1 The Czech Republic Business and Taxation Guide. Business and Taxation Guide to. The Czech Republic

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1 1 The Czech Republic Business and Taxation Guide Business and Taxation Guide to The Czech Republic

2 2 The Czech Republic Business and Taxation Guide Preface This guide was prepared by Mazars s.r.o. in September Mazars s.r.o., Primary Contact: Pavel Klein Pobrezni 3, Prague. Tel Praxity 2011 This guide is intended as a general guide and should not be acted upon without further advice.

3 3 The Czech Republic Business and Taxation Guide Contents Page 1. General information Opportunities and possible obstacles for foreign investors 1.2 Area and population 1.3 Government and law 1.4 Currency 1.5 Economy 2. Regulation of foreign investment 8 3. Government incentives Tax incentives 3.2 Job creation and training/re-training grants 3.3 Site support 3.4 Other support/guidance available 4. Business organisations available to foreigners Setting up and running business organisations General information 5.2 Joint-stock company 5.3 Limited liability company 5.4 General commercial partnership 5.5 Limited partnership 5.6 Co-operative 5.7 Branch of a foreign entity 6. Corporate taxes and social charges Corporate income tax 6.2 Transfer pricing 6.3 Thin capitalisation 6.4 Permanent establishment 6.5 Withholding tax 6.6 Corporate tax administration 7. Personal taxation Personal income tax 7.2 Tax exempt income 7.3 Taxation of non-residents 7.4 Income tax allowances and rates 7.5 Personal income tax administration 7.6 Social security and health insurance contributions 7.7 Real estate tax 7.8 Inheritance and gift tax 8. Double taxation agreements Sales tax VAT, Customs and Excise Value added tax (VAT) 9.2 Customs duties 9.3 Excise duties

4 4 The Czech Republic Business and Taxation Guide 10. Portfolio investment for foreigners Trusts Practical information Transport 12.2 Language 12.3 Time relative to GMT 12.4 Business hours 12.5 Public holidays

5 5 The Czech Republic Business and Taxation Guide 1. General information 1.1 Opportunities and possible obstacles for foreign investors The Czech Republic is a fully democratic country with a market economy. The political and economic conditions are stable. The Czech Republic is a member of the European Union (EU) with: An advantageous location in the centre of Europe A relatively low cost structure A well-qualified, highly educated labour workforce - particularly strong engineering skills IT and R&D spend per capita is among the highest in Central Eastern Europe (CEE). These factors all contribute to the Czech Republic being an attractive destination for foreign investment. The Czech Republic has a strategic location in the centre of Europe, with very good access to established western and emerging eastern markets. GDP at purchasing power parity (PPP) per capita in 2010 was $ The Czech Republic is a member of the Organisation for Economic Co-operation and Development (OECD), the United Nations, the International Monetary Fund (IMF), the International Labour Organization (ILO), the World Trade Organization (WTO) and the Council of Europe. The long-term economic development of the Czech Republic will be facilitated through meeting all the duties and obligations arising from membership in these organisations. The Czech Republic is an industrial country with a highly developed industrial base. Its main industries include engineering, in particular automotive, construction, metallurgy, glass manufacturing and beer production. The service sector has also become much more developed over the past two decades. In 2010, the Bertelsmann Transformation Index ranked the Czech Republic as the most successful transforming country among the 125 global countries surveyed. The tax system in the Czech Republic is comprehensive and tightly regulated. Each tax is regulated by separate legislation,and each has defined laws. The administration and collection of the individual taxes is the responsibility of the Ministry of Finance of the Czech Republic and its subordinate administrative bodies, particularly the local tax offices. The Czech Republic tax system comprises: Corporate income tax Personal income tax Value Added Tax (VAT) Road tax Real estate taxes Energy /environmental taxes Gift tax Custom duties Excise duty. The Czech healthcare system is inspired by European traditions, founded on public services and financed predominantly by public means. Czech physicians/doctors are well-regarded throughout Western European countries.

