Corporate income Tax in The Czech Republic

Corporate income tax is levied on corporate entities, including joint-stock companies, limited liability companies, general partnerships and limited partnerships. The last two entities are considered for tax purposes transparent and therefore taxed at their partners’ level. Legal persons with a registered office or a place of management in the territory of the Czech Republic are subject to tax liability, which is related to their worldwide income. Nonresidents are subject to tax only on income from resources in the territory of the Czech Republic. The taxation period for corporate income tax is generally a calendar year or a business year, which shall start on the first day of a month except January and run for twelve successive months.

TAX BASE AND RATE

The tax base results from accounting profit, which is calculated according to Czech accounting laws and practice. However, final tax liability is calculated using a tax base with adjustments made for tax non-deductible expenses, tax depreciations and losses, items not recorded in the accounts etc. In general, tax deductible costs are only costs incurred in order to generate, assure and maintain taxable incomes. Representation costs, gifts, thin capitalisation interest, remuneration of board members, shortages and damages, creation of accounting reserves, differences between accounting and tax depreciations etc. are costs, that are tax non-deductible. The tax rate which is applied on taxable profit amounts to 19 %. Shares of profits, dividends, settlement shares, royalties, interest and other incomes are subject to a withholding tax amounting to 15 % unless the relevant double tax treaty or legislation of the European Union stipulates something else.

TAX DEPRECIATION RULES

Depreciation of tangible (purchase price more than 40,000 CZK) and intangible (purchase price more than 60,000 CZK) assets are tax deductible under conditions stated in Czech corporate income tax law. Otherwise, the accounting rules are used (e. g. for assets with purchase price lower than 40,000 CZK or 60,000 CZK). Tax depreciation is allowed to the legal owner of assets only. Companies can choose between accelerated or linear depreciation at prescribed rates, nevertheless they cannot switch the selected method after the start of depreciation. Depreciation cannot be interrupted in the case of intangible assets. The statutory depreciation rates rely on depreciation groups which the assets are classed into. The depreciation periods are 3 years (e.g. PCs, tools), 5 years (e.g. cars, industrial machinery), 10 years (e.g. big industrial machinery), 20 years (e. g. small buildings), 30 years (e. g. factory buildings, warehouses) and 50 years (administrative buildings and hotels).

CARRYING FORWARD LOSSES

Tax losses may be carried forward and offset against profits made in the following five tax periods given the fulfilment of certain conditions. The basic condition is, the non applied tax loss may not be deducted from the tax base if the composition of the persons directly participating in the capital or control of the company has significantly changed.

THIN CAPITALISATION

The maximum allowable related party debt equity ratio is 4:1 (6:1 for banks and insurance companies). Limitation of tax deductibility of expenses in connection with debt-equity ratio is not related only to interest but to the whole area of financial expenses (e.g. different types of bank fees and charges, expenses connected with assurance, processing of credits, fees for guarantees, etc.). Tax deductibility of financial expenses is not limited only to the situation of non-satisfaction of the debt-equity ratio. Financial expenses whose interest rate is variable according to the results (profit or loss) of the business are also tax non-deductible.

TRANSFER PRICING RULES

Related party transactions must take place at usual market prices. Expenses exceeding the usual price can be adjusted by the tax authority and the differences between the actual charged price and the usual market price can be considered tax non-deductible. Furthermore, this would also lead to an assessment of additional taxes and related penalties. Nevertheless, there is no obligation to have transfer pricing documentation in the Czech Republic, but taxpayers have to be able to prove that the armslength principle was adhered to in every related party transaction. According to the Guidelines of the Czech Ministry of Finance, the OECD Transfer Pricing Guidelines and the concept of the EU Transfer Pricing Documentation can be used in proving this fact.

TAXATION OF BRANCHES OF FOREIGN CORPORATIONS

Trading branches are usually taxable on actual profits as is recorded in their accounting records, in the same manner as Czech companies (corporate income tax). Non-trading branches of foreign companies may be liable to corporate income tax on anticipated profits. The basis on which anticipated profits are calculated must be negotiated in advance with the local Financial Authority.

