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Income Tax in Czech Republic



Personal Income Tax

Tax Return Date

The tax return has to be submitted by 1 April of the following year, or 1 July if the return is prepared and submitted by a certified tax adviser or by a solicitor. In the latter case, a power of attorney in respect of the tax adviser must be submitted to the tax authority by 1 April upon which the deadline for submission of the tax return is automatically prolonged by three months (to 1 July).

In special cases the tax authority can postpone the date for submission of the tax return by up to three months at a written request of the taxpayer or his/her tax adviser (even if the deadline was already once prolonged due to filed power of attorney). The request needs to be filed before the respective deadline.

The tax year ends on 31st December

Tax Compliance

Residents

Generally, Czech tax residents are liable to declare and pay tax in the Czech Republic on their worldwide income, that is employment income, income from self-employment, rental income, investment income and capital gains, and other taxable income.

The deadlines for final tax payments are the same as for the tax return. The tax payment is transferred to the appropriate account of the tax authority under a unique tax identification number of the individual. In the case of foreigners, the tax identification number is generated by the tax authority upon registration.

Non Residents

Individuals who are Czech non-resident for tax purposes are subject to tax only on income from Czech sources.

Tax Rate

There is a flat rate of 15 percent applicable on a super-gross salary (gross salary increased by 34 percent of employer part of Czech obligatory social security and health insurance contributions) This is either hypothetical (if the employee is not subject to the Czech social security scheme) or actually paid if the individual is subject to the Czech social security scheme.

From 1 January 2013, in addition to standard 15% flat rate, a 7% solidarity tax increase is imposed on annual gross income (sum of gross employment income and taxable self-employment income/or reduced by the actual tax loss from self-employment income) exceeding CZK 1,355,136 (amount applicable for 2017). In the case of employees on Czech payroll, the solidarity tax increase is applied monthly on income exceeding 1/12 of the above annual threshold as an advance payment.

Other income except for employment and self-employment income is taxed at 15 percent.
The tax rate is same for both residents and non residents.

Taxable Income

The taxable income of employees includes all wages, salaries, and bonuses paid; contributions to Czech mandatory social security and health insurance systems paid by the employer (or which would be paid by employer if the employee was in the Czech social security and health insurance system); and any benefits in kind (subject to minor exceptions) received as a result of employment. Benefits in kind are valued in principle at open-market values, although a fixed rate of 12% per annum of the purchase price is applied to cars provided by the employer to the employees for both business and private use. The reimbursement of travel expenses in excess of fairly low statutory limits is also a taxable benefit for the employee. Certain non-monetary educational, sporting, and health benefits are non-taxable, provided that other conditions are met. Temporary accommodation provided by an employer as a non-monetary benefit is not taxable up to CZK 3,500 per month if arrangements are properly structured. A cash accommodation allowance is taxable.

Non-resident directors’ fees and fees payable to non-resident members of other statutory bodies of Czech companies are subject to a withholding tax (WHT) of:
· 15% for residents of the European Union, European Economic Area (EEA), or a DTT country (or a country with which the Czech Republic has an agreement on exchange of tax information in place).
· 35% for the rest.

No further tax is payable on this income.

When paid to tax residents, directors’ fees and fees to members of other statutory bodies of Czech companies are taxed under the payroll administration rule. All resident and non-resident directors from EU member states and other countries from the European Economic Area may, however, file the tax return when they utilise their personal tax deduction(s).

Capital gains

There is no separate capital gains tax in the Czech Republic. Capital gains constitute part of the aggregate individual income tax base subject to 15% tax rate.

Gains on the sale of property are exempt if the individual has owned the property for longer than the specified time limit.

The main time limits are as follows:
· Three years for direct ownership in a joint stock company or a fund.
· Five years for shares in other companies.
· Two years for one’s personal residence used for living immediately prior to the sale (five years for real estate in other cases).
· One year for cars, ships, and planes.

Note that the above applies to gains on property that do not form part of the individual's business property. Gains on business property are taxed based on principles similar to those that apply to companies.

