Czech Republic

Leading firms

Tier 1
Deloitte 
EY 
KPMG 
PwC 
Tier 2
WTS Alfery 

Market overview

Unlike many jurisdictions, the tax authorities in the Czech Republic are not especially focused on transfer pricing, instead VAT fraud captures most of their audit attention. Even so, changes to the transfer pricing market have been introduced in response to the OECD's BEPS project.

EU directives have altered the TP documentation required in the jurisdiction. This includes the introduction of country-by-country reporting (CbCR) and the automatic exchange of information between tax authorities.

The commencement of the automatic exchange of information will take place in the Czech Republic in September 2017. Full implementation of the BEPS proposals is something that will take time in the jurisdiction however. "We are aware of [the BEPS recommendations], but it is not something that has been implemented into Czech law, so the practice is totally different to the theory," said Jana Alfery, partner at WTS Alfery.

So far as implementation of Actions 8-10 of the BEPS report is concerned, there is no specific timetable in place in the jurisdiction for these to be transposed into law. In practice, the Czech authorities focus on the economic substance of transactions, meaning that all of the commonly accepted methods for TP calculations are accepted, so long as an actual economic basis for the transactions is demonstrated.

The use of advance pricing agreements (APAs) in the jurisdiction is fairly uncommon, and the authorities seldom discuss structures with taxpayers before the submission of a tax return, although this is not to say that it is never done.

"With respect to transfer pricing you can submit a formal request to the Ministry of Finance to approve your transfer pricing procedure, but it takes time, and I do not know of many companies who would want to submit a request. What most companies do is just comply, and then when they have an audit they prepare the documentation," said Alfery.

The Czech Republic never implemented the OECD's transfer pricing guidelines into its domestic law, so the preparation of transfer pricing documentation remains voluntary. The tax authorities will occasionally request it as a part of an audit and it must then be submitted to them within 15 days.

The position of taxpayers is one of relative insecurity – the approach of the tax authorities toward taxpayers has been said by some advisers to be unnecessarily aggressive, generating conflict and uncertainty.


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 April 2016)

Corporate tax rate 19% (a)
Capital gains 0/19% (b)
Branch tax 19%
 
Witholding tax
Dividends 1/15/35% (c)(d)(e)
Interest 1/15/35% (c)(e)(f)(g)
Royalties 0/15/35% (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 2016 Worldwide Corporate Tax Guide


Firm contact details

WTS Alfery