CzechInvest Information Series No. 4
Serial No.: TAX/01/95-4
Date of Issue: January 1, 1995
As of 1 January 1993, a new taxation system was introduced in the Czech Republic (CR) to which several amendments became effective January 1, 1994. With a combination of indirect taxes, direct taxes and taxes on property, the system comprises :
Consumer taxes ( excise duties ) - Consumption Tax
Income tax on corporations and individuals - Corporate Income Tax, Personal Income Tax
Inheritance, gift and immovable property transfer tax
Environmental protection taxes
All entrepreneurs whose turnover exceeds about US$27,300 in three successive months must register as VAT payers with the financial authorities.
The basic tax rate for goods is 23%, with a rate of 5% for certain selected goods (i.e. specific agricultural produce, essential food, coal and other sources of energy, pharmaceutical products, paper products, books and electric-power driven vehicles).
The basic tax rate for services is 5%, with a rate of 23% for some selected services (i.e. restaurants, accommodation services, tourism, trading and intermediary services, repair and maintenance services for machines, vehicles, and tools).
The VAT is levied on all sales of goods and services rendered in the CR.
The taxation period is one month.
The same VAT rates are applied to the imported goods, goods sent out of the country for processing and then returned, and certain non-regular domestic bus transportation.
Goods exported from the CR are tax exempt, except when previously released for temporary domestic circulation.
Services rendered abroad are not taxable in the CR, and certain domestic services are tax-exempt under the new VAT law. These include postal services, radio and television broadcasting, financial services, insurance services, the transfer and leasing of real estate, health services, social welfare services, lotteries, recycling, the sale of enterprises, and non-profit activities.
This tax applies to hydrocarbon fuels and lubricants, spirits and distilled liquors, beer, wine, and tobacco products that are produced in or imported to the CR; the tax is set as a fixed amount per unit of the product concerned.
The tax is levied on all income of Czech legal entities and on Czech-source income of foreign legal entities. It is payable on the basis of profit reported in the enterprise's financial statements as adjusted for certain deductible and non-deductible items. No distinction is made between ordinary income and capital gains for these purposes.
The standard rate of corporate tax is 41%. It applies irrespective of whether the enterprise is subject to Czech or foreign ownership.
Tax deductible expenditures include: tax depreciation; social security contributions; operating lease payments; financial lease payments under special conditions; immovable property tax; certain expenditure relating to health and safety at work and environmental protection; travel allowances up to statutory limits; value of a receivable from a debtor who cannot go through bankruptcy proceedings due to lack of property; contractual fines and interests on past amounts due; acquisition price of an ownership interest in a business entity in the tax period of its disposal; and gifts to Czech municipalities, legal entities and physical persons for educational, cultural, environmental, charitable or religious purposes (deductions must be more than 2,000 Ke (about $66) and cannot exceed 2% of payer's tax base).
Taxpayers can deduct up to 10% of the value of new tangible fixed assets acquired for consideration from their tax base provided they are the first owners of these assets. The 10% deduction does not affect the assets' book value.
Starting January 1, 1995, legal entities (with the exception of investment funds) will be allowed to deduct from their tax base one half of the withholding tax deducted from dividends and other paid profit distributions. This was designed to moderate the effect of double taxation on dividends.
Non-deductible items include: entertainment; travel allowances in excess of the statutory limits; reserves unless specifically permissible by special regulation; directors' fees; tax paid on behalf of another taxpayer; capital items; interests and other yields paid by employers to their employees on deposits exceeding the usual interest rate provided by banks at the same location; interests arising from deferred tax payments; increased tax liability; interest on loans for deferred customs duties; and most fines and penalties.
Withholding Tax
Certain types of income -- whether received by Czech or non-resident taxpayer -- are subject to withholding taxes as follows:
- 25% on dividends, directors' fees*, profit shares and other related distributions;
- 15% on bank deposit interest.
*As of January 1, 1994, directors' fees paid to members of statutory and other bodies of legal entities are not subject to a 20% withholding tax as before, but are to be paid net of a 25% tax prepayment. Income from such directors' fees are now included in the personal tax of a director and remain non-deductible for the company.
Incomes subject to withholding tax are (with some exceptions) deductible for corporate tax purposes.
Subject to the provisions of relevant double taxation treaties, withholding taxes apply to Czech-source income and payments to non-resident taxpayers as follows :
- 25% on licence payments, royalties, rentals and operating lease payments, copyright payments;
- 1% on financial lease payments;
- 25% on loan interest payments;
- 25% on payments for technical assistance, business consultancy and other related services.