* Income from the sale of shares below the limit of CZK 100,000 per taxable period is exempt from taxation.

Dividend and interest income

Income from capital (i.e. dividends and other yields from securities, limited liability companies or limited partnerships, and interest and profit shares from silent partnerships) is taxable income and is generally treated as a part of the total annual tax base.

Dividends and other yields from securities or partnerships from limited liability companies or limited partnerships, profit shares from silent partnerships, and interest from deposit certificates and bonds paid by a Czech resident entity to a Czech tax resident are all subject to WHT of 15%. A WHT rate of 15% applies to income received by resident individuals from interest and other yields from savings on deposit accounts.

The rate of 15% also applies to income paid to Czech tax non-residents residing in EU/EEA states or in a state having concluded a DTT or an agreement on exchange of tax information with the Czech Republic. In other cases, the tax rate for this type of income is 35%.

WHT may be reduced under the applicable DTT. Several of these treaties further reduce the rate of WHT. Reduced WHT rates are only applicable if the individual remains tax resident in another jurisdiction (i.e. the other party to the DTT) and is not treated as a Czech tax resident as defined under the treaty.

Rental income

Income from the lease of real estate or the lease/rental of moveable property represents another subgroup of taxable income. Deductible expenditures can be determined either as actual expenses or as a lump-sum percentage of taxable income (30%). Annual lump-sum expenses are limited to CZK 600,000.

Deductions

The Czech tax legislation provides for the following deductions up to limits stipulated by the Czech tax legislative from tax base. The following deductions can be claimed by Czech tax resident and also by Czech tax non-resident who have more than 90 percent of the worldwide income from Czech sources and who is the tax resident in other EU Member country or EEA country.
· Interest on mortgage provided in the Czech Republic or abroad, provided that further conditions stipulated by the Czech tax legislation are met (particularly that the mortgage has to be used for financing own permanent housing/accommodation of the individual or family members).
· Contributions paid by an individual to a private pension fund in the Czech Republic or private pension insurance scheme in another EU (EEA) Country, provided that further conditions stipulated by the Czech tax legislation are met. apply).
· Contributions paid by an individual to a private life insurance scheme or private pension insurance scheme in the Czech Republic or in another EU (EEA) Country, provided that further conditions stipulated by the Czech tax legislation are met.
· Cash or non-cash charitable contributions made to defined Czech entities and individuals as well as similar entities and individuals registered in another EU (EEA) country.

Tax credits

The following tax credits can be claimed in the Czech Republic.
· Tax credit of CZK 24,840 per year for the taxpayer (generally for residents and non-residents; from 2014 tax credit can also be claimed by individuals receiving pension from Czech pension insurance scheme or a similar foreign compulsory old age insurance scheme).

The following credits can be claimed by Czech tax resident and also by Czech tax non-resident who have more than 90 percent of the worldwide income from Czech sources and who is the tax resident in other EU Member country or EEA Member country.

· Tax credit of CZK13,404 annually per dependent child, CZK 15,804 (should be increased during 2017 to CZK 17,004) for a second dependent child and CZK 17,004 (should be increased during 2017 to CZK 20,604) for third and each subsequent dependent child living with taxpayer in the common household in EU Member country or EEA Member country.
· Pre-school fee paid for each child up to the annual minimum wage (i.e. CZK 11,000 for 2017)
· Tax credit of CZK24,840 for a spouse whose own worldwide income does not exceed CZK68,000 per year.

Residency Rule

An individual is considered a resident for tax purposes in the Czech Republic if either of the following conditions is met:
· The individual has a permanent home in the Czech Republic (either an owned or rented residence where the individual has the intention to live permanently). The possession of a long-term visa does not, by itself, make an individual a tax resident in the Czech Republic.
· The individual is present in the Czech Republic for 183 or more days in a calendar year. This includes the days of arrival and departure.

An individual not meeting the conditions of Czech tax residency is considered Czech tax non-resident. Non-residents present in the Czech Republic for less than 183 days in any 12-month period and working for a foreign employer with no taxable presence in the Czech Republic are not subject to Czech income tax on employment income from work performed in the Czech Republic (Czech-source income).

