Taxation of legal entities
Corporate tax is levied on the profits of legal entities, primarily limited liability companies (s.r.o.) and joint-stock companies (a.s.). Although partnerships are legal entities under the Commercial Code, the profits of a general partnership (v.o.s.) are not subject to corporate tax: instead, each partner's share of the profits is taxed in his hands. In the case of a limited partnership (k.s.), the limited partner's share of the profits is subject to corporate tax in the hands of the k.s., while the general partner's share is taxed in the same way as in the case of v.o.s.
A branch or permanent establishment of a foreign company is generally subject to tax on the same basis as a company, although for so-called "non-trading" branches, i.e. those which do not invoice, it is possible to be taxed on a deemed profit basis, which will probably be a percentage of revenues generated in the Czech Republic, or a percentage of costs.
The current rate of corporation tax is 19%.
Capital gains are generally included in income and taxed at the same rates. There is no tax consolidation within the Czech Republic. Each company within a group is taxed individually, with no set-off of losses against profits between different companies.
The current rate of dividend tax is 19%.
If a Czech company is a subsidiary of another Czech company or a company resident in another EU member state (the EU Parent/Subsidiary Directive), there is no tax on dividens paid by the Czech subsidiary. For dividends from 2008, the basic test for determining whether a parent/subsidiary relationship exists is the holding of at least 10% of the registered capital of the subsidiary for at least 12 months.
Taxation of business income
The tax treatment of income derived from business activities is broadly the same for natural and legal persons. The starting point for computing the taxable profits is the profit before tax disclosed by the accounts. This is then subject to adjustments under the Income Tax Act. Unless the Income Tax Act contains a provision to the contrary, income and expenses according to the accounts are taxable/deductible. Where capital gains form part of business profits, they are taxable as normal income.
Deductible items include:
- tax depreciation of tangible assets
- tax depreciation of intangible assets
- lease rentals, subject to certain restrictions
- certain reserves, as set out in the Act on reserves
- expenditure on research and development
Tax depreciation of tangible assets is available under the Income Tax Act. Such assets are divided into 6 categories broadly reflecting expected useful lifetime, from farm animals (category 1) to administrative buildings (category 6).
The depreciation periods for the assets categories are:
- 3 years
- 5 years
- 10 years
- 20 years
- 30 years
- 50 years
The tax depreciation periods of intangible assets are:
- audiovisual products: 18 months
- software and intangible results of research and development: 3 years
- incorporation expenses: 5 years
- other intangibles: 6 years
Taxation of individuals
The taxation of individuals depends primarily on their residence status. Residents of the Czech Republic are subject to tax on worldwide income, whereas non-residents are subject to tax on Czech source income only.
Residents is defined as individuals or entities having a permanent home in the Czech republic, or spending 183 days or more in the Czech Republic during the tax year (the year to 31 December).
Personal income tax is charged on:
- employment income
- business income
- investment income
- capital gains
- any other income not within the above categories.
There are numerous exemptions, of which the most important are probably the exemptions from tax on gains from the sale of securities (including shares in an a.s.) which have been held for at least 6 months, and of an interest in a private company or partnership which has been held for at least 5 years.
Personal income tax is charged at 15%. Dividends and other income subject to withholding tax at source are not subject to any further taxation. Foreign source investment income is subject to a flat rate of 15%.
Employees are subject to tax on income in all forms, whether in cash or in kind. In particular, benefits such as the provision of a car which is available for private use are taxable. There is little provision for private pension schemes in the Czech Republic. As a result, contributions paid by the employer are, with restricted exceptions, taxable benefits.
Social security contributions, where payable, amount to 47.5% of an employee's salary, with an upper limit on the salary subject to contributions. This consists of an employee's contribution of 12.5% and employer's contribution of 35%, made up as follows:
|Employer (%)||Employee (%)|
International tax issues
Companies having their "seat" in the Czech Republic are subject to Czech tax on their worldwide income. Until 2001, a company's seat was defined simply as where it was registered. From January 2001, however, the definition has been extended to include the place whete the company is managed. Such companies are referred to below as Czech resident. Other companies (non-resident) are subject to tax on Czech-source income only, subject to the provisions of double taxation agreements.
