establishment takes precedence over the national definition. The national
definition expressly includes a building site or construction or assembly project if it exists
for more than six months.
The tax rate of 41% applies to nonresident entities. The rules for computing taxable profits
are generally the same as for resident entities.
Various categories of income with a source in the Czech Republic are subject to
withholding taxes.
No provision for group consolidation of profits or losses for tax purposes exists.
Transfer-pricing provisions apply when the contract price of a transaction between
associated persons differs from the usual market price.
Branch or Subsidiary? The profits of a branch are subject only to corporate income tax;
there are no withholding taxes on branch profits remitted abroad. In contrast, the
distributions of a subsidiary are subject to withholding tax at 25%, subject to relief
provided by double tax treaties. However, a branch may not repatriate profits earned in
Czech koruny.
Corporate Assessments and Payments
The tax year is the calendar year. Tax is assessed on the basis of annual returns of income,
which exclude income subject to final withholding tax.
Taxpayers must submit an annual tax return on or before 31 March in the year following the
tax year. This time limit can be extended if the tax return is submitted by an authorized tax
adviser. Taxpayers must calculate their own liabilities and claim the exemptions and
reliefs to which they are entitled.
A taxpayer that is obliged according to Czech law to have its financial statements verified
by an independent auditor must submit its return and pay the tax by 30 June following the
relevant tax year.
Advance payments of tax must generally be made. Revised provisions for making advance
tax payments came into effect in January 1995. If the last known tax liability did not exceed
Kc 20,000, no advance payments are due. If the last known tax liability exceeded Kc
20,000 but did not exceed Kc 100,000, the taxpayer must pay each half-year advance
payment in the amount of 40% of the last known liability. In this case, the advance
payments must be made by 30 June and by 15 December.
If the last known tax liability exceeded Kc 100,000 but did not exceed Kc 10 million, the
taxpayer pays the advance payments quarterly in the amount of one-fourth of the last known
liability. In this case, the advance payment must be made by the end of each calendar
quarter, but the last payment must be made by 15 December.
If the last known liability exceeded Kc 10 million, the advance payments must be paid
monthly by the end of each calendar month, but the payment for December must be made by
15 December.
Any outstanding annual tax liability must be paid within the time limit allowed for
submission of the return.
The tax authorities have the right to increase assessments in the three years following the
calendar year in which a taxpayer was obliged to file a return. If a branch is unable to
determine its profit, the tax authorities and the taxpayer may agree to impute a deemed
profit.
Taxpayers have one month from the issue of a notice of assessment in which to file an
appeal. The appeal may be passed to a directorate, whose decision is final.
Resident individuals are subject to personal income tax on their worldwide income and
gains. Nonresident individuals are subject to income and gains derived from Czech
sources.
Individuals are regarded as resident if they have their permanent residence or usual
domicile in the Czech Republic. An individual's usual domicile is in the Czech Republic if
he or she is present in the country for at least 183 days in a calendar year.
Under legislation that became effective on 1 June 1993, foreign experts with specific
knowledge sent to work and reside in the Czech Republic by a foreign entity in order to
provide their expertise to a Czech resident entity are subject to tax only on income and
gains derived from Czech sources.
Treatment of Families. There is no joint taxation of families; each individual is regarded
a separate taxpayer.
Personal Income Tax Rates. Income that is aggregated and not taxed at flat rates is
subject to the progressive rates. Effective January 1995, the top marginal personal income
tax rate was reduced to 43%.
Taxable Income. Individuals are subject to income tax on employment income, income
from business activities, income from capital assets, leasing income, and other types of
income defined by the law. Taxable income consists of the aggregate income from these
sources.
Employment income. Income from employment includes taxable benefits in kind.
Directors' remuneration is treated separately, that is, it is not included in the tax base; it is
subject to withholding tax at 25%, and no deductions are given. Other persons in receipt of
employment income may deduct social security contributions and other amounts.
Income from business activities. The tax base for income from business activities is the
income less expenses incurred to generate, ensure, and maintain that income. In some cases,
lump-sum deductions may be claimed instead of actual expenses. Profit shares of general
partners are charged as income from business activities.
Dividend income. Income from capital assets includes dividends, but the 25% withholding
tax levied is a final tax.
Capital gains. Capital gains are generally taxable if an asset has been used to generate
income, carry on business activities, or provide independent services.
Exempt income. Exemptions include income from the sale of a dwelling that was the
seller's home for at least two years, income from the sale of nonbusiness immovable
property owned for at least five years, social security benefits, and compensation and
insurance payments.
Income from the transfer of interests in limited liability companies is generally exempt
when the interest has been held for more than five years. This exemption does not apply to
income from an interest in a company if the interest was acquired from the equity of a
taxpayer within five years of the termination of his or her business activity.
The income from the sale of securities (that is, interest in a joint stock company) is also
exempt if the securities have been held for more than three months. This exemption does not
apply to income from the sale of the securities included in the taxpayer's equity provided
that the sale takes place within six months of the termination of business activity.
Deductions and Reliefs. Residents may deduct the following allowances in arriving at
taxable income:
* A basic allowance of Kc 24,000.
* An allowance for each dependent child of Kc 12,000.
* A spousal allowance of Kc 12,000, provided that the spouse's income is Kc 24,000 or less.
* An allowance for disabled taxpayers, depending on the degree of disability and the extent of assistance needed.
Deductions are allowed for donations to organizations with their seats in the Czech
Republic, provided that the total value of the donation exceeds 2% of the tax base or is at
least Kc 1,000; however, the total donations in a year must not exceed 10% of the tax base.
