Until the end of 2020, there was a transition period in which the supply and purchase of goods to/from the United Kingdom were assessed according to current European regulations.
However, the United Kingdom ("UK") withdrew from the EU ("EU") on 1 January 2021 and is now considered a third country for tax purposes. From the New Year, the movement of goods to/from the UK constitutes import/export. Companies trading with companies established in the UK are now subject to customs supervision and the administration involved in customs documents.
In cases where goods were delivered to the UK or goods were acquired from the UK before 31.12.2020 and after the New Year the situation arises where the taxpayer will have to correct the tax base, this correction will be made under the original performance regime following Section 42 et seq. of the Value Added Tax Act (the “VAT Act”).
If goods were dispatched or transported during the transition period, but the goods arrived in the Czech Republic/UK after the end of the transition period, this will be a classic acquisition or delivery of goods between EU countries. However, it must be duly demonstrated that the dispatch or transport of goods took place before the end of the transitional period.
The foregoing does not apply to Northern Ireland. For the trade in goods, Northern Ireland continues to be considered an EU country and will retain this status for at least another 4 years. Northern Ireland will now use the prefix "XI" in its tax identification number. Trade-in goods between the Czech Republic and Northern Ireland will therefore be considered as an intra-Community transaction.
Imports of goods from a third country
Goods are imported if they enter the territory of the EU from a third country (Section 20 of the VAT Act). The place of performance is the Member State on whose territory the goods are located at the time when they enter the territory of the EU from a third country or the Member State in which the relevant customs measures cease to apply to these goods (Section 12 of the VAT Act).
The payer has the obligation to declare or pay VAT:
- by releasing the goods under a customs procedure (free circulation, temporary use, end-use), or
- non-compliance with the fulfillment of any of the obligations set out in the customs regulations for temporary storage, the customs procedures of transit, warehousing or temporary use with complete exemption from import duties, a processing customs procedure (Section 23(1) of the VAT Act).
In the 1st case, the obligation to declare VAT is in the tax period in which the goods were released for the relevant customs procedure. In the 2nd case, the payer is obliged to declare VAT in the amount that would be assessed upon release of the goods for the customs procedure of free circulation at the time of importation of the goods.
According to Section 33 of the VAT Act, a decision on the release of goods into a customs procedure in which the obligation to declare or pay VAT has arisen is considered a tax document for goods import (single administrative document) as is any other decision on assessed tax issued by a customs office, if the tax is paid (e.g. payment order). The tax base shall be the sum of the taxable amount, including customs duties, levies, and charges due on importation of goods and the relevant excise duty and ancillary charges incurred during transport to the first destination in the country, if not already included in the taxable amount when calculating duty. The first destination is considered to be the place indicated on the transport document. To determine the tax base for the import of goods, the exchange rate determined following customs regulations (Section 38 of the VAT Act) shall be used for the conversion of foreign currency.
The import of goods is stated in the tax return either online 7 (21% VAT rate) or line 8 (15% and 10% VAT rates) according to the VAT rate, and if the payer is entitled to a deduction, this is stated on line 43 (21% VAT rate), or 44 (15% and 10% VAT rates). The control statement does not report the import of goods.
Goods export to third countries
The export of goods is governed by Section 66 of the VAT Act and is considered to be the exit of goods from the territory of the EU to the territory of a third country. The export of goods is a performance that is exempt from VAT with the right of deduction and no customs duty is applied to it. Exempt exports are in respect of the delivery of goods that are dispatched or transported from the Czech Republic to a third country by a seller or buyer who has neither a registered office nor a place of residence or establishment in the Czech Republic. The seller and the buyer may charge an authorized entity with the transport of these goods.
If the conditions for export exemption are met, the performance day is considered to be the day of exit of the goods from the territory of the EU. The payer must prove the exit of the goods:
- by decision of the customs office, or
- by other means of proof.
Other means of proof shall include, for example:
a) a copy of the delivery note signed or certified by a consignee outside the customs territory of the EU;
b) proof of payment for the transport service proving the movement of goods;
c) a delivery note signed or verified by the carrier of the goods;
d) a document signed or certified by the economic operator who exported the goods from the customs territory of the EU;
e) a document was drawn up by the customs authority of a Member State or a third country following the rules and procedures applicable in that State or country;
f) a record of economic operators of goods delivered to ships, aircraft, or equipment at sea;
g) delivery receipt obtained from the carrier's application.
According to Section 33a of the VAT Act, a tax document, i.e. a classic invoice issued by the seller to the buyer is a tax document for the export of goods.
The achieved export of goods is stated in the tax return online 22 but is not stated in the control statement.
An important consequence for tax purposes from the point of view of VAT in the case of trade with the UK is the fact that it is not possible to use the so-called special regimes for trade facilitation within EU countries, such as:
- Goods despatch (e-shops)
- Three-way trade
- Relocation of goods within EU warehouses
- Delivery and acquisition of a new means of transport
- Mini one-stop-shop
Provision/receipt of services with a focus on the United Kingdom
If the taxable person supplies or receives service to/from the United Kingdom, then these are third-country transactions that are not reported in the recapitulative statement. Unlike goods transactions, Northern Ireland services are not exempt; Northern Ireland is also considered a third country for services.