Generally, the following individuals are subject to Czech tax on Czech-source income, irrespective of the number of days of physical presence in the country:
· All employees of a Czech company, including all branches.
· Expatriate assignees whose salary costs are borne directly by or recharged to a Czech entity (or a permanent establishment [PE]).
· Statutory representatives or members of the Board of Directors or Supervisory Board of Czech companies.

Dual residency

If the individual is considered resident in more than one country, the final tax residency is determined based on the applicable double tax treaty (DTT). Most DTTs define an individual as a Czech tax resident if one has a permanent home in the Czech Republic, a strong personal and/or economic connection to the Czech Republic, a habitual place of residence in the Czech Republic, or Czech citizenship.



Corporate Tax

Corporate income tax (CIT) applies to the profits generated by all companies, including branches of foreign companies. Corporate partners in general partnerships (i.e. unlimited) and corporate general partners (i.e. unlimited) in a limited partnership are subject to CIT on their share of the profits in the partnership.

Czech resident companies are required to pay CIT on income derived from worldwide sources. Non-resident companies are required to pay CIT on income sourced in the Czech Republic.

The 19% CIT rate applies to all business profits, including capital gains from the sale of shares (if not exempt under the participation exemption regime).

There is a special tax rate of 15% levied on dividend income of Czech tax resident entities from non-resident entities (unless subject to participation exemption).

A 5% CIT rate applies to income of defined investments, and a 0% CIT rate applies to pension funds.

Taxable Income

The starting point for the calculation of the CIT base is the accounting result as per the Czech accounting standards. The tax non-deductible costs are then added and non-taxable revenues deducted from the accounting result.

Inventory valuation

Stock (i.e. inventory) is valued at cost. Czech legislation specifically provides for the use of the arithmetical average cost and first in first out (FIFO) methods to value stock. Last in first out (LIFO) and the replacement-cost methods (except for livestock) may not be used.

Capital gains

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 from the sale of shares may be exempt from Czech taxation if all of the following conditions are met:
· The Czech or EU parent holds at least 10% of the shares of the subsidiary for at least 12 months.
· The subsidiary is a tax resident of the Czech Republic or another EU member state.
· Both the parent and the subsidiary have one of the legal forms listed in the Annex to the EU Parent/Subsidiary Directive.
· The parent or the subsidiary are not exempt from corporate taxation or may not choose to be exempt, and the tax rate applicable to their income is greater than 0%.

If the subsidiary is not a tax resident of the Czech Republic or another EU member state, the exemption may be applied, provided that the subsidiary is a tax resident of a country where there is a DTT in place with the Czech Republic, it has a legal form similar to a limited liability company or a joint stock company, it is subject to CIT at the nominal rate of at least 12% in a year when dividends are paid, and the time test of 10% for at least 12 calendar months is met. The time test may be met both prospectively and retrospectively.

Dividend income

Dividends received by Czech tax resident corporations from non-resident entities are subject to a special tax rate of 15%, unless exempt under the participation exemption regime described below.

Dividends paid by Czech tax resident corporations to Czech resident entities are subject to 15% final withholding tax (WHT), unless exempt under the participation exemption regime.
Dividends paid by Czech tax resident corporations to Czech non-resident entities are subject to 15% final WHT, unless exempt under the participation exemption regime or decreased under the relevant DTT. Dividends paid to entities that are residents of countries outside of the European Union and European Economic Area (EEA), and countries with which the Czech Republic does not have an enforceable DTT or tax information exchange agreement (TIEA), are subject to 35% WHT.

Participation exemption regime

Dividend income may be exempt from Czech taxation (i.e. WHT when a Czech company is paying dividends, CIT when a Czech company is receiving dividends) if all of the following conditions are met:
· The Czech or EU parent holds at least 10% of the shares of the subsidiary for at least 12 months.
· The subsidiary is a tax resident of the Czech Republic or another EU member state.
· Both the parent and the subsidiary have one of the legal forms listed in the Annex to the EU Parent/Subsidiary Directive.
· The parent or the subsidiary are not exempt from corporate taxation or may not choose to be exempt, and the tax rate applicable to their income is greater than 0%.

