1 Basic framework
1.1 Is there a single tax regime or is the regime multi-level (eg, federal, state, city)?
The Czech Republic has a single tax regime, as all taxes are levied at country level.
1.2 What taxes (and rates) apply to corporate entities which are tax resident in your jurisdiction?
The corporate income tax rate is 19%. Income of qualified investment funds is subject to a 5% tax rate and income of pension funds is subject to a 0% tax rate. Foreign source shares in profits - including dividends, settlement shares, shares in liquidation proceeds and similar types of income - are included in a separate tax base, which is subject to a 15% tax rate. Tax withheld in accordance with the tax rates stipulated in applicable income tax treaties may be credited to the 15% Czech tax liability.
1.3 Is taxation based on revenue, profits, specific trade income, deemed profits or some other tax base?
Taxable profits are calculated based on the accounting results. Every corporate entity seated or doing business in the Czech Republic must keep accounting books according to Czech accounting standards. However, if the entity issues securities which are accepted for trading on a European regulated market, it may keep accounting books based on International Financial Reporting Standards. In the latter case, however, the corporation must adjust its accounting results to Czech accounting standards to establish the starting point for the corporate income tax base calculation.
Accounting results which are computed on an accrual basis are further adjusted for tax purposes pursuant to the Income Tax Act. The most significant adjustments include, without limitation:
- interest and other costs relating to loans from related parties, calculated on that amount of the principal which exceeds four times the equity;
- representation costs;
- some reserves and provisions;
- unpaid contractual interest and penalties;
- unpaid real estate tax and real estate transfer tax;
- unpaid health insurance and social security contributions due from an employer to employees; and
- shortages and damages.
1.4 Is there a different treatment based on the nature of the taxable income (eg, gains on assets as opposed to trading income or dividend income)?
The types of income that are subject to a specific taxation regime are limited, since most types are included within the taxpayer's general tax base. Generally, only foreign source shares in profits - including dividends, settlement shares, shares in liquidation proceeds and similar types of income - are included in a separate tax base and subject to a 15% tax rate.
1.5 Is the regime a worldwide or territorial regime, or a mixture?
The Czech Republic uses a worldwide tax regime. This means that income (with the exception of shares in profits and similar types of income) sourced outside the Czech Republic is taxed in the same way as Czech Republic sourced income, unless a respective tax treaty limits the right of the Czech Republic to tax such income.
1.6 Can losses be utilised and/or carried forward for tax purposes, and must these all be intra-jurisdiction (ie, foreign losses cannot be utilised domestically and vice versa)?
Taxpayers may use tax losses to offset future profits disclosed in the five tax periods immediately following that for which the tax loss was incurred, regardless of whether they were triggered in or outside the Czech Republic. However, certain restrictions apply if the taxpayer which incurred the tax loss is involved in a company reorganisation, or if a substantial change takes place in the composition of the parties directly participating in equity or controlling the taxpayer.
1.7 Is there a concept of beneficial ownership of taxable income or is it only the named or legal owner of the income that is taxed?
The beneficial ownership concept is used for taxation in the Czech Republic.
1.8 Do the rates change depending on the income or balance-sheet size of the taxpayer?
The corporate income tax rate is a flat rate of 19%, which does not depend on the size or other characteristics of the taxpayer.
1.9 Are entities other than companies subject to corporate taxes (eg, partnerships or trusts)?
In general, not only companies, but all legal entities - such as private foundations, general and limited partnerships and non-profit organisations - are subject to corporate income tax. Some other entities are also considered to be payers of corporate income tax, such as trusts established in accordance with the Czech Civil Code, unit funds and société d'investissement à capital fixe funds.
2 Special regimes
2.1 What special regimes exist (eg, for fund entities, enterprise zones, free trade zones, investment in particular sectors such as oil and gas or other natural resources, shipping, insurance, securitisation, real estate or intellectual property)?
Expenses incurred by Czech taxpayers for research and development (R&D) purposes can be used as general costs (unless swapped to equity (capitalised)), and can also be used to decrease the tax base. This means that if all statutory conditions are met, 200% of R&D expenses can decrease the taxpayer's accounting profits in a given tax period. However, the taxpayer must prepare an R&D project and comply with certain requirements set out in the Income Tax Act in order to use such expenses to decrease its tax base.
Further, Czech tax law supports pension funds with a corporate income tax rate of 0% and qualified investment funds with a special income tax rate of 5%.
Under government investment incentives focused on high-tech manufacturing and service industries, substantial tax relief is available for qualified investments in the form of a tax discount.
