Czech Republic

Leading firms

Tier 1
Deloitte 
EY 
KPMG 
PwC 
Tier 2
WTS Alfery 

Market overview

The number of tax audits in the Czech Republic in 2016 has more than doubled since 2013. The introduction of mandatory disclosure of related party transactions in 2014, may well be the reason behind tax officials' intensified scrutiny.

There were 630 audits in the first three quarters of 2016, in contrast to 282 audits for the whole year of 2013.

"We've seen a very dramatic change in the approach of the authorities," said Marek Romancov from Deloitte. "Historically there were no tax audits, if there were any they would focus on very routine, simple issues. What we see now is [a] significant increase. The approach is much more complex and aggressive."

Romancov highlighted that despite the tax authorities' increase in activity, the country still had a long way to go before achieving quality legislation. Advance pricing agreements (APAs) are still relatively rare in the Czech Republic.

"On one hand you have aggressive tax authorities, but then you have vague legislation which gives you an opportunity to interpret things how you want, as well as inexperienced judges," said Romancov. "On a whole, this creates a very uncertain environment. We have seen many clients facing expensive audits, in terms of time, cost and ultimately the adjustments, which can range from €10 million to €200 million."

The Czech Republic signed the OECD's multilateral instrument (MLI) on tax treaty related measures in June 2017.

While signing the MLI does not guarantee a greater focus on transfer pricing, Jan Pařík, a tax partner from White & Case, said: "The new reporting initiatives are so revolutionary. They are heavily affecting the market situation. This is unlikely to ever happen again in our careers. BEPS is [the way] forward. Our current tax systems were designed almost a century ago. The time has come."

However, Pařík and Romancov both stressed that these changes would not be easy to adapt to. Pařík said: "We are facing instability and uncertainty. It is stressful for clients for compliance reasons."

Pařík also highlighted that the threat of resignation by Prime Minister Bohuslav Sobotka following a dispute with former Finance Minister Andrej Babiš had further threatened stability.

The Czech Republic is scheduled to hold parliamentary elections in October 2017.


Tax authorities

Ministry of Finance
Letenská 15 118 10 Praha
Tel: +420 257 04 1111
Fax: +420 257 04 2788
Email: podatelna@mfcr.cz
Website: www.mfcr.cz


Tax rates at a glance

(As of July 2017)

Corporate tax rate 19% (a)
Capital gains 19% (b)
Branch tax 19%
 
Witholding tax
Dividends 15% (c)(d)(e)
Interest 15% (c)(e)(f)(g)
Royalties 15% (c)(e)(g)(h)
 
Net operating losses (years)
Carryback 0
Carryforward 5

  1. Basic investment funds are subject to tax at a rate of 5%. The preferential treatment will be available for Liechtenstein residents as of the date of legal effectiveness of the Czech Republic-Liechtenstein tax treaty. A 0% rate applies to pension funds.
  2. Capital gains derived by Czech or EU/EEA parent companies on transfers of shares in their subsidiaries are exempt from tax if certain conditions are satisfied. The preferential treatment will be available for Liechtenstein residents as of the date of legal effectiveness of the Czech Republic-Liechtenstein tax treaty.
  3. The rates may be reduced by applicable tax treaties.
  4. Dividends are subject to a final withholding tax at a rate of 15%. Under the principles of the EU Parent-Subsidiary Directive (No. 90/435/EEC), dividends paid by Czech companies to parent companies (as defined in the directive) located in EU/European Free Trade Association (EFTA) countries are exempt from withholding tax if the parent company maintains a holding of at least 10% of the distributing company for an uninterrupted period of at least one year. The preferential treatment will be available for Liechtenstein residents as of the date of legal effectiveness of the Czech Republic-Liechtenstein tax treaty. Dividend distributions between two Czech companies are exempt from tax under similar conditions. Effective from January 1 2014, the tax exemption does not apply if any of the following circumstances exists:
    • The parent company or the subsidiary is exempt from corporate income tax or similar tax applicable in its jurisdiction.
    • The parent or subsidiary may opt for an exemption from corporate income tax or similar tax applicable in its jurisdiction.
    • The parent or subsidiary is subject to zero corporate income tax or similar tax applicable in its jurisdiction.
  5. The 35% withholding tax generally applies to Czech-source income arising to Czech tax non-residents from countries outside the EU/EEA that have not entered into a double tax treaty with the Czech Republic or a bilateral or multilateral tax information exchange agreement that is binding on both the Czech Republic and the respective foreign country. The 35% withholding tax rate also applies if the Czech income payer is unable to prove the tax residency status of the respective beneficial income owner. If applicable, the 35% rate affects all types of income subject to withholding tax (for example, dividends, interest, royalties or rental income). It does not affect rental income from financial leases if the 5% withholding tax rate applies
  6. Interest payments are subject to withholding tax at a rate of 15%. Under the principles of the EU Directive 2003/49/EC, interest paid by Czech companies to related companies (as defined in the directive) located in EU/EFTA countries is exempt from withholding tax if certain additional conditions are met. The preferential treatment will be available for Liechtenstein residents as of the date of legal effectiveness of the Czech Republic-Liechtenstein tax treaty.
  7. For each type of income, EU/EEA tax residents may choose to include the income in their tax return and have it taxed at the standard corporate income tax rate after deduction of associated expenses (while claiming a credit for the withholding tax paid against tax liability stated in the tax return) or they may choose to treat the withholding tax as a final tax on the income.
  8. This withholding tax applies to nonresidents. Under the principles of EU Directive 2003/49/EC, royalties paid by Czech companies to companies located in EU/EFTA countries are exempt from tax if certain additional conditions are met. The preferential treatment will be available for Liechtenstein residents as of the date of legal effectiveness of the Czech Republic-Liechtenstein tax treaty.

Source: EY and Deloitte


Firm contact details

WTS Alfery