As we informed you at the end of last year, the tax package for 2019 markedly expanded the reporting duty in relation to income paid by Czech payers to other countries. The reporting duty in accordance with the Income Taxes Act (hereinafter the “Act”) only concerned income on which withholding tax was paid. In accordance with the amendment to the Act, payers now have the duty to report all income from sources in the territory of the Czech Republic that is paid abroad and is subject to withholding tax, even in the event that such income is exempt from tax in the Czech Republic or a double tax treaty states that it is not subject to taxation in the Czech Republic.
The following exceptions to the duty to submit a new notification to the tax administrator exist:
- Income exempt from income tax or income that is not subject to taxation in the Czech Republic based on the provisions of a specific double tax treaty, if the aggregate value of the income of the relevant type flowing to one beneficiary does not exceed CZK 100,000 in a calendar month;
- Income of tax non-residents of the Czech Republic based on an agreement on performance of work or income of a “small extent” (i.e. up to CZK 3,000 a month);
- The tax administrator releases a payer from this duty based on a request for no more than five years (only in reasoned cases).
The following types of income of tax non-residents are subject to withholding tax:
- Income from short-term services provided in the territory of the Czech Republic that do not establish a permanent establishment;
- Income from independent activities (e.g. architect, doctor, lawyer, tax and accounting advisor) and from the activities of artists and sportsmen performed personally in the territory of the Czech Republic;
- Compensation for the provision of a right to use or for the use of a copyright, a subject of industrial property, computer programs (software), production knowledge, technical knowledge and other knowledge usable in business (know-how);
- Rental of a movable located in the territory of the Czech Republic;
- Income from auctions of shares and ownership interests (shares in profit, settlement shares, shares in the liquidation balance of business corporations);
- Interest on credit financial instruments provided;
- Remuneration for members of bodies of legal entities (regardless of from what legal relationship it results);
- Penalties from obligation relations;
- Income from a trust fund and/or a family foundation;
- Income without consideration (gifts).
The duty to notify the tax administrator of income flowing to tax non-residents from sources in the territory of the Czech Republic is performed by taxpayers using a new form (Notification of Income Flowing to Other Countries). A notification should be submitted by income payers by the end of the month following the calendar month in which the duty to withhold tax arose or in which it would have arisen, if an exemption or the relevant provisions of a double tax treaty had not been applied. The moment decisive for the running of this period can depend on the type of income and is derived, in particular, from the moment of payment, sending or crediting of a payment of income to a foreign entity, or from the moment the relevant liability is booked by the Czech income payer in accordance with accounting regulations. Tax entities were obligated to make the first notifications for income paid or obligations booked in April, by 31 May 2019.
A notification is submitted on a form issued by the Ministry of Finance. An electronic format for the notifications was made available by the financial administration on 27 June 2019.
If a payer wants to ask the tax administrator to release it from the duty to submit notifications, it is necessary to submit an official request containing the specific reasons. Our current experience indicates that a request with only general arguments, such as an increase in the administrative burden, will probably not be granted by the tax administrator.
For the sake of completeness we add that the new notification fully replaces the current valid form Taxpayers Report of Income Tax Collected by Withholding.
The tax administrator can impose a fine for non-compliance with a duty of a non-monetary nature, up to CZK 500,000, for the non-submission or late submission of a notification.
We recommend paying increased attention to the identification of income flowing to other countries subject to this new reporting duty in your company.
Senior Tax Consultant