TAXATION OF PERMANENT ESTABLISHMENT

A permanent establishment (PE) is usually taxable on its profits from resources in the territory of the Czech Republic. The Czech corporate income tax law considers a PE to be a fixed place of business (e. g. office, mine, workshop) or a performance of services (e. g. advisory, management services) by means of employee or other persons in the Czech Republic over a substantial period of time (so called “service PE”). PE is usually interpreted by the Czech tax authority only in accordance with the Czech national law and the particular double tax treaty, disregarding the OECD Model and the OECD commentary. The method of taxation of a permanent establishment is either in the same manner as for Czech companies or may be liable to corporate income tax on anticipated profits. The basis on which anticipated profits are calculated must be negotiated in advance with the local Financial Authority, unless the relevant double tax treaty does not stipulate something else.

TAXATION OF INVESTMENT FUNDS

Czech legislation differentiates between a domestic investment fund and a mutual fund. Nevertheless, both of them are liable to a preferential corporate income tax amounting to 5 %. The most important tax difference between the above mentioned funds is the person of taxpayer. While an investment company is the taxpayer in case of a mutual fund, the investment fund is the taxpayer on its own. Investors of in both types of funds are generally liable to a 15% withholding tax, but the actual facts of each case have to be analysed.

TAXATION OF REAL ESTATE INVESTMENTS

Real estate investments are taxed under the same conditions as every other corporate investor and the rules for business incomes are applicable as well as for rentals or leasing payments. There are no special legal rules for the taxation of income from the transfer of shares in a real estate project company (i. e. special purpose vehicle). Therefore this income would not be taxed as an income from a sale of a real property and would not be subject to the real estate transfer tax.

TAXATION OF SHAREHOLDERS

Income from dividends and shares in profit, as well as from transfers of shares in a company, paid by a subsidiary to its parent company is exempted from income tax in Czech Republic provided conditions of the EU Parent/Subsidiary Directive are met. On satisfaction of certain conditions the said tax exemption is also applicable to income flowing to tax residents in the Czech Republic from their participation in subsidiaries being tax residents of states, with which the Czech Republic has concluded effective double taxation agreements. Should the mentioned directive not be applied, income tax amounting to 15 % will be withheld, unless the relevant double tax treaty stipulates something else.

TAXATION OF ROYALTIES AND INTEREST

Royalties (licence fees) and interest arising to a company, which is a tax resident of another EU member state are tax exempt under the EU Interests Licence Directive provided its conditions are met. This exemption has legal effect in the Czech Republic as of 1st January 2011. Should the mentioned directive not be applied, income tax amounting to 15 % will be withheld, unless the relevant double tax treaty stipulates something else.

LIQUIDATION

Profits arising on liquidation are taxed as corporate income at the normal corporate income tax rate. Distribution of liquidation proceeds to shareholders is subject to withholding tax in the same way as dividends.

INHERITANCE AND GIFT TAX

Both inheritance and gift tax are levied on the transfer of property by inheritance and donation. These transfers are exempt from taxation in the Czech Republic if they are carried out among close relatives (firstly husbands, children, parents, siblings, uncles, aunts, nieces, nephews). Otherwise, the tax rates depend on the value of transferred property and they vary from 7 % to 40 %.

ROAD TAX

Vehicles registered and used for business purposes in the Czech Republic are subject to road tax. Its taxpayer is the user of vehicle, but it could be e. g. an employer as well, if travel expenses are reimbursed to employees for using their private cars. The tax base depends upon the engine cylinder capacity or the maximum permitted weight and the number of axles.

REAL ESTATE TAX

The tax payer is, in the case of real estate tax, the owner of land or a building located in the Czech Republic. The tax base depends on the size of the real estate, its location, kind and the purpose which is used for. The municipalities set a special municipality’s coefficient every year which can dramatically influence the final tax liability.

REAL ESTATE TRANSFER TAX

Real estate transfer tax amounting to 3 % is levied on transfers of immovable property located in the Czech Republic. The tax base comes either from the purchase price or the appraised value, depending on which of them is higher. The taxpayer is the seller and the buyer is considered to be a guarantor of the tax.