Taxation of Corporations – Corporate Income Tax

Tax residents

Companies with a registered seat or place of management in the Czech Republic are treated as Czech tax residents and are subject to Czech corporate income tax on their worldwide income. Permanent establishments and branches of foreign companies are generally taxed on Czech-source income only.

Permanent Establishments of Foreign Companies

A permanent establishment is interpreted as a facility, including e.g., an office, workshop, point of sale, place of extraction of natural resources, etc., located in the Czech Republic. A “deemed” permanent establishment is created in the Czech Republic if any commercial, managerial, advisory or other services are provided by employees of a foreign entity in the Czech Republic for more than six months in any twelve successive calendar months. This also applies to a construction site in the Czech Republic.

The presence of a person empowered to conclude binding contracts for a foreign entity may give rise to a permanent establishment. The rules may be modified by a double-taxation treaty.

Tax Base and Rates

The tax base is generally the difference between income and expenses, as adjusted for tax purposes. The accrual and matching principle must be followed.

The corporate tax rate is 19%. A special tax rate of 5 % applies to basic investment funds. The tax rate amounts to 0 % for a fund of a pension company or a pension insurance institution.

Tax Period

Generally, the tax year is the calendar year. Tax payers may establish a fiscal year that is different than the calendar year. A fiscal year must be 12 successive calendar months. To change the fiscal year, the taxpayer must file a notification letter with the relevant Financial Office in advance.

Filing deadlines

Taxpayers must file an annual tax return within three months following the end of the tax period (i.e. by 1 April for a calendar year). A three-month extension of the filing deadline is available to taxpayers represented by a registered tax advisor; this three-month extension is automatically granted to taxpayers subject to a statutory audit. The filing deadline can be extended to up to 10 months if the tax return includes taxable income which has been assessed abroad.

Payment of Tax

The final tax liability is assessed in the annual tax return and must be paid by the same due dates as those for filing the tax return. Advance payments are required from all taxpayers except those whose last known tax liability was CZK 30,000 or less. Taxpayers make advance payments either biannually or quarterly, depending on the amount of their previous tax liability.

Tax losses

Assessed tax losses can be carried forward and offset against future profits for a maximum period of five years. Utilisation of tax losses is not possible if there has been a significant change in the ownership of the company intending to utilise the tax loss, unless the company satisfies the “same business” test. A significant change in the ownership is defined as a change in more than 25% of the registered capital or voting rights or when a shareholder gains decisive control.

Transfer pricing and the arm’s length principle

Transactions between related parties must be at arm’s length. The tax authorities can adjust the tax base and assess penalties if the taxpayer is not able to prove that arm’s-length prices were used in related-party transactions. In addition, for tax non-residents from outside the EU, expenses in excess of the arm’s length price are classified as a deemed dividend and taxed accordingly unless a double-taxation treaty disallows such taxation. Starting in 2014, companies are obliged to file together with their corporate income tax return a separate disclosure including overview of transactions with related parties.

While there are no specific documents requested for transfer pricing purposes, Czech authorities generally expect that OECD Transfer Pricing Guidelines be met.

Binding rulings

Tax payers can obtain a binding ruling on the application of transfer pricing policy (APA), utilisation of tax losses, determination of costs attributable to taxable or non-taxable income, differentiation between technical appreciation and repairs and maintenance, assessment of R&D costs which can be used for special deductions from the tax base, differentiation between costs of use of immovable assets by individuals for private and business purposes.

Implementation of the European Anti-Tax Avoidance Directive

The following rules should enter into force with effect from 1 January 2020:

  • Taxation of a controlled foreign company („CFC rules“), which should help to avoid double taxation => A taxpayer of corporate income tax who is a tax resident in that country must include in its tax base all passive income or income from artificial transactions of its controlled foreign company, if its tax burden is less than the half of the tax that would be paid by the company as a tax resident of the taxpayer’s Member State; and
  • Notification about income arriving abroad to tax administrator => applies to the Czech taxpayer, who also makes a payment of income from sources in the Czech Republic to the Czech non-resident taxpayer, from which income the tax is withheld at the special tax rate, even if such income is exempt from the taxation or double tax treaty stipulates that it is not subject to taxation in the Czech Republic.
  • Taxation when relocating property without changing ownership => refers to the transfer of assets between a company and its permanent establishment, the transfer of a business or operating activity carried out by a permanent establishment to a permanent establishment situated in another country or the transfer of assets in the event of a change in the tax residency of the company; and
  • Solution of hybrid mismatches, i.e. the consequences of different legal qualifications, where the tax-legal nature of an entity or instrument is qualified differently in the countries concerned.

Thin capitalisation rules

Until 2018 the thin capital debt/equity ratio was 4:1 (6:1 for insurance companies and banks), i.e., financial costs on the portion of a related-party loan above four times the recipient company’s equity were tax non-deductible for the recipient. Thin capitalisation rules also applied to so-called “back-to-back” credits and loans (credits and loans between related parties provided through an unrelated intermediary). When paid outside the EU, excess interest is reclassified to dividends and taxed accordingly, unless a tax treaty disallows such taxation.

From 1 January 2020, in connection with the implementation of the European ATAD guidelines, the profit or the difference between the revenues and costs of corporate tax taxpayer will be increased by the amount corresponding to the positive difference between the excess loaned costs and the limit on the acceptability of the excess loaned costs, when the profit or difference is higher than:

a.30 % of EBITDA, or

b.CZK 80,000,000

Non-deductible loaned costs can be transferred to other tax periods. The rule will apply to both loans from affiliated and non-affiliated persons.