Nonresidents are only entitled to the basic allowance of Kc 24,000.
Under recent legislation, the tax base is reduced by 30% for foreign experts with specific
knowledge sent to work and reside in the Czech Republic by a foreign entity to provide
their expertise to a Czech resident entity. Foreign expert relief applies to individuals
seconded to Czech natural or legal persons and Czech permanent establishments of foreign
entities.
Personal Assessments and Payments
The tax year is the calendar year. Returns must be filed on or before 31 March immediately
following the end of the year to which the return relates. The time limit may be extended.
In the case of employment income, employers must calculate and withhold tax from monthly
amounts of salaries and wages. Foreign employers without a branch in the Czech Republic
are not required to calculate and withhold tax prepayments. Advance payments must be
made on other sources of income, generally on the same basis as such payments are made
by companies.
Income subject to final withholding tax does not have to be reported on returns.
Basic Rates. Withholding tax at the basic rate of 25% is levied on dividends, other income
from securities, and income from other distributions of profits, regardless of whether the
income is paid to residents or nonresidents. Unless the rate is reduced under a double tax
treaty, the tax is final.
Interest payments to residents or nonresidents on certain types of debts are subject to final
withholding taxes at the rate of 25%. However, interest on savings deposits is subject to
withholding tax at the rate of 15% when paid to individuals.
The rate of withholding tax on royalties is 25%. Only payments to nonresidents are subject
to this tax. The tax is final.
Rental income paid to nonresidents, with the exception of the rental of real property, is
subject to final withholding tax at the rate of 25%. The rate is 1% on lease rentals when the
lease includes an obligation to purchase the leased asset.
Income derived from the authorship of articles for newspapers and media broadcasts is
subject to a 10% withholding tax when paid to resident or nonresident individuals if the
gross income does not exceed Kc 3,000.
Rates Under Double Tax Treaties. Most of these treaties were concluded by
Czechoslovakia; however, most of the treaty partners have formally agreed to continue to
apply the treaties to the successor states or are in practice doing so.
The Czech Republic continues to observe the multilateral treaties concluded by
Czechoslovakia and other members of the Council for Mutual Economic Assistance
(COMECON) but intends to replace these treaties in due course with bilateral treaties.
Signatories of the COMECON treaties included Bulgaria, Hungary, Mongolia, Poland,
Romania, and the former Soviet Union. Poland has since concluded a separate treaty with
the Czech Republic. Hungary no longer honors the COMECON treaties. Some states,
formed out of the former Soviet Union -- in particular the Baltic states -- no longer apply
the COMECON treaties.
Value Added Tax. Businesses must register for value added tax (VAT) if their turnover
exceeds Kc 750,000 in the immediately preceding three calendar months. In other cases,
businesses may register for VAT voluntarily. The tax is payable on all sales of goods and
services and on the importation of goods. The tax is payable on the price of goods and
services, including duties. The input and output system is similar to the systems applying in
European Union member states.
The basic rate of VAT was reduced, as of January 1995, from 23% to 22%, but a 5% rate
applies to most services and various goods, including fuel and most foodstuffs. Various
goods and services are exempt, including financial, insurance, educational, and health care
services.
Social Security Contributions and Payroll Taxes. As of January 1995, employers must
contribute 9% of their total payroll to the health insurance fund and 26.25% to the social
security fund. Employees contribute 4.5% of their wages to the health insurance fund and
8.75% to the social security fund. Employee contributions are withheld from their wages
on a monthly basis, as in the case of tax on employment income.
Individuals engaged in business activities must also make contributions. For health
insurance the rate is 13.5% and the basis is 35% of the prior year's tax base; for social
security the rate is 30.2% and the basis is 35% of the income from business activity.
Administration and Court Fees. The Czech Republic does not levy business license or
trade taxes, but administration and court fees are levied on those registering a business or
independent activities.
Taxes on Land and Buildings. Owners of land are subject to a land tax. Rates vary
according to the use to which land is put (in the case of agricultural land) and on its area
and type (in the case of other land). Owners of buildings are subject to a tax on buildings.
Rates vary depending on floor space and the use of the buildings.
Inheritance and Gift Tax. Tax is charged on the value of property acquired by an heir and
on the value of gifts. The heir is liable in the case of inherited property, and the donee is
liable in the case of gifts. The rates are the same in both cases and depend on the degree of
relationship involved. There are three categories of beneficiaries: category 1 includes the
spouse, children, and parents; category 2 includes siblings, grandparents, and other
individuals with a close relationship with the deceased or donor; and category 3 includes
persons not in categories 1 or 2. The minimum and maximum rates for each category are
1% and 5%, 3% and 12%, and 7% and 40%, respectively.
Both of the taxes are computed in the same way, but the total amount of the inheritance tax
is multiplied by a coefficient of 0.5.
Real Estate Transfer Tax. Sellers of immovable property are generally subject to real
estate transfer tax. The tax base is the value of the immovable property as determined by
the Decree on Valuation of Buildings and Land. The rate is 5%.
Miscellaneous Taxes. Excise duties are levied on fuel and lubricants, alcohol and spirits,
beer, wine, and tobacco products.
Registered owners of motor vehicles used for business activities are subject to road tax.
Also, owners of motor vehicles registered abroad who use their vehicles in the Czech
Republic are liable. The tax depends on the type of vehicle used.
The Czech Republic levies a number of local taxes, including a tax on recreational
facilities, a tax on the use of public grounds, a tax on advertising, and a tax on the sale of
spirits and tobacco products.
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