Regarding dividends paid, provided that the conditions above are met, the exemption also applies when dividends are paid by a Czech subsidiary to a parent in Switzerland, Norway, or Iceland.

Regarding dividends received, if the subsidiary is not a tax resident of the Czech Republic or another EU member state, exemption on dividends received by a Czech resident may be applied, provided that the subsidiary is a tax resident of a country where a DTT with the Czech Republic is in place, it has a legal form similar to a limited liability company or a joint stock company, it is subject to CIT at the nominal rate of at least 12% in a year when dividends are paid, and the time test of at least 10% for at least 12 consecutive calendar months is met.

Interest and royalty income

Interest and royalties received by Czech tax residents are included in the standard tax base subject to the 19% CIT rate.

Czech-source interest and royalty income received by Czech tax non-residents is subject to 15% WHT, unless subject to domestic exemption or a DTT stipulates otherwise. Interest and royalties paid by Czech tax residents to entities that are residents of countries outside of the European Union and European Economic Area, and countries with which the Czech Republic does not have an enforceable DTT or TIEA, are subject to 35% WHT.

Under domestic law, interest and/or royalty income is exempt if it is paid by a Czech resident to an EU resident recipient who is a beneficial owner of the interest and/or royalty income, provided that for at least 24 months before the payment:
· the payer is in at least a 25% parent-subsidiary or at least a 25% direct sister relation to the recipient of the income and
· the interest and/or royalty is not attributable to a Czech PE of the recipient.

The exemption is applicable subject to approval by the tax authorities.

Exchange gains and losses

Realised foreign exchange gains and losses are accounted for in profit and loss accounts and represent taxable revenues or tax-deductible costs, respectively. The same treatment applies to unrealised foreign exchange differences; however, there are court cases dated 2012 concluding that unrealised foreign exchange income is not taxable as it is only virtual income rather than a real increase of the taxpayer’s property.

The default functional currency is the Czech koruna. A Czech company cannot opt for any foreign currency to be the functional currency for tax purposes.

Foreign income

Companies resident in the Czech Republic are taxed on their worldwide income. A Czech corporation is taxed on its foreign branch income when earned (accrual basis) and on foreign dividends when approved by general meeting.

The participation exemption regime described above may be applicable.
There is no controlled foreign company (CFC) legislation in the Czech Republic. However, under the EU Anti-Tax Avoidance Directive, the Czech Republic is obligated to implement CFC legislation by the beginning of 2019.

Deductions from Income

Methods of tax depreciation are prescribed by tax legislation and are independent from depreciation methods for accounting purposes. Tax depreciation is calculated on an asset-by-asset basis, applying the straight-line or accelerated basis methods of depreciation at statutory rates. Under both methods, depreciation expense in the first year is lower than for subsequent years. The company may choose which method to apply to a new asset, but once the choice is made, it cannot be altered. All assets are classified into six groups, which determine the number of years over which the asset will be written off, as follows:

Assets
Life of Asset (Years)
Office machines and computers, tools
3
Engines, motor vehicles, machines, audio-visual equipment
5
Elevators, escalators, turbines, air conditioning equipment, electric motors, and generators
10
Buildings made of wood and plastic, long-distance lines, and pipes
20
Buildings (except for those listed in groups 4 and 6), roads, bridges, tunnels
30
Administrative buildings, department stores, historical buildings, and hotels
50

‘Tangible assets’ (i.e. assets that are subject to tax depreciation) are defined by tax legislation generally as assets with economic useful lives of greater than one year and acquisition prices higher than CZK 40,000. Certain assets, such as buildings, are always considered tangible assets.

Taxpayers are generally not obligated to depreciate a tangible asset for tax purposes every year. Depreciation may be interrupted in any year and continued in a later year without a loss of depreciation potential.