6 6 The Czech Republic Business and Taxation Guide In many respects,the Czech Republic is rapidly evolving to Western living standards, although the cost of living remains substantially lower than in Western Europe. However, prices, particularly in Prague, continue to move towards western European levels. The retail industry in Prague has expanded very rapidly - almost every type of consumer product is now available. The Czech Republic ranks 34th out of 111 countries in the worldwide quality-of-life index and second highest in CEE countries. 1.2 Area and population The Czech Republic is located in the geographical heart of Europe, close to most major western European economic centres. It shares borders with Austria, Germany, Poland and Slovakia. The Czech Republic comprises three distinct regions: Bohemia in the west, Moravia and part of Silesia in the east. The total land area is 78,864 square kilometres (30,450 square miles) The country s population is 10.4 million, with a labour workforce of 5.7 million. The Czech Republic has a temperate continental climate, with relatively hot summers and cold, cloudy and snowy winters. Most rain falls during the summer. 1.3 Government and law The Czech Republic was subject to communist influence from 1948 until November 1989, when the Velvet Revolution, so-called because of its non-violent nature, signalled the end of communist rule. Since 1989 the Czech Republic has operated as a multi-party democratic political system. Until 1993, the Czech Republic was part of a federation with Slovakia, making up the former Czechoslovakia. Peaceful negotiations concerning division of the country led to an agreement that the state of Czechoslovakia would cease to exist on 1 January Today, the state s official name is the Czech Republic, and it s a parliamentary republic. The head of state is the President, currently Mr. Václav Klaus. The President is elected by parliament for a fiveyear term, and can serve no more than two consecutive terms. The President appoints the Prime Minister, and may also appoint other cabinet members. The Parliament, led by the Prime Minister (currently Petr Nečas), is divided into: The lower house - the Chamber of Deputies (Poslaneckásněmovna), with 200 memberwho are elected by proportional representation every four years. There are 14 voting districts, mirroring the country's administrative regions. The upper house, the Senate (Senát) comprises 81 senators, who are elected to a six-year term of office. Every two years (on even years in the autumn), one third of the Senate members are elected to office. This two year run-off voting is modelled on the U.S. Senate, which means that every two years the Senate undergoes partial renewal. The Czech Social Democratic Party currently holds the most seats in both the Chamber of Deputies and the Senate, followed by the Civil Democratic Party. With regard to legislative matters, the adoption of laws is generally introduced by the Chamber of Deputies. Proposals may be introduced by individual or groups of Deputies, the Senate, the government, or representative bodies of higher self-governing territorial units.

7 7 The Czech Republic Business and Taxation Guide As a member of the EU, the Czech Republic has to implement EU directives. In the event of any uncertainties about directives can be addressed during any stage of the litigation to the European Court of Justice (ECJ). The referring Court must then implement the ECJ decision. The judicial system was completely restructured in This created a civil and criminal court system, forming the courts of general jurisdiction. They are competent in all type of disputes, with the exception of those expressly reserved for the administrative courts or the Constitutional Court. The structure, functions and powers of the courts of general jurisdiction are regulated by law. The highest appellate is the Supreme Court, located in Brno. There are two High Courts, located in Praha (Prague) and Olomouc and eight Regional Courts and 86 District Courts. 1.4 Currency The monetary unit used in the Czech Republic is the Czech crown, known as the koruna. This can be abbreviated as Kč, with the international abbreviation CZK. One crown consists of 100 hellers (haléř). Although heller coins have not been in circulation for several years, hellers are still incorporated into merchandise prices. The final price is always rounded to the nearest crown value. Contracts may be made using any currency. 1.5 Economy The principal industries are heavy and general machine-building, iron and steel production, metalworking, chemical production, electronics, transportation equipment, textiles, glass, brewing, china, ceramics, and pharmaceuticals. The Czech Republic s main agricultural products are sugar beets (now largely destroyed by EU quota policies), fodder roots, potatoes, wheat, and hops. The Czech Republic has one of the lowest levels of inflation in CEE. It s currently around 1.9%. Privatisation of the banking sector and the gas and telecommunications industries has been completed. The Czech Republic has long expressed a desire to adopt the Euro, although a strong and stable government will still be needed to initiate the substantial fiscal restructuring, which could take between three and five years.

8 8 The Czech Republic Business and Taxation Guide 2. Regulation of foreign investment No restrictions are imposed on the import or export of capital in the Czech Republic. Repatriation payments can be made in any currency. Both residents and non-residents can hold bank accounts in any currency. The Czech Republic has anti money laundering legislation, which applies without distinction to domestic and foreign investments. Banks, financial advisors and individuals that deal with business investments must be able to produce evidence to corroborate full compliance with anti-money laundering rules and regulations.

9 9 The Czech Republic Business and Taxation Guide 3. Government incentives There are various incentive and business support programmes available to new and existing domestic and foreign investors in the Czech Republic. One of the main focus areas is attracting and developing businesses in the manufacturing sector, so this is the sector which many incentive programmes support. Investment incentives in the Czech Republic are regulated by the Investment Incentives Act (No. 72/2000). The minimum investment limit is CZK 100 million. Depending on the exact scheme, these incentives can offer: Tax incentives (corporate tax relief for up to five years for new companies, partial tax relief for up to five years for existing companies) Job creation grants (financial support for the creation of new jobs) Financial support for the training and re-training of new employees Transfer of public land at a favourable price. 3.1 Tax incentives The tax incentive takes two forms. If a new company (legal entity) is established for the investment project, the new company is eligible for corporate tax relief for up to five years. If the investment forms part of an expansion project within an existing Czech company (legal entity), the company is eligible for partial tax relief for up to five years. This tax relief is terminated when the company has reached the maximum level of eligible state aid. 3.2 Job-creation and training/re-training grants Job creation grants amounting to CZK 50,000 per employee and training and re-training grants amounting to 25% of total training and retraining costs are available. However, it s important to note that these grants are only available in districts where unemployment is at least 50% higher than the national average. 3.3 Site support The preferential transfer of land, or land with infrastructure owned by the state or municipalities, is possible,but these do depend on individual landowner agreements. Incentives are available individually or collectively and are designed to have maximum impact in the early stages of a project. 3.4 Other support/guidance available Businesses establishing themselves in the Czech Republic may also be able to obtain financial support from the EU structural funds. An operational programme Enterprise and Innovation (valid between 2007 and 2013) is designed to improve the performance and competitiveness of enterprises specifically in the areas of manufacturing and services. Most of the incentive aid programmes are designed to support small and medium-sized enterprises.

