Tax Newsletter 2024

Tax framework for doing business in the Czech Republic

As an EU Member State, the Czech Republic is required to comply with all EU Directives and Regulations with regard to tax policy. The Czech Republic is also a member of the OECD and the World Trade Organization. Business activities in the Czech Republic are carried on by sole entrepreneurs or by legal entities.

• Legal entities

Czech legislation stipulates the following legal entities that are frequently used for carrying on business activities in the Czech Republic.

A general partnership (v.o.s.) is a transparent entity for tax purposes (not treated as a tax resident). This means that the income of the partnership is not attributed to the partnership but to its partners directly. Thus, the partners, if individuals, are subject to unlimited personal income tax liability on income derived by the partnership. If the partner of a partnership is a corporation (s.r.o. or a.s.), the income share of that partner is subject to corporate income tax liability.

With regard to a limited partnership (k.s.), the income of the partnership is split into two parts. Income attributable to its unlimited partners is taxed at the level of the partners, whereas income attributable to its limited partners is taxed at the level of the partnership.

• Sole entrepreneurs

Sole entrepreneurs operating a business in the Czech Republic may derive income in the following four categories:

• income from agriculture and forestry;
• income from independent (professional) services;
• income from business or trade; and
• profit shares of general partners in general and limited partnerships.

Please note that individuals as well as partnerships can also derive income from non-operating activities, such as real estate or capital investments.

Corporate income tax

• Expenses

Only expenses incurred to generate, assure, and maintain taxable income are tax deductible. In particular, no deduction is allowed for:

• private expenses and expenditures;
• penalties;
• representation expenses (except for low-value items with a trademark);
• asset provisions, allowances;
• gifts
• reserves.

• Tax depreciation of tangible assets

Two basic methods of depreciation, straight-line and accelerated, may be used for tax purposes. A tangible fixed asset is depreciable if its acquisition or production cost exceeds CZK 80,000.00 (approximately EUR 3,200.00).

For income tax purposes, the depreciation of tangible fixed assets may be interrupted at any time and resumed (except for certain assets). The depreciation of certain new assets in depreciation groups 1–3 can be increased by 10, 15, or 20 % in the first year.

For tangible assets included in the first or second depreciation group that are acquired between 1 January 2020 and 31 December 2023 an extraordinary depreciation may be applied. The depreciation period is reduced from 3 years to 12 months (for the first depreciation group) and from 5 years to 24 months (for the second depreciation group). The extraordinary depreciation is voluntary and can be applied only in respect of new assets (i.e. by the first user of the assets).

The extraordinary depreciation may be applied for tangible asset that is an emission-free vehicle acquired in the period from 1 January 2024 to 31 December 2028.

The new limitation of CZK 2 million for determining the input price of passenger cars for business purposes (i.e., any depreciation on the input price above CZK 2 million would be tax ineffective). For finance leases, the limitation will be applied to lessees by restricting the tax deductibility of lease payments, both in aggregate and for a single tax year.

Tax depreciation of intangible assets

Intangible fixed assets acquired until 31 December 2020 must be depreciated for tax purposes, if the acquisition or production cost exceeds CZK 60,000.00 (approximately EUR 2,400.00) and the asset’s useful life is longer than one year. The tax depreciation cannot be interrupted. Technical improvement on such intangible assets has to be depreciated according to the wording of the Czech Income Tax Act valid as of 31 December 2020.

The tax depreciation of intangible fixed assets acquired after 1 January 2021 equals to accounting depreciation.

• Carry-forward and carry-back of tax losses

A loss carry-forward is limited to up to 5 years, while tax consolidation is not possible. Moreover, the tax losses incurred in 2020 and onwards up to CZK 30 million (approx. EUR 1.2 million) can be carried back and set off against the tax liability of two preceding taxable periods.

Both, the loss carry-forward and carry-back are limited in the event of a substantial change in the shareholders or controlling persons of the company exceeding 25 %. Nevertheless, losses may be carried forward or back even in the case of substantial change if it is proven that there is no change in the company’s business activities.

• Withholding tax on the income of non-residents

Withholding tax rate of 15 % or 35 % may be reduced by double tax treaties or income may be exempt (see below). Payments to persons residing in a country with which the Czech Republic has not concluded a double tax treaty or an agreement for the exchange of information are subject to the 35 % rate.

