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ENTREPRENEURSHIP OF FOREIGN ENTITIES AND ITS TAXATION IN THE CZECH REPUBLIC Entities that are not tax residents of the Czech Republic may become liable to income tax according to the Income Tax Act No. 586/1992 Coll., as amended, if they receive income derived from the territory of the Czech Republic. Although the basic level of taxation of this income is relatively low (corporate income tax 19%, natural persons 15%), it may become a fundamental complication for their business activities. It is essential to realise the fact that, in some cases, income tax of tax non-residents is withheld in a form of withholding tax from gross revenues (at the rate of 5% or 15%), and not from profit.

1. TYPES OF INCOME TAXED BY WITHHOLDING TAX Among revenues of tax non-residents derived from the territory of the Czech Republic, on which 15% withholding tax is levied (unless reduced/eliminated by a double tax treaty or unless a permanent establishment is created), may be included e.g.:

Revenues from :  services (except realisation of building site or construction or instal-

lation or assembly project) rendered on the territory of the CR,  consulting, management, and brokerage and similar professional

activities provided on the territory of the Czech Republic,  independent personal services rendered on the Czech territory,  income of artists and athletes for their performance in the CR.

Payments from Czech tax residents (or from permanent establishments of non-residents) for:  industrial and cultural royalties, including payments of any kind

   

received as a consideration for the use of any industrial, commercial or scientific equipment, except of financial leases, director’s fees, contractual penalties from business obligations, dividends, other income derived from a capital asset interest.

Revenues of tax non-residents obtained from the territory of the Czech Republic on which 5% withholding tax is imposed are rentals from financial lease. We have to note that the Czech Republic has a broad system of capital gains (realised on sale of shares) tax exemption valid for Czech nontransparent companies with shares in Czech/EU non-transparent subsidiaries and for EU non-transparent companies with shares in Czech subsidiaries. The conditions are, in particular, that at least a 10% share is held for at least a 12-month period (even sale of shares in a thirdcountry subsidiary may qualify under certain additional conditions).

2. TYPES OF NON-RESIDENTS‘ INCOMES TAXED BY TAX IMPOSED ON PROFITS Besides income liable to withholding tax types of income derived by nonresidents from the territory of the Czech Republic, incomes exist which are subject to the standard 19/15% Czech corporate income tax applied

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on profit. For these types of income, a standard income tax return shall be submitted (once a year until 1.4. of the following year, or until 1. 7. of the following year if the tax return is prepared by a tax advisor/attorney at law on the basis of Power of Attorney) and the tax base consists of profit adjusted for attributable and deductible items. These revenues are typically represented by revenues from real estate or permanent establishment.

Permanent Establishment Permanent establishment in the Czech Republic arises as a result of a fixed place of business, of a building site or construction or installation or assembly project carried out by a tax non-resident which has existed for more than six months within any twelve-month period, from the performance of professional services and of other activities of an independent character in the Czech Republic, if such activities are carried out on the territory of the Czech Republic for more than six months within any twelve-month period. Also, a dependent agent with authority to negotiate/conclude contracts in the Czech Republic binding on the non-resident may trigger a permanent establishment of this non-resident. These basic definitions of permanent establishment can be altered by wording of the relevant treaty on avoidance of double taxation.

3. TAXATION OF PARTNERSHIP INCOME Czech general commercial partnerships (v.o.s.) and limited partnerships (k.s.) are regarded as tax transparent entities for the purpose of corporate income tax (the latter only with respect to the general partner(s)). The profits of a general commercial partnership are not subject to taxation at the v.o.s. level, but at the level of its partners. In a limited partnership, profits are divided into a part for

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Although the Czech Republic as a member of OECD has signed many international bilateral double tax treaties regarding the avoidance of double taxation – currently with 88 states – these agreements mostly modify the rate of the withholding taxes, but the principle of withholding tax by retention tax from the whole income instead of profit taxation is a basic complication. Under these conditions, it is appropriate to consider founding a subsidiary or branch used for doing business in the Czech Republic.

Doing Business in the Czech Republic 2016  

This title (in English), appearing since 1994, contains topical economic, business and practical information intended for foreign businessme...

Doing Business in the Czech Republic 2016  

This title (in English), appearing since 1994, contains topical economic, business and practical information intended for foreign businessme...

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