Provision of a service to a third country
When providing a service to a third country, the place of performance is governed by Sections 9 and 10 of the VAT Act. If the place of performance is determined following Section 9(1) of the VAT Act, i.e. the recipient of the service is a taxable person, then the place of performance is the third country.
In the tax return, such provision of a service is reported on line 26. The performance is not declared in either the recapitulative or control statement.
However, if it is a procedure according to Section 9(2) of the VAT Code, the service is being provided to a non-taxable person. In such a case, this is a classic domestic taxable performance with the obligation to pay tax in the country as of the day of provision of the service or the day of issue of the tax document, whichever occurs earlier. If the payer accepts an advance payment before the service is provided, he is obliged to declare the tax as of the day of receipt of the payment.
In the tax return, this performance shall be stated on line 1 or 2 according to the relevant rate of VAT and also in section A.5 of the control statement.
Receipt of a service from a third country
If a taxable person receives a service from a taxable person in a third country, then the Czech Republic is the place of performance according to Section 9(2) of the VAT Act. In this case, the so-called tax liability transfer regime applies, where a taxable person in the Czech Republic must pay the output tax and at the same time has the option to claim an input tax deduction, if he/she uses the performance within his business activity, as of the date of provision of the service. If the taxable person provides an advance to the supplier before the supply of the service, the obligation to declare VAT on the amount provided arises on the date of the advance (if the taxable supply is known with sufficient certainty).
If the taxable person receiving the service from a third country is not a payer, he must become an identified person.
Receipt of a service from a third country from a taxable person is reported on line 12 or 13 of the tax return according to the relevant VAT rate. In the control statement, this performance shall be stated in section A.2 without stating the supplier's VAT number. The right to a deduction is applied for online 43 (or line 44) of the tax return.
Corporate income tax
Brexit has an impact not only on value-added tax, but also on corporate income tax, in particular on profit shares, royalties, and interest.
Shares of profits flowing from a subsidiary that is a resident of another state of the European Union, to a parent company that is a Czech tax resident (Section 19(1)(ii) of the ITA) are exempt from income tax. As the United Kingdom is no longer part of the EU, this exemption cannot be applied and any share of profits must be subject to withholding tax.
Under certain conditions, an exemption can be claimed between a parent company (Czech or EU tax resident) and a subsidiary from a third country. The exemption conditions are as follows:
- The subsidiary must be a resident of a third country with which the Czech Republic has a double taxation agreement (the Czech Republic has such an agreement with the UK),
- It has a legal form that is comparable to the legal form of a limited liability company or cooperative,
- The parent company holds at least a 10% stake in this subsidiary,
- The subsidiary must be subject to a tax similar to corporation tax, the tax rate of which must be at least 12%.
The final condition is that the share (parent company) recipient must be its real owner. This exemption also applies to the transfer of a shareholding in a subsidiary.
If the subsidiary is located in the Czech Republic and the parent company in the UK, this exemption cannot be applied, withholding tax will be applied and it is necessary to work based on the double taxation agreement (the "Agreement"). The Agreement stipulates the tax rates that apply to profit shares, namely:
- A rate of 5% applicable to gross income if the recipient is a company that owns at least 25% of the voting rights of the company paying the dividends, or
- A 15% tax rate, which applies in other cases.
Royalties and interest
Royalties and interest accruing to a business corporation that is a resident of another EU Member State from a business corporation that is a resident of the Czech Republic are exempt from tax provided that certain conditions are met. This exemption is also not applicable from 2021 on such income to business corporations in the United Kingdom. The Agreement also provides for the taxation of that income.
Interest accruing from the Czech Republic to the UK is not subject to tax in the Czech Republic and will thus be taxed in the UK. Royalties are divided into two groups:
- Group 1: compensation for the use of a patent, trademark, design or model, plan, secret formula or manufacturing process, or for the use of industrial, commercial or scientific equipment, or information obtained in the industrial, commercial, technical, technological, or scientific field;
- Group 2: compensation for the use of copyright in a literary, artistic, or scientific work (including cinematographic films and films or recordings for radio or television broadcasting).
Group 1 of royalties may be taxed in the country in which they originate, but the tax rate may not exceed 10%. Group 2 of royalties may be taxed only in the state of the recipient of such income.
A taxpayer may be required to secure tax. Tax is secured for income from which no withholding tax is levied and accrues to a taxpayer who is not an EU or EEA tax resident. The payer must secure the tax when paying, remitting, or crediting the payment to the taxpayer. The tax will be secured in the amount of 10% of income from sources in the Czech Republic. The amount of the tax secured shall be paid by the end of the month following the month in which the obligation to deduct the secured tax arises.