• Domestic participation exemption

Any income from transfer of shares and profit distributions derived by a resident from a participation in a Czech resident company is exempt from corporate income tax, provided that it holds the participation of at least 10 % of the share capital for a minimum holding period of 12 months. The participation exemption can be applied only if the company is the beneficial owner of the income.

• International participation exemption

Dividends and income from the transfer of shares received by a Czech parent company or Czech permanent establishments of a company that is resident in another EU or EEA Member State, or Switzerland, are tax exempt provided the participation of at least 10 % of the share capital for a minimum holding period of 12 months is met. The participation exemption can be applied only if the company is the beneficial owner of the income. Dividends and income from the transfer of shares received from subsidiaries resident in other countries that have concluded a double tax treaty with the Czech Republic are also exempt, as long as the profits have been subject to a corporate tax rate of at least 12 percent.

• Intercompany interest and royalties

Interest and royalties paid by a Czech resident company or a Czech permanent establishment of a company registered in another EU Member State to an associated company resident in another EU or EEA Member State, or Switzerland, are not subject to withholding tax in the Czech Republic provided that certain conditions are met.

• Thin capitalization rule

Financing costs on loans exceeding the debt-to-equity ratio of 1:6 for banks or insurance companies and 1:4 for other entities are treated as non-deductible expense. Thin capitalization rules also apply to financing costs on loans between related parties arranged through a third-party intermediary (back-to-back loans).

• Exceeding borrowing costs

Czech tax legislation restricts the deductibility of exceeding borrowing costs, i.e., net borrowing costs that exceed the threshold of CZK 80,000,000.00 (approx. EUR 3,200,000.00) or 30 % of EBITDA in one taxable period. Borrowing costs cover both, payments to related and unrelated parties, irrespective of whether these payments are domestic or cross-border payments. This provision does not apply to financial institutions.

• Transfer pricing

In general, if prices agreed between related parties differ from prices that would have been agreed between independent parties under the same or similar terms and conditions on the same or similar market (arm‘s length price), without such a difference being properly explained, the taxpayer‘s tax base is adjusted by the difference. In this respect, OECD Transfer Pricing Guidelines are followed in the application of domestic transfer pricing legislation. Companies are not obliged to submit transfer pricing documentation. However, during a tax inspection, companies are expected to provide it upon request within 15-30 days. Taxpayers may also apply for a binding ruling to confirm that the transaction in question complies with the pricing regulation. The application fee is CZK 10,000.00 (approximately EUR 400.00).

Certain taxpayers are required to complete an Annex to the Corporate Income Tax Return that contains details about transactions with related persons and entities.

• Pillar II

In December 2022, the EU adopted a directive on ensuring a global minimum level of taxation for multinational enterprise groups and large-scale domestic groups in the EU. The purpose of EU Directive is to laying down the rules to incorporate the OECD Pillar Two into European Member States to ensure a global minimum effective tax rate of 15 % that targets on large groups with a turnover of at least EUR 750 million

The new Czech legislation transposing the EU directive is effective from 31 December 2023 and follows the overall implementation timeline proposed by the Directive. An Income Inclusion rule is applied from 2024 and an Undertaxed Payments rule is effective from 2025. Moreover, the Czech Republic has adopted the Qualified Domestic Top-up Tax rules.

Personal income tax

Progressive tax rates of 15 % and 23 % apply in the Czech Republic:

For 2024, the income of 36 times the defined average salary amounts to CZK 1,582,812.00 (approximately EUR 64,300.00).

• Social and health insurance

In the Czech Republic, social security contributions are levied on income up to the maximum assessment base, which amounts to 48-multiple of the defined average salary, i.e. CZK 2,110,416.00 (approximately EUR 84,400.00) for 2024. Health insurance contributions payable by employees and employers are not capped. The social security and health insurance contribution rates for employed persons are:

• Personal income tax reliefs

From the tax base Czech tax residents can deduct among others the following:

• contributions to pension insurance schemes and life insurance up to statutory limits;
• paid interest for a mortgage or a construction loan (up to CZK 150,000.00; approximately EUR 6,000.00) if the mortgage/loan was used for financing personal housing needs.