10 10 The Czech Republic Business and Taxation Guide CzechInvest offers domestic and foreign investors up-to-date, specialist information about the diverse support offered to business people in the Czech Republic. See for more details.

11 11 The Czech Republic Business and Taxation Guide 4. Business organisations available to foreigners The Czech Commercial Code states that foreign investors (both individual and legal entities) are able to conduct business in the same way as Czech Republic residents. A foreign person is defined as someone that has their main residence or has their registered office outside of the Czech Republic. Foreign companies may operate in the Czech Republic either by registering as a branch office or by establishing a Czech company. There are five different types of companies legally recognised in the Czech Republic. However the most common are limited liability companies (s.r.o.) and joint stock companies (a.s.). For Czech income tax reporting requirements, companies that are incorporated in the Czech Republic or have their central management team based in the Czech Republic are regarded as Czech tax residents. A non-resident company is required to pay the Czech income tax if trading activities are conducted through a permanent establishment in the Czech Republic.

12 12 The Czech Republic Business and Taxation Guide 5. Setting up and running business organisations 5.1 General information With regard to mandatory business obligations and other important aspects to consider when doing business in the Czech Republic (e.g. property leases, loans/mortgages on property), investors must refer to the Civil Code and the Commercial Code. The Commercial Code covers the main aspects of Czech corporate law.the Commercial Code regulates the status and activities of entrepreneurs and applies to both legal entities and individuals. The legal documents required to form a company are set in the Commercial Code. The Czech Republic Commercial Code legally recognises five different forms of business entities: Joint stock company Limited liability company General commercial partnership Limited partnership Co-operative. Any Company being established must have a unique business name. Also, a legal entity established for business purposes under foreign law seated outside of the Czech Republic may relocate its registered seat to the Czech Republic under certain conditions. In order to create a company in the Czech Republic, it must be registered with the Commercial Register, which is maintained by the respective Registry Court. The legal Company representative must apply to the Commercial register to register the company within 90 days from either: The datethe company was founded or The date the company s trading licenses, or similar equivalent business authorisations were issued and delivered. Before registering in the Commercial Register, all companies must obtain a trade licence, or for some types of business a concession, related to the activities they intend to perform or some other business authorisation. In order to meet the conditions of the trade licence, the company will often need to appoint an authorised representative with specific accountabilities for trade compliance. However, in some general business activities, the appointment of a responsible representative is not always required. 5.2 Joint-stock company (akciováspolečnost 'a. s.') Typically used for larger companies. However, banks, insurance companies and other financial institutions, including investment companies and security brokers, etc, must be established as either a joint-stock company or as a branch of a foreign entity.

13 13 The Czech Republic Business and Taxation Guide Established by a Founder s Deed by one founder (a legal entity) or by a Memorandum of Association by more than one founder (either individuals or legal entities). Minimum registered capital for a joint-stock company is CZK 2 million, or CZK 20 million if the company is founded through a public share offering. In order to register on the Commercial Register, at least 30% of the investment capital and all in-kind contributions must be paid prior to registration. A reserve fund must be created of 20 % of the net profit for the first year of profit, up to a maximum of 10% of share capital. In addition, 5% of the net profit after tax must be transferred to the reserve fund each year until it reaches 20 % of share capital. The statutory body of a joint-stock company is the board of directors, comprising at least three members. Each joint-stock company must establish a supervisory board, which monitors the activities of the board of directors and the company s operations. The supervisory board must include at least three members. If the company has more than 50 full-time employees, the employees are able to elect one-third of the supervisory board. Shareholders of a joint-stock company are not liable for the debts and obligations of the company. A joint-stock company must be audited by an independent external party if one or more of the following criteria are met for both theyear in question and the previous year: 1. Net turnover exceeds CZK 80 million per annum 2. Total assets exceed CZK 40 million 3. Average number of employees exceeds Limited liability company (společnost s ručenímomezeným spol. s.r.o. or s.r.o. ) Commonly used for small and medium-sized businesses. Created by preparing an Establishment Memorandum (in the case of one shareholder, either an individual or a legal entity), or a Memorandum of Association (if the company has more than one shareholder). A limited liability company with one shareholder cannot establish or become the sole shareholder of another limited liability company. There is a maximum of 50 members. Both the Establishment Memorandum and the Memorandum of Association must be executed in the form of a notary deed. A limited liability company does not issue shares. The ownership interest of each shareholder is the proportion of their contribution to the registered company capital. Minimum registered capital is CZK 200,000 - a partner s minimum deposit must be at least CZK 20,000. Foreign shareholders may contribute in foreign currency. In order to register the company in the Commercial Register the total paid-up investment contributions and the value of non-monetary investment contributions must total at least CZK 100,000. A reserve fund must be created of 10% of the net profit in the first year of profits, up to a maximum of 5% of the registered capital. 5% of the net profit after tax must be transferred to the reserve fund

