V. BUSINESS AND FINANCE
ENTREPRENEURSHIP OF FOREIGN ENTITIES & ITS TAXATION IN THE CZECH REPUBLIC Entities that are not tax residents of the Czech Republic may become liable to income tax according to the Income Tax Act No. 586/1992 Coll., as amended, if they receive income derived from the territory of the Czech Republic.
Although the basic level of taxation of this income is relatively low (corporate income tax 19 %, natural persons 15 %), it may become a fundamental complication for their business activities. It is essential to realise the fact that, in some cases, income tax of tax non-residents is withheld in a form of withholding tax from gross revenues (at the rate of 5 % or 15 %) and not from profit. Withholding tax rate of 35 % is also applicable for taxpayers who are not EU members or taxpayers from a country that has not signed Double Tax Treaties with the Czech Republic. Although the Czech Republic as a member of OECD has signed many international bilateral double tax treaties regarding the avoidance of double taxation – currently with 88 states – these agreements mostly modify the rate of the withholding taxes, but the principle of withholding tax by retention tax from the whole income instead of profit taxation is a basic complication. Under these conditions, it is appropriate to consider founding a subsidiary or branch used for doing business in the Czech Republic.
I. TYPES OF INCOME TAXED BY WITHHOLDING TAX Among revenues of tax non-residents derived from the territory of the Czech Republic, on which 15 % withholding tax is levied (unless reduced/eliminated by a double tax treaty or unless a permanent establishment is created), may be included e.g.:
other income derived from a capital asset interest. Revenues of tax non-residents obtained from the territory of the Czech Republic on which 5 % withholding tax is imposed are rentals from financial lease. We have to note that the Czech Republic has a broad system of capital gains (realised on sale of shares) tax exemption valid for Czech non-transparent companies with shares in Czech/EU non-transparent subsidiaries and for EU non-transparent companies with shares in Czech subsidiaries. The conditions are, in particular, that at least a 10 % share is held for at least a 12-month period (even sale of shares in a third-country subsidiary may qualify under certain additional conditions).
II. TYPES OF INCOME OF NON-RESIDENTS TAXED ON INCOME PROFITS Besides income liable to withholding tax types of income derived by non-residents from the territory of the Czech Republic, incomes exist which are subject to the standard 19/15 % Czech corporate income tax applied on profit. For these types of income, a standard income tax return shall be submitted (once a year until 1 April of the following year, or until 1 July of the following year if the tax return is prepared by a tax advisor/attorney at law on the basis of Power of Attorney) and the tax base consists of profit adjusted for attributable and deductible items. These revenues are typically represented by revenues from real estate or permanent establishment.
Revenues from: s ervices (except realisation of building site or construction or installation or assembly project) rendered on the territory of the Czech Republic; consulting, management, and brokerage and similar professional activities provided on the territory of the Czech Republic; independent personal services rendered on the Czech territory; income of artistes and athletes for their performance in the Czech Republic.
Payments from Czech tax residents (or from permanent establishments of non-residents) for: i ndustrial and cultural royalties, including payments of any kind received as a consideration for the use of any industrial, commercial or scientific equipment, except of financial leases; director’s fees; contractual penalties from business obligations; dividends;
The Czech Republic – Your Business Partner in the EU
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