Certain specified incomes are tax-exempt. These include incomes derived from the operation of small hydro-electric power plants, wind-power plants, solar facilities, facilities for the production of biologically degradable substances, and the Czech National Bank.
The CR maintains double taxation agreements with 30 countries. Depending on the agreement concerned, such taxes are either paid in the CR or abroad. The complete list of double taxation agreements valid in the CR is available at CzechInvest.
Treatment of losses: Losses incurred during an accounting period (one calendar year) can be carried forward for a period of five years.
Social security contributions: Payments by companies in excess of the statutory amount (35.25%) are regarded as a taxable benefit on the employee.
Tax concessions are granted to enterprises employing disabled persons.
Czech residents are subject to income tax on their total income while non-residents pay income tax on Czech-source income only. Two criteria are used to determine residence status -- having a permanent home in the CR and/or residing in the CR for at least 183 days within a calendar year.
All categories of taxable income (including income from employment and private business, rental income and certain capital gains ) are aggregated and taxed at progressive rates from 15 to 44%. The top rate applies for annual income over 1.08 million Ke (approximately US$40,000).
Personal allowances are as follows:
- 21,600 Ke annually for each taxpayer
- 10,800 Ke for each child (for a maximum of four children)
- 12,000 Ke for taxpayer's spouse (if the spouse's annual income does not exceed 20,400 Ke)
- 6,000, 12,000 or 36,000 Ke for disabled persons according to degree of disability.
Deductions may be taken for the value of gifts donated to municipalities and persons with a seat in the CR to support science, education, social and health services, environmental and humanitarian activities. The maximum deductible amount is 10% of the tax base.
Director fees, dividends, interest and related receipts are generally taxed by way of withholding, using the same rates as with corporate tax. Incomes subject to withholding tax are not included in the tax base for individual income tax purposes.
Withholding taxes on Czech-source income on non-residents (e.g. for license payments; royalties; rentals; copyright payments; interest; technical assistance; business consultancy and other related services; directors' fees; income from independent activities of artists, athletes, lecturers) are subject to double taxation agreements as with corporations.
All forms of compensation in cash and in kind (generally assessed at market value) are taxable as employment income.
Social security contributions by employees (13.25%) are deductible from taxable income.
Road tax is levied on both companies and individuals engaged in the transport business. The amount of tax depends upon the number of lorries, buses and volume of personal cars.
Non-resident entrepreneurs pay road tax on border when crossing the border, with the amount of tax varying according to the vehicle's length of stay within the country.
Road tax is deductible for income tax purposes.
Property tax is levied on buildings, structures and land in the CR. The taxpayer is the owner or the user (individual or company).
The basic tax rate for houses and buildings is fixed but this rate varies in accordance with number of floors and location.
Tax rates for land reflect the type and quality of land (agricultural, forest, water).
INHERITANCE, GIFT AND IMMOVABLE PROPERTY TRANSFER TAX
These taxes vary according to individual family relationship of the heir/recipient and value of property.
The three groups of taxpayers are: direct relatives (ancestors and descendants) with a tax rate of 1-5%, according to tax base; indirect relatives, with a rate of 3-10%; and all unrelated individuals and legal entities, with an inheritance and gift tax of 7-40% and an immovable tax of 4-20%.
Inheritance tax is levied on immovable property in the CR irrespective of the heir's nationality or residence status. Inheritance tax is not levied on immovable property situated abroad.
Movable property and bank deposits are exempt from inheritance and gift tax when the value concerned does not exceed 500,000 Ke (for direct relatives), 60,000 Ke (for indirect relatives) and 20,000 Ke (for all others).
Taxpayers must calculate their tax liability and submit annual tax returns with payment in the proscribed form. Tax returns for the preceding year must be filed before March 31st of the current year or June 30st when prepared by a recognised auditor. Tax officials examine the tax return and accountancy records and assess any difference between the taxpayer's payment and final tax due. Delinquent taxpayers are penalised 0.3% of the total tax for each day of delay.
Withholding taxes are to be paid before the 15th day of the second month after payment subject to such tax occurred. Reduced rates due to double taxation agreements are applied automatically and need not be requested.
Tax legislation and administration is structured in three tiers: the Ministry of Finance is the top body, followed by regional financial authorities, which in turn govern local financial authorities.
NOTE: This information is current as of June 1994. Although we have made every effort to ensure the reliability of our sources, CzechInvest does not assume responsibility for its accuracy.