14 14 The Czech Republic Business and Taxation Guide each year, until it reaches 10% of the registered capital. A Supervisory Board is only necessary if specifically requested by the Memorandum of Association. The company exists independently of its members (shareholders). The shareholders of a Limited Liability company are only jointly and severally liable for the obligations of the company up to the amount of total unpaid contributions recorded in the Commercial Register. At the company s general meeting an executive (jednatel), or executives, are appointed. The company executives are legally responsible for the management of the company. A limited liability company does not require an external audit unless two or more of the following criteria are met, for both the year in question and the previous year: 1. Net turnover exceeds CZK 80 million per annum 2. Total assets exceed CZK 40 million 3. Average number of employees exceeds General commercial partnership (veřejnáobchodníspolečnost veř. obch. spol. or v.o.s. ) A general commercial partnership (unlimited liability) is an association of two or more legal entities or individuals, for the purpose of carrying out business under a common business name. The partnership liabilities are unlimited. As with a limited liability company, ageneral commercial partnership does not require an external audit unless two or more of the following criteria are met, for both the year in question and the previous year: 1. Net turnover exceeds CZK 80 million per annum 2. Total assets exceed CZK 40 million 3. Average number of employees exceeds Limited partnership (komanditníspolečnost kom. spol. or k.s. ) A limited partnership is a partnership in which one or more limited partners (komanditista) are liable for the partnership obligations up to the amount of their unpaid contributions as set out in the Commercial Register, and one or more general partners (komplementář) have unlimited liability. Limited partnerships are a special type of trading partnerships that include elements of a general commercial partnership and a limited liability company. Regulation of limited partners is subject to the appropriate provisions concerning a limited liability company and the limited partnership itself is subject to the appropriate registration regarding a general commercial partnership. As with a limited liability company, a limited partnership does not require an external audit unless two or more of the following criteria are met, for both the year in question and the previous year: 1. Net turnover exceeds CZK 80 million per annum 2. Total assets exceed CZK 40 million 3. Average number of employees exceeds 50.

15 15 The Czech Republic Business and Taxation Guide 5.6 Co-operative (družstvo) Cooperatives are formed by at least five members (or by at least two legal entities) to undertake business activities for the economic or social benefit of their members. The amount of registered capital and the total of the members basic investments must be entered into the Commercial Register. Members are not liable for the obligations of the Co-operative. A Co-operative must have a registered capital of at least CZK 50,000. A Co-operative does not require an externalaudit unless two or more of the following criteria are met, for both the year in question and the previous year: 1. Net turnover exceeds CZK 80 million per annum 2. Total assets exceed CZK 40 million 3. Average number of employees exceeds Branch of a foreign entity (organizačnísložkazahraničníosoby) Foreign companies may operate in the Czech Republic either by registering as a branch office or by establishing a Czech company. A branch office of a foreign business entity is not a Czech legal entity, but functions as the representative of a foreign company and has specific duties and obligations that must be met. Branch offices must fully list their planned activities on their application for registration in the Commercial Register. The branch office must have an appointed director registered on the Commercial Register, who is entitled to act on behalf of the foreign company with regard to the branch. A branch of a foreign business entity does not require an external audit unless two or more of the following criteria are met, for both the year in question and the previous year: 1. Net turnover exceeds CZK 80 million per annum 2. Total assets exceed CZK 40 million 3. Average number of employees exceeds 50.