Country-by-Country reporting

As an action within the international fight against tax evasion, the Czech Republic introduced a new notification obligation in the form of „Country-by-Country reporting“(“CbCR”) entered into force in September 2017. The Act No. 164/2013 Coll., establishes the obligation for Czech entities which are part of a multinational group reporting annual consolidated revenues of over EUR 750 million to submit a Notification to Specialized Tax Office. In the Notification, it is necessary to specify the ultimate parent entity of this group and further the entity, which will submit the CbCR for this group.

The Czech ultimate parent entities of these types of multinational groups will need to submit the so-called Country-by-Country Report, a report containing data arranged by country, for this group.

Withholding Tax

A final withholding tax of 15 % is levied, for example, on:

  • Dividends and other profit distributions
  • Decrease in share capital, dissolution of reserve fund or a similar fund, previously increased from profit
  • Liquidation surplus payments

An exemption from withholding tax is available under rules similar to those in the Parent/Subsidiary Directive for dividends paid to qualifying tax residents of the EU, Switzerland, Norway, Iceland and Liechtenstein under the condition that the recipient holds at least a 10 % share in its subsidiary for at least 12 months and the respective companies have a required legal form.

A final withholding tax is further levied, for example, on the following payments when made by Czech companies to foreign parties:

  • Interest (15 %)
  • Royalties (15 %)
  • Management fees (15 %)
  • Director’s fees (15 %)
  • Financial lease payments (5 %)

Interest and royalty payments between directly related enterprises (more than 25% for more than 24 months), which are tax residents in the EU, Switzerland, Norway, Iceland and Liechtenstein are exempt from tax. Exemptions based on the Interest and Royalty Directive have to be approved
by the relevant tax authority in advance.

The withholding tax rate can also be reduced in accordance with the relevant double tax treaty.

Payment of income subject to withholding tax to those countries where no double tax treaty or no treaty on the exchange of information was concluded is subject to a 35 % withholding tax.

Participation exemption

The conditions for exemption from taxation of capital gains from the sale of shares in a qualifying subsidiary are the same as to the conditions for tax exemption of dividends, and the exemption applies to the transfer of shares in a qualifying subsidiary that is a tax resident in an EU member state, Norway, Iceland, Liechtenstein or a double taxation treaty country.

Direct expenses related to holdings in a subsidiary are not tax-deductible. This includes e.g. interest on loans used in relation to the acquisition of a subsidiary and the share acquisition costs. The indirect holding costs are explicitly set at 5 % of received dividends unless lower actual costs can be proven by the tax payer.

Investment incentives

Investment incentives can now be obtained for 10 years in the form of a tax holiday. The permissible public subsidy rate in all Czech regions except the City of Prague is 25%. In 2019, an amendment to the Investment Incentives Act will enter into force, which will introduce more strict conditions for obtaining investment incentives. Investment incentives will be more focused on projects with higher added value and projects linked to the creation of more positions for skilled workers.

Further information on investment incentives and other forms of support is available at the website of CzechInvest (Czech Investment and Business Development Agency) - http://www.czechinvest.org.

Double deduction of research and development costs

Under certain conditions R&D costs may be used to reduce the tax base twice – once as tax deductible costs and a second time as an R&D allowance. Unutilised R&D allowance can be carried forward for up to three immediately consecutive years subject to specific conditions. The R&D allowance is increased from 100% to 110% on incremental R&D costs.

Deductions to support professional education

Companies providing professional education to pupils and students can utilise a deduction in the amount of CZK 200 per pupil/student per each hour. If assets are acquired for professional education, the tax base can be reduced twice: first by utilising tax depreciation and second up to 110 % of the acquisition value in the year of acquisition.

Accelerated depreciation in the first year

Czech tax law allows acceleration of the depreciation of some tangible assets in the year in which the assets are put into use, provided the taxpayer is the first owner of the asset and other conditions are met. The first-year depreciation can be increased up to 20 % depending on the type of asset and the taxpayer’s business activity.

Mergers

Provisions incorporating the Merger Directive allow Czech companies to carry out tax-neutral contributions of businesses or its parts, share exchanges, mergers and de-mergers or spin-offs. In addition, subsequent to the contribution of a business or its part, merger or de-merger, the tax losses of the contributing entity or the one ceasing to exist as a result of the merger are transferred to the legal successor company to the extent they were generated by the same activities. The Czech company must be a joint-stock or limited liability company.

  • Tomáš Urbášek
    PricewaterhouseCoopers
    Česká republika, s.r.o.
    nám. Svobody 20, 602 00 Brno
    + 420 542 520 255
    tomas.urbasek@cz.pwc.com

  • Petr Mašek
    PricewaterhouseCoopers
    Česká republika, s.r.o.
    nám. Svobody 20, 602 00 Brno
    + 420 542 520 254
    petr.masek@cz.pwc.com

  • Tomáš Ráček
    PricewaterhouseCoopers
    Česká republika, s.r.o.
    nám. Svobody 20, 602 00 Brno
    +420 542 520 257
    tomas.racek@cz.pwc.com

  • Dana Hlaváčová
    PricewaterhouseCoopers
    Česká republika, s.r.o.
    nám. Svobody 20, 602 00 Brno
    +420 542 520 261
    lucie.hlavacova@cz.pwc.com