Foreign-source income of Czech resident companies is generally taxable, subject to the provisions of double taxation agreements. The income of foreign branches or permanent establishments of Czech residents is included in taxable profits. Dividends from foreign companies form a separate source of income which is taxable at a special rate, currently 15%.
Under some double taxation treaties, however, the income of a permanent establishment in other state is exempt from Czech tax. In such a case, expenses related to that income are not tax deductible.
Relief for foreign taxes is given by credit only if there is a double taxation agreement with the other state. Otherwise, the foreign tax can only be treated as an expense.
Non-residents are subject to Czech tax on:
- income of a permanent establishment in the Czech Republic
- employment income from duties performed in the Czech Republic
- income from services performed in the Czech Republic
- income from the sale or use of real estate in the Czech Republic
- income from performance and sporting activities in the Czech Republic
- royalties, dividends and other profit distribution , interest, and lease rentals
- capital gains on the sale of securities or sale of an interest in a private company or partnership where the buyer is a Czech resident or is a permanent establishment of a non-resident
- lottery and gambling winnings in the Czech Republic
- alimony and pensions arising in the Czech Republic
- income arising from reductions in capital
- income from payment of a receivable acquired by assignment
These tax liabilities are to some extent mitigated by tax treaties, where applicable. In particular, where there is a treaty income from services can be taxed only if the service provider has a permanent establishment in the Czech Republic and income from employment can be taxed only if the employee is employed by a Czech company or a permanent establishment, or if he or she spends more than 183 days in the Czech Republic.
Income which is liable to tax is generally subject to withholding taxes, for example for EU tax residents:
- dividends and interest 15%
- royalties (normally including lease rentals) 25%
- services provided in the Czech Republic 25%
- activities of entertainers and sportsmen 15%.
Where such withholding taxes are charged, they are a final tax. They are generally reduced by double taxation treaties, but it should be emphasised that Czech treaties never reduce the rate of withholding tax on royalties to zero, with the exception of some " cultural" royalties.
Tax administration is governed partly by the Income Tax Act and partly by the Administration of Taxes Act.
All Czech resident companies, limited partnerships, and permanent establishments of non-resident companies must make tax returns. This does not apply to general partnerships.
All individuals having a monthly taxable income exceeding CZK 15,000 must make tax returns unless the income is subject to withholding tax. This means that, in general, employees of Czech companies or branches of foreign entities are not required to make returns unless they also have other taxable income. Anyone who claims a tax loss must make a return.
The deadline for submission of a tax return is 3 moths from the end of the taxable period. For all taxpayers, with the exception of legal entities that have adopted an "economic" year's end, the taxable period is the year to 31 December, and the tax return deadline is therefore 31 March. This deadline is extended by a further 3 months if the taxpayer is subject to a statutory audit, or the taxpayer engages a registered tax adviser to submit the tax return on his behalf.
Except for withholding taxes, tax is collected during the year by a systém of prepayments based on the previous year's liability. The final deadline for settlement of the liability is the same as for the submission of the return.
The tax authorities have the power to carry out tax inspections on the taxpayer's premises. Normally, such an inspection must be carried out within 3 years of the end of the year in which the return was due (i.e. within 4 years of the end of the relevant taxable period). However, if an inspection is carried out within this period, the deadline for further inspections is extended by a further 3 years, up to a maximum of ten (i.e. 11 years after the end of the year being inspected).
There is a provision in the Income Tax Act that where a taxpayer has returned a loss, the period in which an inspection may be carried out is extended by the period during which the loss may be utilised. Since losses may be carried forward for up to 7 or 5 years, depending on whether they were incurred before or after 1 January 2004, this seems to mean that theoretically an inspection could be carried out up to 18 years after the end of the period concerned. A recent decision of the Supreme Administrative Court has indicated that this may apply only to companies which have been granted investment incentives.