16 16 The Czech Republic Business and Taxation Guide 6. Corporate taxes and social charges 6.1 Corporate income tax All companies registered or with their effective management in the Czech Republic are liable to corporate income tax. This is payable on worldwide taxable income and capital gains. Permanent establishments and branches of foreign companies are taxed only on Czech-source income and gains. The tax base is calculated from the accounting profit/loss shown on the relevant financial statements, prepared according to the Czech accounting legislation. The accounting profit/loss is further adjusted for tax purposes. A corporate income tax rate is 19%. A corporate income tax rate of 5% applies to investment funds, unit funds and pension funds. Czech legislation allows taxpayers to change their accounting period from calendar year to fiscal year, and vice versa. They simply notify the tax authority. When changing the accounting period, taxpayers are required to enter into a transitional period, which could be shorter or longer than 12 months. Tax Losses Tax losses may be carried forward for up to five years and offset against taxable profit arising in any of these years, providing the restrictive conditions stipulated by the Czech Income Tax Act are met. Tax deductible costs Tax-deductible costs in the Czech Republic are similar to those commonly listed by other countries. Generally, costs are tax-deductible if incurred in order to generate, assure and maintain the taxable income. Czech law defines certain types of costs which are deemed tax deductible, regardless of whether the above test is met. Research and development (R&D) costs allowance Up to 100% of the costs associated with R&D projects and incurred in a given tax year or period for which a tax return is filed can be deducted from the tax base as a special tax allowance. (This can mean costs incurred for R&D may be deducted from the tax base twice once as a normal tax deductible cost and then as special tax allowance). 6.2 Transfer pricing Czech transfer pricing legislation is based on OECD standards, which legally permits transfer pricing adjustments between related parties - both in internal and cross-border transactions. The Czech tax authorities are showing an increased interest in using transfer pricing investigation against multinational entities operating in the Czech Republic. 6.3 Thin capitalisation

17 17 The Czech Republic Business and Taxation Guide Tax deductibility of financial costs (for example, interests on loans from related parties and other related costs such as arrangement fees, commitment fees, etc) is subject to thin capitalisation rules. The permitted debt/equity ratio 4:1 applies to related-party loans. For insurance companies and banks the debt/equity ratio is 6: Permanent establishment A permanent establishment is a taxable presence of a foreign entity that carries out business activities in the Czech Republic. It is not necessarily a legal entity; however it is a taxable entity and therefore must be registered for tax purposes. Generally, a permanent establishment of a foreign company is created through: Construction sites Assembly project sites Provision of services by employees of the foreign company, or individuals working in another capacity for the foreign company providing management, consulting, or similar services to a Czech entity, including branches (where the provision of services exceeds six months in 12 consecutive calendar months Establishing an office, workshop, production facility, sales outlet, or other business facility (for example a fixed place of business) in the Czech Republic, irrespective of the six month rule. A dependent or independent agent, (a person that is qualified to complete agreements in the Czech Republic in the name of a non-resident) usually executes these entitlements. It is often recommended that professional advice is sought before undertaking any type of business activity in the Czech Republic, to avoid unfavourable tax consequences. 6.5 Withholding tax Certain types of payments, such as dividends and profit shares, are subject to withholding tax. Withholding tax rates range from 5% to 15%, depending on the type of income. The payer of withholding tax is the person/entity that pays the income, which is subject to the withholding tax. The list below summarises income that is subject to the withholding tax: 15% 15% 15% 5% 5% License fees, royalties, rents and operating lease payments, copyright fees, etc. Paid to a non-residents of the Czech Republic without permanent Czech status Dividends*, profit shares and other related distributions paid to a non-resident of the Czech Republic without a permanent Czech establishment Dividends, profit shares and other related distributions, lottery prizes, public competition prices, interest from deposit accounts and other personal deposits, etc. paid from a Czech source to a Czech resident or non-resident Financial lease payments paid to a non-resident of the Czech Republic without a permanent Czech establishment Financial lease payments paid to a non-resident of the Czech Republic without a permanent Czech establishment *Dividends paid within the EU, Norway, Iceland and Switzerland may be exempt from withholding tax under certain conditions.

18 18 The Czech Republic Business and Taxation Guide The withholding tax rate is eliminated by Czech local law if requirements, according to the applicable EU directive, are met. The tax exemption on dividends (and capital gains from the disposal of shares) applies automatically when the conditions are met. Exemption applies only to a limited liability company and joint stock company, where the parent company holds at least 10% share for at least 12 months, while the exemption on royalties and interest applies based on decisions by the Czech tax authorities. Also, the withholding-tax rate can be reduced under a double taxation treaty concluded between the Czech Republic and the country where the recipient of the payment is a tax resident. As of 1 January 2010, the Czech Republic has concluded double-taxation treaties with 75 countries. The exemption under the treaty applies automatically and it is not subject to notification or approval of tax authorities. 6.6 Corporate tax administration The deadline for filing corporate income tax returns and outstanding tax liabilities is by the end of the third month after the end of the taxable period. This deadline may be prolonged by another three months if the company is subject to statutory audit or the corporate tax return is submitted by a registered tax advisor, under a power of attorney.

