Czech Republic tax system: audit, reporting and optimization of taxation of Czech companies and individuals: VAT, income tax and capital gains
Basic taxes (briefly)
|Corporate tax (in detail)||Income tax is paid at the rate of 19%. With regard to income in the form of dividends, tax is paid at the rate of 15%|
|Capital gains tax. Details||generally included with other taxable income and taxed at the regular corporate income tax rate|
|VAT. Details||The standard VAT rate is 21%. Reduced rates of 15% and 10% apply to some goods and services|
|Other taxes||Social contributions, Real estate tax|
International tax agreement
|Albania, Armenia, Australia, Austria, Azerbaijan, Bahrain, Barbados, Belarus, Belgium, Bosnia and Herzegovina, Brazil, Bulgaria, Canada, Chile, China, Colombia, Croatia, Cyprus, Denmark, Estonia, Ethiopia, Finland, Former Yugoslav Republic of Macedonia, France, Georgia, Germany, Greece, Hong Kong (China), Hungary, Iceland, India, Indonesia, Iran, Ireland, Israel, Italy, Japan, Jordan, Kazakhstan, Korea (Democratic People's Republic of), Korea (Republic of), Kosovo, Kuwait, Latvia, Lebanon, Liechtenstein, Lithuania, Luxembourg, Malaysia, Malta, Mexico, Moldova (Republic of), Mongolia, Montenegro, Morocco, Netherlands, New Zealand, Nigeria, Norway, Pakistan, Panama, Philippines, Poland, Portugal, Romania, Russian Federation, Saudi Arabia, Serbia, Singapore, Slovakia, Slovenia, South Africa, Spain, Sri Lanka, Sweden, Switzerland, Syrian Arab Republic, Tajikistan, Thailand, Tunisia, Turkey, Turkmenistan, Ukraine, United Arab Emirates, United States, Uzbekistan, Venezuela, Viet nam|
|Andorra, Aruba, Bahamas, Beliz, Bermuda, Cayman Islands, Cook Islands, Guernsey, Isle of Man, Jersey, Monaco, San Marino, Sint Maarten, Virgin Islands, British|
The system of taxation of the Czech Republic resembles the systems of taxation of other European countries. The system of taxation of the Czech Republic consists of the following tax categories: value added tax (VAT), income tax, real estate tax, road tax, estate tax, gift and inheritance tax, excise duty, real estate transfer tax and environmental tax. Each type of tax is defined in a specific piece of legislation. The administration and collection of the individual taxes falls under the Ministry of Finance of the Czech Republic and its subordinated administrative bodies, above all the local tax authorities.
Personal Income Tax
Personal income tax in Czech Republic is taxed on the worldwide income of resident individuals, and on Czech- source income of non-residents. Tax base is income from employment, income from self-employment, income from capital – e.g. interest, dividends, rental income, and other income – e.g. occasional income, income from sale. Personal income tax is levied at rate of 15%. The tax year for individuals is calendar year. Tax on employment income is withheld by the employer and remitted to the tax authorities. The tax return must be filed by 1 April of the following year. This deadline can be extended to the first day of the seventh month if the tax return is prepared and submitted by the registered tax advisor under a power of attorney, or application of the taxpayer not represented by such an advisor, a three-month extension to file a tax return may be granted at the discretion of tax authorities. Penalty and interest apply for late payment of tax, failure or late filing, or under-declaring income.
Corporate income tax is levied on the worldwide income and capital gains of resident taxpayers and is assessed on the basis of a company’s annual net profits minus deductible expenses. Nonresident companies are taxed only on Czech-source income. As of 1 January 2011, the standard corporate income tax is 19%, with a reduced rate of 5% applying to income from investment and pension funds. Investment income received by Czech companies from abroad forms a separate tax base that is taxed at 15%. The income tax rate is the same for foreign and domestic investors. Branches are taxed at the same rate as local companies.
Capital gains tax
Income from the sale of assets is generally included with other taxable income and taxed at the regular corporate income tax rate. Capital gains on the sale of securities and participations in companies resident in the EU, Norway or Iceland 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 generated on the sale of a subsidiary that: is tax resident in a non-EU country with which the Czech republic has concluded a tax treaty; has a specific legal form; satisfies the conditions for the dividend exemption similar to those of the EU Parent – Subsidiary Directive; and is subject in its home country to tax similar to the Czech corporate income tax at a rate of at least 12%.
Losses may be carried forward for five years. Loss relief is restricted where there has been a significant change (more than 25%) in the structure of persons or entities directly participating in the equity/share capital of the control of the loss-making company or if merger was carried out.
The tax year for corporations can be the calendar year, an economic year, a period from the time of a merger to the end of the calendar year, or the accounting period if this period is longer than 12 months. The economic year is a 12-month period that starts on the first day of any month except January.