Generally, penalties for the late payment of tax are 0.1% of the tax liability for each day in default. If tax is assessed as a result of an inspection by the tax authority, the penalty rate is doubled, i.e. 0.2% of the additional tax per day in default. If tax is assessed based on a supplementary tax return filed by the taxpayer, only half the rate (0.05%) per day in default is applicable. This applies for the first 500 days during which the tax is overdue; thereafter penalties accrue at 140% of the Czech national Bank discount rate per annum.
Value added tax VAT is generally due on supply of goods or services with a place of supply in the Czech Republic made by a taxable person in the course of economic activities carried on by that person. The following transaction are subject to Czech VAT:- delivery of goods and transfer
Value added tax (VAT)
VAT is generally due on supply of goods or services with a place of supply in the Czech Republic made by a taxable person in the course of economic activities carried on by that person.
The following transaction are subject to Czech VAT:
- delivery of goods and transfer of immovables for a consideration, with a place of supply in the Czech Republic
- provision of services for a consideration, with a place of supply in the Czech Republic
- intra-Community acquisition of goods for a consideration, with a place of supply in the Czech Republic
- import of goods into the Czech Republic
If goods are sold to a customer who is registered for VAT in another EU Member State and the sale involves the removal of those goods from the Czech Republic (either by the supplier or by the customer) to another EU Member State, then the supply is a zero-rated (exempt with credit) intra-Community supply. The supplier should obtain the customer's VAT number and quote it in the invoice.
If goods are sold and delivered to a customer who is not registered for VAT in another EU Member State, Czech VAT should be accounted for unless the "distance selling" threshold in the destination EU Member State is exceeded. Once the limit is exceeded the supplier may have to register for VAT in that Member State.
The import of goods from outside the EU is subject to Czech VAT and is payable by the importer.
Registration for VAT purposes
If a Czech entity or an EU/foreign entity has a seat, place of business or fixed establishment in the Czech Republic, it is treated as a Czech entity. A Czech entity which makes taxable supplies in the Czech Republic exceeding the annual VAT registration threshold of CZK 1 million is required to register and account for Czech VAT. Even if the registration threshold is not exceeded, Czech entities can still choose to register for VAT as Voluntary Traders.
Foreign and EU entities who have no seat, place of business or fixed establishment in the Czech Republic are obliged to register for Czech VAT if they provide a taxable supply within the territory of the Czech Republic on which they have to account for VAT. There is no VAT registration threshold for non-Czech entities, which means that VAT registration is obligatory if any such taxable supply of any value is effected within the Czech Republic.
If the annual turnover is higher than CZK 10 million, VAT returns have to be submitted on a mothly basis. If the annual turnover is lower than CZK 2 million, VAT returns must be submitted quarterly. If the turnover is between CZK 10 million and CZK 2 million, the taxable person can choose whether to complete monthly or quarterly VAT returns. Non-Czech entities may only pay VAT quarterly, i.e. the monthly taxable period is not allowed.
The VAT liability has to be paid by the due date for submission of the VAT return. A Czech VAT payer is obliged to submit the VAT return within 25 days of the end of the tax period, even if he has no tax liability. The tax liability is payable within the same 25 day period, with the exception of VAT on imported goods, where the tax due date is subject to customs regulations.
European Sales List - tax evidence
The ESL must be completed if a VAT registered business:
- makes supplies of goods to a person registered for VAT in another EU member state or
- makes a transfer of its own goods between the Czech Republic and another EU member state or
- acts as the intermediary in a triangular transaction between VAT registered traders in other EU member states.
- The ESL must be submitted every calendar quarter by the 25th day of the following month. A penalty of up to CZK 2 million may be imposed for failure to submit the ESL.