If certain conditions are met, the taxpayer may apply for the following tax relief:

• Sole entrepreneur

A sole entrepreneur is entitled to deduct expenses from his/her taxable income, either in their actual amount or as a lump sum in the range of 30–80 % (depending on the type of self-employment activities). Taxable income from which the lump sum expense is calculated is capped at income of CZK 2 million (approximately EUR 82,000.00).

vat

Taxable persons with their seat or place of business in the Czech Republic are exempt from VAT if their turnover does not exceed CZK 2 million (approximately EUR 80,000.00) during the preceding 12 calendar months. The fiscal representative for VAT purposes does not exist in the Czech Republic.

• VAT rates

The standard VAT rate is applied on most goods and services.

The reduced VAT rate applies mainly to supplies of basic foodstuff, certain pharmaceuticals and medical products.

• Zero rate

A zero rate is applicable to exports of goods, intracommunity supplies, international transport and related ser- vices, services on goods subsequently dispatched outside the EU, and other supplies defined in the VAT Act. From 1 January 2024 the zero rate is applied for domestic supply of books and e-books.

• Local reverse charge mechanism

The Czech Republic is one of the leading EU Member States with the application of optional reverse charge mechanism to many specific supplies of goods and services. The local reverse charge mechanism is, among others, applicable on certain conditions to the supply of construction services, game consoles, laptops and tablets, integrated circuits (microprocess and central processing units), supply of gas and electricity to a licensed trader.

Tax incentives

The tax base may be affected by the application of tax incentives. The most important incentives are the following:

• Investment incentive

Investment incentive is granted mainly for projects with high added value, i.e. projects that are proven to be linked to R&D activities, and for up to 10 taxable periods. Czech legislation defines a broad list of conditions that must be fulfilled for investment incentive to be granted, depending on the nature of the recipient‘s business. These are, for example, the minimum amount to be invested and the minimum number of new jobs to be created.

• Research and development expenditures

A company involved in research and development projects may deduct an additional 100 % or 110 % of the related research and development expenditures from its tax base. If a company reports a tax loss or its tax base is lower than the amount of costs incurred in relation to research and development projects, the company is entitled to deduct these costs (or the remainder thereof) in up to three subsequent taxable periods.

other business-related taxes

• Capital duty

No capital duty is levied in the Czech Republic.

• Excise duties

Excise duties are payable on ethyl alcohol, beer, wine and intermediates, mineral oils, and tobacco products. These duties are non-recurring and are payable by the seller, who passes these costs on to the customer. Moreover, there is an obligation to have a fiscal tax representative.

• Custom duties

As an EU Member State, the Czech Republic does not levy customs duties on the import of goods from other EU Member States. Customs tariffs for imports from countries outside the EU are determined by the EU.

• Road Tax

Road tax is imposed on motor vehicles up 12 tuns (trucks and trailers) that are registered in the Czech Republic. The tax rates for motor vehicles (e.g., trucks) range from CZK 0 up to CZK 24,200.00. Tax rates can be further reduced by up to 100% of the tax base if the motor vehicle is used for combined transport of goods.

The road tax for personal vehicles used for business purposes has been fully abolished during 2022.

• Real estate tax

Real estate tax covers plots of land, buildings, residential apartments and non-residential (business) premises. Tax on buildings is based on the area of land occupied. The rates range from CZK 3.5 to 18 per square meter for buildings. Real estate tax on selected agricultural land is 1.35 percent of the deemed value. On permanent grasslands and commercial forests the rate is 0.45 percent of the deemed value. For building land, the rate is CZK 3.5 per square meter, CZK 9 per square meter for other improved land surface used for business, CZK 1.8 per square meter for agricultural improved land surface and CZK 0.35 per square meter in other cases.

• Environmental taxes

Czech law stipulates various environmental taxes. Electricity, natural gas and coal are subject to environmental taxes. The municipality is entitled to impose a fee on municipal waste within its jurisdiction.

Tax treaties

Currently, the Czech Republic’s network of tax treaties includes more than 98 treaties, and new tax treaties are still being negotiated. Double taxation may only be eliminated if a respective tax treaty exists. The Czech Republic has concluded tax treaties with the following countries: