Taxation in the Czech Republic: VAT, withholding, income tax and transfer pricing | Interview

With regards to recent changes in VAT compliance, the VAT Control Statement had a significant impact. Taxable persons registered for VAT in the Czech Republic are obliged to submit the so-called VAT Control Statement after January 1^st, 2016. The VAT Control Statement is completed, together with VAT return and Intrastat reports, on a monthly basis.

The VAT Control Statement serves as the tool against VAT fraud, as both suppliers and customers must report selected details from their invoices and these details must match each other. Following the introduction of the VAT Control Statement, the efficiency of tax collection has increased, together with the administrative burden of the taxpayers in the country.

There are no special tax rules for the IT sector in the Czech Republic. Nevertheless, keeping in mind Czech tax specifics, I would like to mention that it is possible to utilize expenses destined towards software development as a research and development tax credit (an item decreasing one’s tax base) in the case that all legal conditions are met.

A 35% rate applies when dividends, interest and royalties are paid to a jurisdiction that has not concluded a double tax treaty and an agreement for the exchange of information on tax issues with the Czech Republic.

It must be emphasized that this rate is also applied in a situation in which the taxpayer does not have the proper documentation (tax residency confirmation) to support the use of the advantageous tax rates.

In practice, it is more common that the 35% rate is used if the parties underestimate the documentation related to the residency of the payment’s recipient.

At first glance, the calculation of the personal income tax liability looks simple since there is a flat rate of 15% applicable on the tax base of the individual.

However, in the end, people are often surprised that their final tax liability is higher since the flat rate of 15% is applied on the super gross salary (salary increased by social security and health insurance paid by the employer) as the employee’s income.

Furthermore, there is an additional 7% solidarity tax increase that is imposed on annual gross income exceeding approximately 56,000 Euros for employment and self-employment income.

We do not have the split VAT regime in the Czech Republic.

Nevertheless, the Czech VAT Act allows individuals to voluntarily pay the VAT directly to the tax authority from the bank account of the taxable supply’s recipient if specific conditions are met, e.g. this process must be agreed with the taxable supply’s provider (best if done contractually). The taxable supply’s recipient must provide the information specified by law in their payment details so that it matches with the provider’s tax liability.

We would recommend focusing more on transfer pricing in the Czech Republic as the number of tax audits and the resulting tax adjustments have increased dramatically.

The Czech tax authorities have begun to recognize the importance of transfer pricing and started to focus on the knowledge of its employees and the collection of necessary information. Due to the obligatory tax return attachment on related party transactions and country-by-country reports, the Czech tax authority has better access to information on the agreed transfer prices and potential indicators of misconduct.