Under the EU Parent/Subsidiary Directive rules implemented into Czech legislation, dividends paid by a qualified Czech subsidiary to a qualifying parent company that is tax resident in a member state are exempt from withholding tax.
A dividend received by a qualified Czech parent company from a qualified EU subsidiary is also exempt from tax.
Qualifying criteria include tax residency, having one of the listed legal forms required, and that at least 10% of the shares have been held by the parent company for at least 12 months.
Taxable income includes the following:
For individuals, the tax year corresponds to the calendar year. For income tax purposes, income is taxed in the year when payment is actually received or, in the case of non-monetary benefits, in the year when the benefit is received. Employment income received in January relating to work performed in the previous year must be included in the tax base of the previous year.
The income of individuals is subject to a flat tax rate of 15 percent. The 15 percent flat tax on employment income is calculated based on the super gross salary, which is the gross salary increased by the social security and health insurance contributions payable by the employer. An additional 7 percent (a “solidarity tax”) is applied on income (the sum of gross salary and the self-employment tax base) exceeding the maximum annual assessment base for social security contributions (CZK 1,355,136 in 2017).
Tax on immovable property is payable by owners of immovable property situated in the Czech Republic. This tax is low compared with other developed countries.
EU membership has greatly impacted Czech VAT rules and procedures, as EU directives, regulations and case law apply and must be adhered to by the taxpayers and tax authorities.
The standard VAT rate is 21 percent and applies to most goods and services. Two reduced rates are applied in the CR. The first reduced rate of 15 percent applies to, e.g., food products, public transportation services, social housing construction, and transfers of social housing, unless these are tax-exempt. The second reduced rate of 10 percent applies to essential baby nutrition, pharmaceuticals for human and veterinary purposes, books and newspapers.
Income tax liabilities are, to some extent, modified or mitigated by tax treaties, where applicable. The CR has concluded 87 double taxation treaties. Also, the
CR is one of the first signatories of the Multilateral Instrument amending double taxation treaties.
Transactions between related parties should be conducted in accordance with the arm’s length principle. The arm’s length principle should govern the evaluation of transfer prices among associated enterprises. Companies are obliged to disclose their related party transactions in financial statements and, in particular, in an appendix to the corporate income tax return containing information about all foreign related party transactions – subject to some limitations. This information is electronically reported directly to the tax authorities.
The Czech Republic, as a member of the Joint Transfer Pricing Forum of the European Union (EU JTPF) and the Organisation for Economic Cooperation and Development (OECD), follows the OECD principles and guidelines for the content of TPD (Master file and local file). The Ministry of Finance and the General Tax Directorate have issued several methodological instructions in this respect; they are not legally binding but they serve as useful guidelines for taxpayers.
In the CR there is no legal obligation to have transfer pricing documentation prepared.