Since the Czech republic’s accession to the EU, the value added tax (VAT) regime has been amended to conform to the common European system. VAT is charged on the supply of most goods and the provision of services at a standard rate of 20%. A reduced rate of 10% applies to the supply of certain good and services. Imported goods are assessed for VAT at the same rates as domestic goods, and the export of goods to non-EU countries is an exempt supply.
Companies seated in the Czech Republic with a turnover exceeding CZK 1 million per 12 calendar months are required to register for VAT. Registration also is required if purchases from other EU countries exceeds CZK 326,000 per calendar year. Additionally, some specific transactions – such as the acquisition of certain services – create an immediate obligation to register for VAT and a company can register voluntarily even if its turnover fails to reach the threshold if it renders taxable supplies in the Czech Republic. Foreign businesses and companies from other EU member states are obliged to register for VAT in the Czech Republic in certain circumstances.
VAT tax period and returns
The VAT return must be filed and the paid within 25 days after the end of the taxable period. The taxable period is a calendar month or calendar quarter, depending on taxpayer turnover.
As from 2009, tax residents from EU states and countries forming the European Economic Area (EEA) are entitled to file a tax return after the end of the tax period in which they are allowed to charge the relevant expenses against select Czech-sourced income (such as interest or royalties). If the withheld tax is higher than the resulting local tax liability the foreign, entity has a tax overpayment and is entitled to a refund. Dividends paid to residents and nonresidents are subject to a final withholding tax of 15%. However, under the EU Parent-Subsidiary Directive, dividends paid by Czech companies to parent companies located in other EU Member States, Switzerland, Norway or Iceland are exempt from withholding tax if the parent company maintains a holding of at least 10% of the distributing company for an uninterrupted period of at least 12 months. Dividend distributions between two Czech companies are exempt from tax under similar conditions. Dividend also are exempt if paid by a subsidiary that: is tax resident in a non-EU country with which the Czech Republic has concluded a tax treaty; has a specific legal form; satisfies conditions for the dividend exemption similar to those of the EU Parent-Subsidiary directive; and is subject to home country tax similar to Czech income tax at rate of at least 12%. Interest paid to nonresidents is subject to a 15% withholding tax unless the rate is reduced under a tax treaty or the interest qualifies for exemption under EU Interest and Royalties Directive or EU-Swiss agreement or meets comparable requirements for payments to Norway or Iceland. Royalties paid to nonresidents are subject to a 15% withholding tax unless the rate is reduced under a tax treaty. As from 1 January 2011, royalties paid to related-party recipients (parent, subsidiary or sister ) in the EU, Switzerland, Norway or Iceland are exempt if the requirements for application of the EU Interest and Royalties Directive or EU-Swiss agreement or comparable requirements for payments to Norway or Iceland are met.
Stamp duty is not levied in the Czech Republic.
There is no annual government fee in Czech Republic.
Other taxes and duties
|Road tax||applies only to those vehicles that are used or intended for business. Vehicles used exclusively for personal needs are exempt from the tax. Tax rates are defined as fixed annual amounts. Real estate tax||generally applies to land and buildings; however, there are many exemptions. In terms of land, the tax base is either the plot area or the price of the land. The tax rate depends on the form of usage of the land and its location. In terms of buildings, the tax base is the built up area and the tax rate again depends on the type of usage of the building and its location. Generally, the larger the municipality, the higher the rate. Real estate transfer tax||applies to a transfer of real estate for a fee. The unified tax rate is defined as 3 % of the price of the transferred real estate. Inheritance tax||applies to assets acquired through inheritance. Certain groups are not subject to inheritance tax. Gift tax||is a one-off tax which applies to the payment-free acquisition of assets. Certain groups are not subject to gift tax. Environmental tax||applied on electricity, natural gas and solid fuels. Social security contribution||employers must contribute the equivalent of 34% of gross wages to the state social security and health insurance funds monthly; employee pay an additional 11% of gross wages to the funds.|
Transfer pricing: All related party transactions must be conducted at arm’s length. If the prices between related entities differ from those contracted with unrelated parties under the same or similar conditions and the difference is not properly documented, the Czech tax authority may adjust the taxpayer’s income tax base. In applying the arm’s length standard, the Czech Republic has implemented the OECD Transfer Pricing Guidelines. Advance pricing agreements may be obtained from the tax authorities. Thin capitalization: Thin capitalization rules are applied to related persons and to loans and credits from other than related parties if the related parties are obliged to grant a directly related loan or borrowing to an other-than-related party (“back-to-back financing”). The proportion of loans and borrowings to equity must no exceed 4:1 (6:1 if the debtor is a bank or insurance company). Financial expenses related to loans and borrowings where the interest or the maturity is derived from the profit of the debtor remain fully nondeductible. Controlled foreign companies: No General rules: The Tax Procedure Code stipulates a substance-over-form rule. Additionally, the Czech Supreme Administrative Court has, in principle, adopted the abuse-of-law doctrine developed by the European Court of Justice.