2.2 Is relief available for corporate reorganisations or intra-group transfers of companies and other assets? Please include details of any participation regime.
If a corporate reorganisation is carried out for genuine economic reasons, the reorganisation is tax neutral. Another underlying condition is that the successor company must perform business activities in the 12 months preceding the reorganisation. However, this condition can be rebutted by evidence of genuine economic reasons.
As to the shareholding regime, dividends distributed by both foreign and local subsidiaries and capital gains on the sale of shareholdings may be exempt from tax if some conditions laid down in the Income Tax Act are satisfied. Among other things, the parent company must hold a minimum 10% share of the registered capital of the subsidiary for at least 12 months, and both the parent and the subsidiary must have a legal form stipulated in the EU Parent-Subsidiary Directive.
Similar rules apply to shareholdings of local companies in foreign subsidiaries located in tax treaty countries. In addition, some further conditions must be met - in particular, the income of the foreign subsidiary must be subject to tax at a rate of at least 12% and its legal form must be comparable to the key legal features of a limited liability company, a joint stock company or a cooperative under Czech law.
2.3 Can a taxpayer elect for alternative taxation regimes (eg, different ways to calculate the taxable base, such as revenue-based versus profits based or cash basis versus accounts basis)?
Corporate income taxpayers cannot choose alternative taxation regimes, except for deemed service permanent establishments established before 1 January 2014, which may continue calculating their tax base on a cash basis; and new permanent establishments, which in certain circumstances may not be required to keep accounts on an accrual basis.
2.4 What are the rules for taxing corporates with different functional or reporting currency from that of the jurisdiction in which they are resident?
Corporate income taxpayers are generally required to keep their accounting records for statutory purposes in accordance with Czech generally accepted accounting principles and in Czech koruna. Any conversion to a different functional currency is an internal matter of the corporation.
2.5 How are intangibles taxed?
The Income Tax Act stipulates special rules for the depreciation of intangible assets acquired for trading purposes. The tax depreciation is charged evenly on monthly basis. The depreciation period either is set for the term of the licence agreement or, if the use of the property is not limited in time, varies from 18 to 72 months depending on the type of intangible. Goodwill acquired for a fee is depreciated evenly over 180 months.
2.6 Are corporate-level deductions available for contributions to pensions?
Corporate income taxpayers may deduct contributions to pensions which are defined in their internal guidelines, labour contracts or collective agreements with trade unions to qualified private pension funds provided by pension institutions which are registered and regulated in a member state of the European Union or the European Economic Area, and which satisfy certain statutory requirements laid down in the Income Tax Act. The limitation of these deductions results, by definition, in the limitation of exempt income in the form of employers' contribution for the employees, which is CZK 50,000 per year in combination with life insurance contributions, if any.
2.7 Are taxpayers from different sectors (eg, banking) subject to different or additional taxes or surtaxes?
There are no sector taxes or surtaxes in the Czech Republic.
2.8 Are there other surtaxes (eg, solidarity surtax, education tax, corporate net wealth tax, remittance tax)?
There is no solidarity surtax, education tax, corporate net wealth tax, remittance tax or similar tax surcharges in the Czech Republic.
2.9 Are there any deemed deductions against corporate tax for equity?
The Czech Republic does not provide for any deemed deductions for equity.
3 Investment in capital assets
3.1 How is investment in capital assets treated – does tax treatment follow the accounts (eg, depreciation) or are there specific rules about the write-off for tax purposes of investment in capital assets?
While investment in capital assets does not represent a tax-deductible expense, tax depreciation of capital assets is tax effective. Although the tax depreciation set by the Income Tax Act usually does not correspond precisely with the accounting depreciation defined according to the economic life of the asset, the tax and accounting deprecation correlate quite well in many corporations. Accounting depreciation is used as a tax-deductible expense only for low-value fixed assets (ie, assets whose value is lower than CZK 40,000 in the case of tangible assets or CZK 60,000 in the case of intangible assets).
Tax depreciation is set forth in the Income Tax Act. Tangible assets are divided into six tax depreciation categories, with different depreciation periods. A taxpayer can depreciate tangible assets using either a straight-line or accelerated method of depreciation. Intangible assets are depreciated evenly on a monthly basis over periods stipulated by the Income Tax Act. There are certain exceptions which have their own depreciation rules (eg, assets used for photovoltaic electricity generation or the technical improvement of immovable historic monuments). The Income Tax Act also explicitly defines assets that are not depreciated (eg, land and artwork). The assets are depreciated by legal owner and tax depreciation is primarily calculated based on the acquisition price of the respective asset.
