Johan Boersma TAXATION OF COMPANIES IN THE CZECH REPUBLIC.

Johan BoersmaJohan Boersma

TAXATION OF TAXATION OF COMPANIES IN THE COMPANIES IN THE CZECH REPUBLICCZECH REPUBLIC


Corporate taxpayers are Corporate taxpayers are subject to corporate income taxsubject to corporate income tax

Corporate income tax is governed Corporate income tax is governed by the Income Tax Code. There by the Income Tax Code. There are rules applicable only to are rules applicable only to companies or only to individuals companies or only to individuals and there are also common rules and there are also common rules applicable to both.applicable to both.


Type of tax systemType of tax system

In principle, corporate profits are In principle, corporate profits are taxed both at the company level taxed both at the company level and at the shareholder level.and at the shareholder level.Double taxation is relieved by the Double taxation is relieved by the distributing company being able to distributing company being able to credit against its corporate income credit against its corporate income tax liability an amount equal to tax liability an amount equal to 50% of the withholding tax imposed 50% of the withholding tax imposed on the dividends distributed. on the dividends distributed.


A further relief is provided at the A further relief is provided at the shareholder level by taxing shareholder level by taxing dividends at a lower final dividends at a lower final withholding tax rate. Finally, an withholding tax rate. Finally, an exemption from withholding tax exemption from withholding tax applies to certain qualifying applies to certain qualifying redistribution, like resident redistribution, like resident companies. The shareholder must companies. The shareholder must at least hold 20% of the shares.at least hold 20% of the shares.


Taxable subjectsTaxable subjects

Joint-stock companies: akciová Joint-stock companies: akciová spoločnost (a.s.)spoločnost (a.s.)

Limited liability companies: Limited liability companies: společnost s ručením společnost s ručením omezenỹm (s.r.o.)omezenỹm (s.r.o.)

BranchesBranches Cooperative enterprises.Cooperative enterprises.


General and limited partnerships General and limited partnerships are also legal entities for are also legal entities for corporate income tax purposes. corporate income tax purposes. However, general partnerships as However, general partnerships as such are taxed only on income such are taxed only on income that is subject to withholding tax that is subject to withholding tax (15%). All other income is taxed in (15%). All other income is taxed in the hands of the general partners.the hands of the general partners.


Limited partnerships as such are Limited partnerships as such are subject to corporate income tax subject to corporate income tax only on the income attributable to only on the income attributable to the limited partners. All other the limited partners. All other income is taxed in the hands of income is taxed in the hands of the general partners.the general partners.


In general, non-profit In general, non-profit associations, foundations and associations, foundations and other public organizations are other public organizations are subject to corporate income tax subject to corporate income tax with respect to income derived with respect to income derived from advertisements, from advertisements, membership fees and leasing.membership fees and leasing.


ResidenceResidence

A company is treated as resident A company is treated as resident if it has its legal seat or place of if it has its legal seat or place of management in the Czech management in the Czech Republic.Republic.


Taxable incomeTaxable income

Resident companies are taxable on Resident companies are taxable on their their worldwideworldwide income. income.

Taxable income is the difference Taxable income is the difference between income and expenses between income and expenses incurred in obtaining that income. incurred in obtaining that income. The taxable income is computed The taxable income is computed on the basis of the accounting on the basis of the accounting profits and is adjusted for several profits and is adjusted for several items as described in the tax law.items as described in the tax law.


Taxable income of taxpayers using Taxable income of taxpayers using double-entry bookkeeping is double-entry bookkeeping is assessed on an accrual basis, while assessed on an accrual basis, while that of taxpayers using single-that of taxpayers using single-entry bookkeeping is assessed on entry bookkeeping is assessed on a cash basis.a cash basis.

Income taxed in accordance with a Income taxed in accordance with a special withholding tax system is special withholding tax system is not included in the corporate not included in the corporate income tax base.income tax base.


Exempt incomeExempt income

Interest on mortgage bondsInterest on mortgage bonds Interest on taxes and social Interest on taxes and social

security paid in excess.security paid in excess.


DeductionsDeductions

Expenses incurred in generating and Expenses incurred in generating and maintaining taxable income are maintaining taxable income are deductible, unless they are listed as deductible, unless they are listed as non-deductible income.non-deductible income.Note:Note: Corporate income tax paid Corporate income tax paid abroad if the underlying income is abroad if the underlying income is included in the Czech taxable base or included in the Czech taxable base or separate taxable base, provided that separate taxable base, provided that no tax treaty appliesno tax treaty applies..