19 19 The Czech Republic Business and Taxation Guide 7. Personal taxation 7.1 Personal income tax All Czech Republic tax residents are subject to personal income tax on their worldwide incomes, while non-residents are taxed only on their Czech source income. Generally, an individual is considered to be a Czech tax resident if they have: A permanent address in the Czech Republic - for example, a place where an individual has their home and circumstances indicate their intention to dwell there permanently Their usual residence in the Czech Republic the individual s total number of days spent in the Czech Republic is greater than or equal to 183 days per calendar year). Final consideration of tax residency is further modified by the relevant Double Tax Treaty. Taxable income includes all monetary or non-monetary income. This includes employment income, benefits-in-kind (for example housing allowances and use of a company car for private purposes), and income from business activities, rental income, capital income (dividends and interest) and any other source of income. The final personal income tax base comprises five partial tax bases, as detailed below: Employment income Employees are subject to tax on income in all forms, whether income payments are made in cash or in-kind. In particular, benefits, such as the provision of a car which is available for private use, are taxable. It is not possible to deduct an employee s social security and health insurance contributions from the tax base. However, items such as mortgage interest, payments for supplementary pension insurance with state support, private life insurance premiums and donations can be deducted if certain conditions are met. Self-employment income Self-employment income could be reduced by the tax deductible expenses. Generally, this can include expenses that are incurred in order to generate, assure and maintain the taxable income). An alternative way to reduce tax deductible expenses is through a flat deduction, determined as a percentage of income, based on the Czech Income Tax Act (at least 40%). Rental income This tax base is calculated as the difference between the rental income and related tax-deductible expenses. For example maintenance or tax depreciation from the purchase price of real estate. These tax deductible expenses only apply to buildings and not plots of land). A flat 30% deduction from rental income can be applied to calculate the tax base, rather than maintaining a record of incurred costs.

20 20 The Czech Republic Business and Taxation Guide Capital income Individuals in the Czech Republic are taxed on their income through personal income tax. There is no capital gains tax. The tax base for capital income is equal to the actual income determined on a cashbasis, with almost no opportunity to deduct any direct expenses. Consequently, the individual would be taxed on all gains realised. Capital income includes the shares on profit (dividends) and interests from loans provided, bank interests and interest from bonds, etc. Other income Other income tax includes special income obtained from occasional business activities. If the tax loss is declared based on self-employment or rental income, then tax loss could be offset and credited against the other tax bases from the defined incomes listed above, with exception of employment income. The loss may be absorbed in the next five taxable periods, providing the restrictive conditions stipulated by the Czech Income Tax Act are met. 7.2 Tax-exempt income There are numerous tax exemptions available to investors, the most important being the tax exemptions on gains from the sale of shares. The exemption applies if held for six months and the shareholder has not had more than 5% of registered capital and voting rights for 24 months preceding the sale. If these conditions are not met, the gains on the sale of the shares are taxexempt after exceeding a holding period of five years. Gains from the sale of non-business real estate are exempt if the property has been held by the taxpayer for at least five years prior to the sale. Gains from the sale of a dwelling are also exempt if the dwelling was used as the taxpayer s main residence for at least two years prior to the sale. If the dwelling was used for less than two years, the exemption applies if the gains are used for the taxpayer s housing in the future. 7.3 Taxation of non-residents Individuals who do not reside in the Czech Republic may be subject to a double tax treaty. An expatriate who is employed directly by a local Czech company or by branch of a foreign company is subject to tax on their income from dependent activity from the first day of employment. The employer withholds monthly tax pre-payments from their salary, which is put towards their annual tax liability. If the expatriate only has income derived from an employment contract, the employer prepares a year-end tax settlement that is a substitute for the expatriate s tax return. If a foreign company transfers an expatriate to a Czech company under a service agreement they should be registered as an individual tax payer with the relevant tax office. Their income is then taxed via the annual personal income tax return. Depending on the individual s previous years tax liability, an expatriate makes semi-annual or quarterly-annual advance payments for their personal tax liability during the course of the year. Generally, income from dependent activities paid by a foreign employer to a Czech non-resident is tax-exempt if the time spent on such activities does not exceed 183 days in any 12 consecutive

21 21 The Czech Republic Business and Taxation Guide calendar months. This tax exemption does not apply to income from an activity performed in a permanent establishment. The distribution of dividends to private individuals will be subject to 15% Czech withholding tax, which could be adjusted by any relevant Double Taxation Treaty. Interest income on cash deposits, bank accounts and other savings is subject to a final withholding tax of 15%. 7.4 Income tax allowances and rates The total income of individuals is subject to a flat tax rate of 15%. However, the payroll tax base from which the tax liability is calculated increases, as it is calculated from the so called super-gross salary (the salary plus social security and health insurance contributions paid by the employer). Therefore, in the case of payroll the effective tax rate is 20.1%. Resident and non-resident individuals may claim a basic personal tax allowance. Other credits are granted to a resident, such as: A tax credit for a spouse living in the taxpayer s household if the spouse s annual income does not exceed CZK 68,000 Credit for a dependent child Credits for individuals with a disability and students. These tax credits are also granted to non-residents, providing at least 90% of their income comes from sources in the Czech Republic. 7.5 Personal income tax administration The personal income tax return filing deadline and final payment of any outstanding tax liability is 1 April of the following calendar year. These deadlines canbeextended by another three months if the personal income tax return is submitted by an authorised tax advisor. 7.6 Social security and health insurance contributions Individuals employed by a Czech employer must pay mandatory Czech social security and health insurance contributions. Social security contributions, where payable, amount to 45% of an employee s salary. This consists of an employee s contribution of 11% and an employer s contribution of 34%. There is an annual cap on social and health insurance contributions equal to 48 times the average national salary, currently up to CZK 1,781,280 during When this limit is reached, the employer should automatically stop paying social security and health insurance contributions. In specific circumstances, an employment contract can be governed by a law other than those established in the Czech Republic. However, the employer and the individual are generally still required to pay mandatory social security and health insurance contributions in the Czech Republic. Foreign individuals with a non-czech employer seconded to work in the Czech Republic may also be