3.2 Are there research and development credits or other tax incentives for investment?
The Czech Republic supports research and development (R&D) activities performed by taxpayers with an R&D tax allowance. The Income Tax Act allows a taxpayer to deduct from its tax base up to 110% of the costs incurred on the implementation of R&D projects during a given tax period. This means that the costs incurred by the taxpayer represent tax-deductible costs and, in addition, may be used again as a tax allowance to decrease the taxpayer's tax base. The R&D projects must be in writing and must contain certain information required by law.
If the amount of the tax base does not allow the taxpayer to utilise the R&D allowance, it can be utilised during the three subsequent tax periods. Taxpayers may apply for a binding tax ruling from the tax authorities to confirm the eligibility of costs for R&D allowance purposes.
The Czech Republic also allows taxpayers to apply for investment incentives, which may be granted to both newly established and existing investors. The investment incentive may take different forms, one of which is an income tax discount.
3.3 Are inventories subject to special tax or valuation rules?
There is no special tax regime with respect to inventories. Inventories are valued at cost. This means that inventories acquired by purchase are valued based on their purchase price and other costs incurred in connection with their acquisition. Internally produced inventories are valued based on own costs, which include:
- direct costs incurred in their manufacture or other activities resulting in their creation, such as work in progress concerning services, construction and development projects, including the costs of material and other consumed products or other expenses that arise in direct relation to the manufacturing or other activities; and
- allocable indirect costs that relate to manufacturing or other activities.
If the actual value of the inventories is lower than the value shown in the taxpayer's accounting books, the accounting value may be decreased by respective provisions in accordance with the prudence principle. However, this is not tax effective.
3.4 Are derivatives subject to any specific tax rules?
Fair value of derivatives and changes thereto continue to be treated as tax costs or taxable revenue, as appropriate, upon realisation; while the corresponding accounting entries are recorded in accordance with International Financial Reporting Standard 9 as equity items.
4 Cross-border treatment
4.1 On what basis are non-resident corporate entities subject to tax in your jurisdiction?
Czech source income of non-resident corporate entities is subject to either withholding tax or corporate income tax, in accordance with the same rules as apply to corporate income of tax residents. In the latter case the corporate income tax is imposed on the tax base of the permanent establishment.
The tax base is established based on either accounting results (i.e., accrued revenue and expenditure) or - in the case of a deemed permanent establishment that has been established in connection with the provision of services in the territory of the Czech Republic, mostly before 1 January 2014 - as the difference between revenue and expenditure for a particular tax period. Further adjustments are performed in accordance with the general rules stipulated by the Income Tax Act.
In a limited number of situations, foreign corporate entities must submit a Czech corporate income tax return. This obligation may arise, for example, in the absence of a tax treaty or if the tax treaty allocates taxation rights concerning capital gains to the Czech Republic and the sale of the shares does not qualify for the parent-subsidiary exemption, upon the sale of shares in a Czech real property-rich company between two non-resident corporations.
4.2 What withholding or excise taxes apply to payments by corporate taxpayers to non-residents?
Withholding taxes apply to interest, dividends, royalties and payments for the lease of real property or movable assets in the absence of income tax treaties or multilateral treaties on the exchange of tax information, or if the taxpayer does not qualify for treaty benefits that would otherwise be available. The withholding tax rate is 35% of the gross interest, dividend, royalty or lease income. Under similar circumstances, payments for the lease of real property or movable assets attract a 5% withholding tax. A 15% withholding tax also applies to revenue from services rendered in the territory of the Czech Republic if the permanent establishment is not duly recognised.
Excise duties do not apply to payments for excise goods acquired from Czech tax non-residents. However, excise duties are applied based on the volume of excise goods delivered to the Czech Republic - that is, the excise tax base is calculated based on the volume of excise goods in litres, hectolitres, kilograms or similar. Excise goods are beer, wine and wine intermediate products, other products containing alcohol, tobacco products and mineral oils (including fuels), and tax rates are set separately for each type. Unless excise goods are delivered under a duty suspension arrangement (only within the European Union and based on a special exemption certificate), the excise duty must be claimed and paid by the taxpayer which receives the excise goods in the Czech Republic.
4.3 Do double or multilateral tax treaties override domestic tax treatments?
International treaties on the prevention of double taxation override the domestic taxation rules. Consequently, the applicable withholding tax rates on income of tax residents of treaty states thus do not exceed 15%.
Evidence of beneficial ownership and tax residence certification are key requirements for the Czech tax authorities to provide access to tax treaty benefits. The recipient of the income may also be required to document other facts and circumstances.