Double Tax Agreements
The Czech Republic has entered a whole range of double tax and tax information exchange mechanisms:
- 90 DTC: Albania, Armenia, Australia, Austria, Azerbaijan, Bahrain, Barbados, Belarus, Belgium, Bosnia and Herzegovina, Brazil, Bulgaria, Canada, Chile, China, Colombia, Croatia, Cyprus, Denmark, Estonia, Ethiopia, Finland, Former Yugoslav Republic of Macedonia, France, Georgia, Germany, Greece, Hong Kong (China), Hungary, Iceland, India, Indonesia, Iran, Ireland, Israel, Italy, Japan, Jordan, Kazakhstan, Korea (Democratic People's Republic of), Korea (Republic of), Kosovo, Kuwait, Latvia, Lebanon, Liechtenstein, Lithuania, Luxembourg, Malaysia, Malta, Mexico, Moldova (Republic of), Mongolia, Montenegro, Morocco, Netherlands, New Zealand, Nigeria, Norway, Pakistan, Panama, Philippines, Poland, Portugal, Romania, Russian Federation, Saudi Arabia, Serbia, Singapore, Slovakia, Slovenia, South Africa, Spain, Sri Lanka, Sweden, Switzerland, Syrian Arab Republic, Tajikistan, Thailand, Tunisia, Turkey, Turkmenistan, Ukraine, United Arab Emirates, United States, Uzbekistan, Venezuela, Viet nam. 14 TIEA: Andorra, Aruba, Bahamas, Beliz, Bermuda, Cayman Islands, Cook Islands, Guernsey, Isle of Man, Jersey, Monaco, San Marino, Sint Maarten, Virgin Islands, British.
Foreign exchange control
There is no exchange control in the Czech Republic.
All legal persons with their seat in the territory of the Czech Republic, foreign persons doing business in the territory of the Czech Republic, natural persons – entrepreneurs entered in the Commercial Register or if their turnover in the last calendar year exceeded the amount of CZK 25,000,000, as well as all entities who have voluntarily decided to keep the accounts, are obliged to keep accounts.
Some companies are obliged to keep the accounts and complete financial statements according to the International Accounting Standards. These are companies who issue securities registered in the regulated securities market in one of the member states of the European Union. The financial statements consists of balance sheet, profit and loss statement, and appendix. Financial statements can also include cash-flow and an overview of changes of equity capital. Financial statements are compiled as at the balance sheet day. The financial statements are published in the Commercial Register. Accounting units are obliged to archive statements for at least 10 years.
The following accounting units have the duty to have ordinary, as well as extraordinary financial statements verified by an auditor:
- Joint stock companies, if they, at the end of the balance sheet day of the accounting period for which the financial statements are verified, and the immediately preceding accounting period, exceeded or already reached at least one of the three criteria: (1) Assets of more than CZK 40,000,000; (2) Annual net turnover of more than CZK 80,000,000; (3) Average calculated number of employees during the accounting period of more than 50. Other commercial companies and cooperatives, if they, at the end of the balance sheet day of the accounting period for which the financial statements are verified, and the immediately preceding accounting period exceeded or already reached at least one of the three criteria above.
Generally speaking, Annual Return is a short review on the current state of the company, which is prepared by the company secretary annually. As a rule it includes the following information:
- Incorporation information (registration date, registered address); Information about directors and their resignation; Information about secretaries and their resignation; Information about registered capital, nominal value of shares and amount of issued shares; Information about shareholders and share transfer.
The tax year for corporations can be the calendar year, an economic year, a period from the time of a merger to the end of the calendar year, or the accounting period if this period is longer than 12 months. The economic year is a 12-month period that starts on the first day of any month except January. There is a three-month period for filing the tax return, beginning from the end of the taxable period. This deadline may be extended to six months if the tax return is prepared and submitted by a registered tax advisor under a power of attorney. The power of attorney must be filed with the financial office by the end of the third month after the end of the taxable period. Upon application of the company, a three-month extension to file a return may be granted at the discretion of the tax authorities. The deadline for companies that are subject to statutory audits is automatically extended to six months. Tax is due on the deadline for filing the tax return. Additionally, 2 or 4 advance payments are required, depending on the previous year’s tax liability. Penalties and interest apply for the late payment of tax, failure to file or late filing or under-declaring income (however, a late payment of no more than 5 days should not result in a sanction).
Taxes of Czechia
|Min. rate for corporate tax||19%|
|Capital gains tax||Regular rate|