22 22 The Czech Republic Business and Taxation Guide subject to Czech social security and health care contributions, depending on the wording of the applicable social security agreement, or be subject to relevant EU social security regulations. Social security and health insurance contributions must be paid on a monthly basis. 7.7 Real estate tax Real estate tax is paid by the legal owner of land or buildings located in the Czech Republic. Different rates apply to undeveloped land, agricultural land and buildings. The real estate tax rate depends on the type of real estate, ranging from CZK 0.2 to CZK 10 per 1 square metre. Real estate transfer tax Any transfer of a real estate is subject to a real estate transfer tax in the Czech Republic. The rate of the real estate transfer tax is 3%. The tax base is the agreed selling price or the value stipulated by an independent expert, whichever is higher. Czech law requires an expert valuation almost in all transactions relating to the sale of real estate. The tax is paid by the seller (except when the seller is in the process of bankruptcy), while the buyer is the guarantor of the tax payment. 7.8 Inheritance and gift tax Rates for inheritance and gift tax in the Czech Republic are determined by the value of the property and by the type of relationship between the donor and recipient/s in case of private individuals. Inheritance and donations between direct relatives are exempt from taxation. For other individuals and legal entities the tax is levied by a progressive tax scale, ranging from 3.5% to 20%, depending on the value of inherited/donated property. In the case of gift tax, the recipient is typically the taxpayer, unless the gift is donated abroad, where the donor is the taxpayer.

23 23 The Czech Republic Business and Taxation Guide 8. Double taxation agreements As of 2011, the Czech Republic has over 75 Double Taxation Agreements in place. These treaties apply to both individual and corporate organisations and specify: Whether the right to tax particular income is exercised by the country of residence or the country of source To what extent tax credits will be granted by one country for taxes paid in another country Whether income is fully tax-exempt in one country or the other. A double taxation avoidance treaty takes precedence over Czech Republic tax legislation. Companies that have their seat in the Czech Republic are subject to Czech tax on their worldwide income. The company s seat is defined as the registered office or where the effective management of the company takes place. These companies are referred to as Czech resident. Subject to the provision of Double Taxation Agreements are Czech-source income of non-residents and foreign-source income of Czech residents. Credit for foreign taxes on income, which is also subject to Czech tax, is only available if there is a Double Taxation Agreement with the other state. Otherwise, the foreign tax can only be treated as an expense.

24 24 The Czech Republic Business and Taxation Guide 9. Sales tax VAT, Customs and Excise 9.1 Value added tax Value added tax (VAT) is a tax on the exchange of goods and services. Companies are obliged to add VAT to the prices of their goods or services and to invoice their customers accordingly.the Czech Republic VAT system is based on an EU directive (2006/112) and therefore follows common principles of the EU VAT system. VAT is imposed on all taxable supplies at their place of supply in the Czech Republic. Generally, VAT is applied to the delivery of goods, provision of services, transfer and use of rights, transfer of real estates or acquisition of goods from other EU member states. VAT is levied on the import or acquisition of goods from other countries. Typically, goods acquired from VAT payers in other EU member states are subject to VAT in the Czech Republic. VAT should be self-assessed by the individual/entity acquiring the goods (reversecharge principle). With regard to service purchases, the place of taxable supply is where the service recipient/consumer is based. However, various types of services, such as those related to real estate or goods supplied with installation, are taxed in the state of their actual placement. The standard rate of VAT, which applies to most taxable supplies, is 20%. In addition, there is a reduced rate of 10% for certain food products, pharmaceuticals used for healthcare, nappies, printed books and periodicals, social housing etc. From the start of 2012, this reduced rate will be increased to 14%. Exempt supplies, where no VAT is charged and where businesses are not entitled to recover VAT include: Insurance services Financial services Postal services Betting, gaming and lotteries Education Health and welfare TV and radio broadcasting Transfers of land (excluding building land) Transfers of immovable property (including financial lease) threeyears after the first approval for use was issued by the construction authorities or first use of the property (whichever is earlier) Lease of land and immovable property (apart from the short-term lease of buildings, lease of parking spaces, and lease of safe deposit boxes) etc. Although the rent of real estate is generally exempt of Czech VAT, the leaseholder/lease ownercould decide to apply VAT, but only whenthelessee is a VAT registered person. Zero rated supplies, when no VAT is charged and a business is entitled to recover the VAT it suffers, include intra-community supplies. This relates to goods supplied by a business in one EU Member