Moreover, general and specific tax anti-avoidance rules enable the Czech tax authorities to deny treaty benefits to conduit entities and in other ‘treaty-shopping' situations.
4.4 In the absence of treaties, is there unilateral relief or credits for foreign taxes?
No unilateral relief or credits for foreign taxes are available in the absence of an applicable treaty for the prevention of double taxation.
4.5 Do inbound corporate entities obtain a step-up in asset basis for tax purposes?
Pursuant to the currently applicable Income Tax Act, there is no step-up in the asset basis for tax purposes.
The original asset value, based on the acquisition costs (net of any valuation adjustments) decreased by tax depreciation, is applied outside the Czech Republic until the transfer of assets to the Czech Republic is converted into Czech koruna based on the applicable Czech National Bank exchange rate. The tax depreciation then continues based on the straight-line depreciation method applied in accordance with the Income Tax Act.
This rule will change upon the introduction of new rules on the taxation of transfers of business assets among EU member states (exit taxation), when the asset basis will be adjusted to the market price.
4.6 Are there exit taxes (for disposed-of assets or companies changing residence)?
In accordance with the Income Tax Act in force, no exit taxes are payable at present. However, exit taxation has been included in a new tax bill and should apply from 1 January 2020. The rules represent a transposition of the EU Anti-Tax Avoidance Directive (2016/1164). The objective of the draft law is to tax the economic value of any capital gain created in the territory of the Czech Republic.
The exit tax shall cover:
- the transfer of assets from the head office or a permanent establishment located in the Czech Republic to a permanent establishment located in another state;
- the transfer of tax residence from the Czech Republic to another state; and
- the transfer of business of a permanent establishment located in the Czech Republic to another state (including corporate reorganisations).
The draft provides for deferral of the tax payment for up to five years. However, the deferral will be immediately revoked if, for example, the business's transferred assets are sold or transferred to a third country.
5.1 Are there anti-avoidance rules applicable to corporate taxpayers – if so, are these case law (jurisprudence) or statutory, or both?
General and specific tax anti-avoidance rules are set out in the Income Tax Act and enable the Czech tax authorities to deny tax concessions, cost deductions or other benefits to sham, fake or pretend transactions, or in the case of circumvention or abuse of the tax law.
The anti-avoidance rules are both statutory rules and interpretations and applications based on case law.
5.2 What are the main ‘general purpose' anti-avoidance rules or regimes, based on either statute or cases?
The Tax Procedure Code stipulates the ‘substance over form' principle of tax procedures, and decisions of the Supreme Administrative Court have established a well-founded general anti-tax avoidance approach that is fairly consistently applied by the courts.
A pending amendment to the Tax Procedure Code will introduce a new, fairly broad general anti-abuse rule that concerns all taxes, not just corporate tax. The amendment stipulates that for the purposes of tax administration, legal deeds and other circumstances whose prevailing purpose is obtaining a tax advantage that defeats the objective and purpose of the applicable tax law shall be ignored.
5.3 What are the major anti-avoidance tax rules (eg, controlled foreign companies, transfer pricing (including thin capitalisation), anti-hybrid rules, limitations on losses or interest deductions)?
Several specific provisions are in place, such as thin capitalisation rules, the principal purpose test for mergers and other company reorganisations, and limitations on tax losses.
The objective of the thin capitalisation rules set out in the Income Tax Act is to limit interest cost deductions in relation to debt financing provided by a ‘related party', as defined in the Income Tax Act. They imply that interest and some other financial costs relating to financial instruments granted by related parties are disregarded in calculating the corporate income tax base once qualified debt exceed four times the equity.
The prices of assets, goods and services sold to related parties must be set at arm's length. The parties to the transaction as well the tax authorities shall make relevant adjustments in calculating the corporate income tax base.
A tax loss may be carried forward for a maximum of five consecutive tax periods. Change of control rules and rules on mergers and demergers imply certain limitations in this regard.
The Income Tax Act currently in force contains no rules concerning controlled foreign companies or anti-hybrid rules. However, these shall be introduced in the act through transposition of the EU Anti-Tax Avoidance Directive, with effect from 2020.
5.4 Is a ruling process available for specific corporate tax issues or desired domestic or cross-border tax treatments?
The ruling procedures that may be initiated at a taxpayer's request include:
- assessments of research and development expenditure;
- preferential deductions;
- advance transfer pricing rulings;
- calculation of the tax base of a permanent establishment; and
- assessment of whether some changes to assets represent so-called ‘technical improvements' which will have an impact on tax depreciation.