LossesLosses

a.a. Ordinary lossesOrdinary losses

b.b. Capital losses.Capital losses.


a.a. Ordinary lossesOrdinary lossesLosses may be carried forward forLosses may be carried forward for5 years. In the case of a limited 5 years. In the case of a limited partnership, the partnership’s tax partnership, the partnership’s tax loss must be reduced by the loss must be reduced by the amount due to its general amount due to its general partners. No carry-back of losses partners. No carry-back of losses is allowed.is allowed.


b.b. Capital lossesCapital lossesCapital losses are generally Capital losses are generally

not not deductible with the exception deductible with the exception of:of:

-- Acquisition costs of options Acquisition costs of options and and securities.securities.


RatesRates

The general rate of corporate The general rate of corporate income tax is 20%. (20: 19%)income tax is 20%. (20: 19%)

A final withholding tax of 15% is A final withholding tax of 15% is levied (see income tax).levied (see income tax).


ANTI AVOIDANCEANTI AVOIDANCE

GeneralGeneral

The law on tax administration The law on tax administration contains a general anti-avoidance contains a general anti-avoidance clause. This substance-over-form clause. This substance-over-form provision entitles the tax authorities provision entitles the tax authorities to look through any transaction and to look through any transaction and access tax according to the real access tax according to the real substance of the transaction.substance of the transaction.


Transfer PricingTransfer Pricing

If the agreed price for a transaction If the agreed price for a transaction between persons associated either between persons associated either economically or personally or economically or personally or otherwise is different from the fair otherwise is different from the fair market price, and this difference market price, and this difference cannot be satisfactorily explained, cannot be satisfactorily explained, the fair market price will be the fair market price will be substituted for tax purposes.substituted for tax purposes.


Thin capitalizationThin capitalization

According to the thin capitalization According to the thin capitalization provision of the Income Tax Code, provision of the Income Tax Code, interest paid on credits or loans interest paid on credits or loans provided by related parties in excess provided by related parties in excess of the ratio 4:1 between the of the ratio 4:1 between the aggregate value of foreign debt and aggregate value of foreign debt and all equity of the company is not all equity of the company is not deductible for tax purposes. The ratio deductible for tax purposes. The ratio for banks and insurance companies is for banks and insurance companies is 6:1.6:1.


The debt/equity provisions do not The debt/equity provisions do not apply in the year of a company’s apply in the year of a company’s foundation or in the subsequent 3 foundation or in the subsequent 3 years. Loans for the acquisition of years. Loans for the acquisition of fixed assets and any interest-free fixed assets and any interest-free loans are not treated as debt for loans are not treated as debt for thin capitalization purposes.thin capitalization purposes.


Controlled Foreign CompanyControlled Foreign Company

There is no CFC legislation.There is no CFC legislation.


From 1 May 2004, under the domestic law From 1 May 2004, under the domestic law implementing the provisions of the EC Interest and implementing the provisions of the EC Interest and Royalties Directive (2003/49/EC), outbound interest Royalties Directive (2003/49/EC), outbound interest payments are exempt from withholding tax, provided payments are exempt from withholding tax, provided that the beneficial owner of the interest is an that the beneficial owner of the interest is an associated company of the paying company and is associated company of the paying company and is resident in another Member State or such a resident in another Member State or such a company’s permanent establishment situated in company’s permanent establishment situated in another Member State. Two companies are another Member State. Two companies are “associated companies” id (a) one of them has a “associated companies” id (a) one of them has a direct minimum holding of 10% in the capital of the direct minimum holding of 10% in the capital of the other or (b) a third EU company has a direct minimum other or (b) a third EU company has a direct minimum holding of 10% in the capital of the two companies. A holding of 10% in the capital of the two companies. A minimum holding period of 2 years is required. The minimum holding period of 2 years is required. The recipient must obtain an approval from the Czech recipient must obtain an approval from the Czech authorities.authorities.


The EC Interest and Royalty Directive The EC Interest and Royalty Directive precludes any taxation on royalty precludes any taxation on royalty payments to associated EU companies. payments to associated EU companies. The Czech Republic, however, has been The Czech Republic, however, has been granted a transitional regime under granted a transitional regime under which it enjoys an exemption from the which it enjoys an exemption from the application of the Directive with respect application of the Directive with respect to royalties until 1 July 2005. to royalties until 1 July 2005. Thereafter, the Czech Republic may Thereafter, the Czech Republic may levy a withholding tax on royalties at levy a withholding tax on royalties at 10% for 6 years.10% for 6 years.

Johan Boersma TAXATION OF COMPANIES IN THE CZECH REPUBLIC.

Documents

income tax code

corporate income tax

income attributable

worldwide income

underlying income

nondeductible income

corporate income tax

corporate income tax