25 25 The Czech Republic Business and Taxation Guide State to a business in another, which have been dispatched or transportedfrom the territory of one Member State to another. VAT registration A business is compulsorily registered for Czech VAT if taxable supplies exceed CZK 1,000,000 for a period of 12 consecutive months, or if purchases of goods from other EU countries exceed CZK 326,000 per calendar year. VAT registration of related companies can be made on a group basis. Foreign and EU entities/individuals who do not have a registered office or place of business in the Czech Republic are obliged to register for Czech VAT if they make a taxable supply in the Czech Republic on which they have to account for VAT, providing the reverse-charge principle cannot be applied. There is no VAT registration threshold for these entities/individuals. This means VAT registration is mandatory if a Czech taxable supply of any value is made. Permanent establishments of foreign and EU entities in the Czech Republic must register for VAT from the moment of establishment. Reporting requirements If the annual turnover of a Czech entity/individual is higher than CZK 10 million, VAT returns must be submitted on a monthly basis. If the annual turnover is lower than CZK 2 million, VAT returns must be submitted quarterly. If the turnover is between CZK 2 million and CZK 10 million, the taxable person can choose whether to file monthly or quarterly VAT returns. Non-Czech entities (including those that have a permanent establishment in the Czech Republic) may only file VAT returns quarterly. In this instance, monthly filing is not permitted. VAT returns must be submitted by the 25th day of the month following the tax period concerned. VAT liability must be paid by the VAT return submission due date. If too much VAT has been paid, the VAT refund credited to the VAT payer within 30 days of the deadline for submitting the VAT return, without the need to request a refund. If a tax audit is initiated before the VAT is refunded, the time-limit is extended. In these instances, the VAT will be refunded within 30 days of the audit being finalised. VAT refund The Czech Republic has implemented the general provisions of the EU Eighth and Thirteenth Directives in respect of VAT refunds for entities registered for VAT purposes in other EU Member States or non-eu businesses. 9.2 Customs duties The Czech Republic is a part of the EU customs union. This means the import of goods into the Czech Republic is subject to the same customs rules as import to any other EU country. In the case of trade with non-eu countries customs duty arises on the customs value of imported goods. The calculation of customs duty is complex and depends on individual circumstances.

26 26 The Czech Republic Business and Taxation Guide It is possible to bring goods into the Czech Republic under a temporary customs clearance and then re-export them free of customs duty. This applies to normal commercial transactions as well as to personal effects of expatriate staff. 9.3 Excise duties Excise duty is payable on hydrocarbon fuels and lubricants, wine, spirits, beer and tobacco products. Excise duties are fixed at a set amount per unit for each group of products. Excise duty is administered by the customs authority. 9.4 Environmental taxes Environmental taxes include tax on natural gas and other gases, on electricity and on solid fuels. Only supplies of these products delivered within the Czech Republic are subject to tax. These taxes are aligned to EC Directives 2003/96/EC and 2004/74/EC. An exemption from environmental tax may be claimed in respect of energy used in metallurgical or mineralogical processes.

27 27 The Czech Republic Business and Taxation Guide 10. Portfolio investment for foreigners There are no restrictions on foreign persons investing in the Czech Republic. Non-residents are only subject to tax on their Czech source income, subject to the provision of any Double Taxation Treaties, for example: Income of permanent establishment in the Czech Republic Income from the sale of real estate and rental of real estate situated in the Czech Republic Dividends and other profit distributions, interest, transfer of shares in Czech resident companies. Czech sources income liable to tax is generally subject to 15% withholding taxes. Withholding tax is a final tax that is generally reduced by Double Taxation Treaties. Dividends paid by a Czech subsidiary to a parent company that is a tax resident in an EU member state or Switzerland, Norway and Iceland, may be exempt from withholding tax. This is based on the EU Parent-Subsidiary Directive which has been implemented by the Czech Republic. Interest paid to associated companies resident in the EU, Switzerland, Norway and Iceland are also generally exempt from withholding tax (based on the EU Interest and Royalties Directive). The Czech Republic has implemented the EU Savings Directive, which enables information to be shared for interest paid by Czech financial institutions to non-residents. Residents of other EU and EEA countries can file a tax return with regard to other types of income subject to withholding tax (for example, interest, royalties, freelance work) and claim a deduction for any related expenses. This does not apply for withholding tax from dividends. In such cases, the withholding tax is considered an advance payment. This may result in reduced tax burden, as withholding tax is calculated on a gross basis.

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