5.5 Is there a transfer pricing regime?
The tax authorities have incorporated the Organisation for Economic Co-operation and Development (OECD) standards into local guidelines and tax administrative practices, and generally follow the OECD model guidelines quite closely, although in some areas the day-to-day practice may be more lenient. Transfer pricing documentation is not obligatory; however, the taxpayer bears the burden of proof in accordance with the general tax administration rules in any case and proper transfer pricing documentation prepared in line with the OECD guidelines is considered beneficial for the taxpayer.
The most significant transfer pricing cases concern fees for management, technical and manufacturing services. Tax inspections also focus on the assessment and documentation of revenue and cost allocation to permanent establishments.
5.6 Are there statutory limitation periods?
The key statutory limitation period concerns tax assessments, which must occur within three years of the statutory deadline for filing the corporate income tax return. However, the limitation period may be extended for 12 months by law in various circumstances, such as for opening a tax inspection before the tax is statute barred or filing a supplementary corporate income tax return in the last 12 months before the end of the statutory limitation period.
If a corporation carries forward tax losses, the three-year statutory limitation period is extended by up to 10 years. If the corporation receives investment tax incentives, the limitation period is extended up to 13 years.
6.1 What are the deadlines for filing company tax returns and paying the relevant tax?
The general deadline for filing a corporate income tax return is three months following the end of the tax period. If the taxpayer's financial statements are subject to a statutory accounting audit or if the tax return is prepared and submitted by an authorised tax adviser under a power of attorney granted by the taxpayer (and the power of attorney is submitted to the tax authorities within three months of the end of the tax period), the deadline for submission of the tax return is six months following the end of the tax period. At the taxpayer's request, the tax authorities may extend the deadline for submission of the tax return by up to three months under certain conditions. If a foreign tax base and tax payments of a permanent establishment must be included in the local company's tax calculation, the tax authorities may extend the deadline by up to 10 months.
Corporate income tax is payable by the deadline for filing the relevant tax return.
6.2 What penalties exist for non-compliance, at corporate and executive level?
The penalty for failure to file a tax return by the statutory deadline, which is automatically assessed, is set at 0.05% of the disclosed tax or 0.01% of the disclosed tax loss per calendar day. The penalty is calculated from the sixth working day after the deadline and is limited to 5% of the disclosed tax or tax loss.
If a corporate taxpayer fails to file a tax return upon the request of the tax authorities, its directors and officers may face criminal charges, depending on the amount of tax which should have been disclosed in the tax return and the relevant circumstances, such as any intent to avoid tax.
If the tax authorities find that additional tax is payable by a taxpayer, penalties and late payment interest will also be imposed. A penalty of 20% of the tax due applies if the tax is increased or if a tax deduction is decreased as a result of a tax audit. A penalty of 1% applies if a tax loss is decreased as a result of the tax audit.
Interest on late payments is calculated at the Czech National Bank repo rate (effective on the first day of the relevant half-year), increased by 14%. This interest charge is applicable for a maximum period of five years.
6.3 Is there a regime for reporting information at an international or other supranational level (eg, country-by-country reporting)?
The Czech Republic has adopted Directive IV on Administrative Cooperation (DAC IV Directive) and has thus implemented country-by-country reporting obligations for multinational taxpayers. The DAC IV Directive amended the directive on mandatory automatic exchange of information in the field of taxation and is focused on groups of multinational enterprises.
In addition, Czech resident taxpayers are required to inform the tax authorities of Czech source income paid to foreign tax residents which is subject to withholding tax in the Czech Republic, regardless of whether such income is exempt from tax or whether a respective double tax treaty prevents the Czech Republic from taxing such income.
7.1 Is tax consolidation permitted, on either a tax liability or payment basis, or both?
Tax consolidation is not permitted in the Czech Republic for the calculation or assessment of a tax liability or the tax base. As each entity is considered a separate taxpayer, there is no possibility to utilise tax losses on a consolidated level without prior steps (eg, merger).
8 Indirect taxes
8.1 What indirect taxes (eg, goods or service tax, consumption tax, broadcasting tax, value added tax, excise tax) could a corporate taxpayer be exposed to?
Corporate taxpayers are usually subject to value added tax and may be also subject to excise taxes if they acquire, produce or sell products which are subject to excise tax (beer, wine, alcohol, mineral oils, tobacco). Some taxpayers are also subject to energy taxes if they supply natural gas and other gases, electricity and solid fuels to end consumers.
8.2 Are transfer or other taxes due in relation to the transfer of interests in corporate entities?
The transfer of interests in corporate entities in the Czech Republic is not subject to transfer or other taxes.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.