Intrastat Declarations - statistical evidence
VAT registered businesses that dispatch or receive goods to or from other EU member states which exceed the relevant annual thresholds (CZK 4 million for dispatches or CZK 2 million for goods received) must complete a supplementary declaration each month. Further information must be provided if the value of goods dispatched or received exceeds CZK 100 million. There may be a penalty of up to CZK 1 million for failure to submit the Intrastat declaration.
The standart rate of VAT, which applies to most taxable supplies, is 21%.
In addition, there is reduced rate of 15% which applies to:
- construction services in respect of residential buildings and flats
- sewerage services, water supply and related services
- health and social services
- regular public transport services
- certain food products
- books, brochures, newspapers and magazines where advertisements do not exceed 50% of the space, picture books and books for children, certain health products and services and aids for the handicapped
The items listed below are exempt from VAT:
- insurance services
- financial services
- postal services
- betting, gaming and lotteries
- health and welfare
- TV and radio broadcasting
- transfers of land (excluding building land)
- transfers of immovable property (buildings, flats and non-residential premises) within 3 years of acquisition of the property or its approval by the construction authorities
- financial leasing of immovable property except where the contract is concluded within 5 years of acquisition of the property or its approval by the construction authorities
- letting of land and immovable property (apart from the letting of parking spaces and safe deposits boxes and short-term lettings).
Excise duty is payable on hydrocarbon fuels and lubricants, spirits, wine and beer and tobacco products. Excise duties are fixed at a set amount per unit for each group of products.
The new Excise Duty Act has implemented EU rules governing the production of the above products and their release into free circulation. These products must generally be produced in a tax warehouse. Once removed from the tax warehouse they must be released into free circulation and excise duty must be paid, or they can be transported under a suspension exemption to alicensed trader in another EU member state or to another tax warehouse. They can also be exported under the suspension system outside the EU.
The excise duty is paid at the moment the suspension regime is terminated. A licensed trader can not firther store or sell the products under the suspension system and he is obliged to pay the excise duty once he receives the goods.
Excise duty is administered by the customs authority.
Real estate tax
The Real Estate Tax Act levies taxes on the owners of immovable property situated in the Czech Republic. Different rates apply to unimproved land, agricultural land and structures. The tax base is calculated as follows:
- The property tax on structures used for business purposes is based on the area of the structure using the rates below:
|Other business||10 CZK/m2|
- An additional charge of CZK 0.75 per square metre is levied for each floor above ground level.
- The taxable base for agricultural land, forests, lakes and ponds used for fish farming is the purchase price or the total land area multiplied by CZK 3.80. The tax rates vary between 0.75% for arable land and 0.25% for forestry.
- For other types of land, the tax is based on the area and the rate is CZK 1 per square metre for building plots and CZK 0.20 per square metre in other cases.
- The amounts calculated above are then multiplied by a coeficient ranging from 1 to 4.5 reflecting the location of the property. The highest coefficient is for land in Prague.
For most property the tax must be paid in quarterly installments in advance. Real estate tax is deductible for corporate income tax purposes.
Real estate transfer tax
A transfer tax of 3% of the higher of the purchase price or the appraised value is payable by the seller on all sales of land and buildings and other immovable assets. A special return must be submitted and the tax must be paid within 30 days of registration of the sale. Where the seller does not pay the tax, the liability will be transferred to the buyer. The tax is deductible for corporate income tax purposes.
Inheritance and gift tax
Inheritance tax is payable by the heirs of deceased persons. Subject to certain exemptions, if the deceased was a Czech citizen with permanent residence in the Czech Republic, the tax is charged on the net value of all assets (except real estate abroad). Otherwise it is charged only on assets located in the Czech Republic.
Gift tax is charged on the gratuitous acquisition of property. The taxpayer is normally the donee, but if the donor is a Czech resident and the donee is not, the tax is payable by the donor.
There are 3 categories of taxpayer for both inheritance tax and gift tax, namely:
- direct relatives and spouses of the deceased/donor
- other relatives
- other persons.
The rates of tax vary depending on the value of the inheritance/gift and the above categories.