Tangible assets are generally depreciated by the taxpayer with ownership title. Certain exceptions apply, for instance, technical appreciation of a rented asset carried out by a tenant or a subtenant may be depreciated by that tenant/subtenant, subject to certain conditions.
Depreciation can start only once the assets are put into use and comply with the requirements of specific laws.

Certain assets have special depreciation methods (e.g. moulds are depreciated based on expected life or number of products).

The value to be used as the basis for tax depreciation depends on how the asset is acquired, for example:
· Acquisition cost (construction and equipment costs, architect fees, legal fees, notary’s fees, etc.) if the asset is acquired for consideration.
· Internal costs incurred if the asset is acquired or produced internally.

‘Intangible assets’ are defined by tax legislation as software, valuable rights, intangible results of research and development (R&D), and other assets regarded as assets for accounting purposes, provided that they:
· were acquired from a third party or developed internally for the purpose of trading with them
· have an acquisition price of more than CZK 60,000, and
· have a useful life of greater than one year.

Intangible assets are amortised for tax purposes based on the number of years that the taxpayer has a licence for the assets if the licence is for a limited number of years. Otherwise, amortisation for tax purposes will vary depending on the asset (e.g. software is amortised over at least 18 months, results of R&D are amortised over at least 36 months).

Goodwill

Goodwill arisen as a result of the purchase of a business (or its part) as a going concern may be evenly amortised for 180 months. Any other goodwill (e.g. arisen within a merger) is disregarded for tax purposes.

Start-up expenses

Start-up expenses incurred in 2016 and after are directly deductible expenses and are no longer recognised as intangible assets.

Interest expenses

Interest as accrued and duly accounted for under Czech generally accepted accounting principles (GAAP) is generally tax deductible, with the following exceptions:
· Interest disallowed based on the thin capitalisation.
· Interest disallowed for its relation to income that is tax exempt or taxed outside the standard tax base.
· Interest disallowed due to its relation to holding a subsidiary.
· Profit-dependent interest.

Under the EU Anti-Tax Avoidance Directive, the Czech Republic has an obligation to implement, by the end of 2018, a new interest stripping rule limiting tax deductibility of net interest expenses (calculated as the difference between interest expenses and interest revenue) to 30% of earnings before interest, tax, depreciation, and amortization (EBITDA) of a company. The interest stripping rule will apply to interest expenses arising in connection with debt instruments from related and also from unrelated parties.

Bad debt

Doubtful or bad receivables that have not yet become statute-barred may be provisioned for under special rules. Generally, provisions may be created for trade receivables overdue for more than 18 months. Provisions of 100% may be created for debts overdue for 30 months. For receivables, banks, insurance companies, and defined financial institutions have their specific system for provisioning.

Charitable contributions

Certain charitable donations are deductible. The minimum deductible donation is CZK 2,000 and the maximum deductible donation is 10% of the tax base.

Travel expenses and meal allowances

Payments for travel expenses and meal allowances that are made to employees may generally be tax-deductible.

Fines and penalties

Contractual fines and penalties are generally tax deductible on a cash basis. Non-contractual fines are not tax deductible.

Taxes

Road tax, real estate tax, and most other taxes, with the exception of income taxes, are deductible, as are social security contributions paid by an employer with respect to employees.

Other significant items

Fees paid to members of other statutory bodies of companies (i.e. board of directors of joint stock companies and cooperatives) for their services are deductible for tax purposes.

Net operating losses

Losses incurred in a tax year may be carried forward to offset taxable profits generated in the following five tax years. Losses may not be carried back. The possibility to utilise tax loss carried forward has been extended even to cross-border mergers (subject to certain limitations).

Payments to foreign affiliates

Generally, deductions may be claimed for royalties, management service fees, and interest charges paid to foreign affiliates, provided such amounts are at arm’s length.


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Note: Information placed here in above is only for general perception. This may not reflect the latest status on law and may have changed in recent time. Please seek our professional opinion before applying the provision. Thanks.


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This blog is Created by CA Anil Kumar Jain.