Corporate tax is levied on the worldwide income of Czech legal entities and on the Czech-source income of foreign entities operating in the Republic.
RATES
The standard corporate tax rate for 1997 is 39%. Additional reduction of the standard rate is planned over the next four years.
A special tax rate of 25% applies to income of investment, pension and mutual funds.
PARTNERSHIPS
Profits and losses of unlimited partnerships are allocated to partners and taxed separately in the hands of the individual partners. Limited partnerships generally remain within the scope of corporate tax, although profit shares attributable to unlimited partners are removed from the partnership's tax base and taxed separately at the level of the unlimited partners.
TAX BASE
Corporate tax is generally paid on the basis of profits/losses reported in Czech financial statements as adjusted for certain non-deductible items.
Non-deductible items include the following:
- Entertainment
- Travel allowances in excess of statutory limits
- Expenses incurred in increasing capital stock
- Directors' fees
- Reserves unless specifically defined as deductible under Czech legislation
- Interest paid from borrowings exceeding thin capitalization limits (see below)
- Tax paid on behalf of another taxpayer
- Most fines and penalties.
Dividends and income from securities which have suffered Czech withholding tax are not subject to corporate tax.
BAD DEBT RELIEF
Full bad debt tax reliefs are normally available in respect of receivables against bankrupt debtors. In addition, 1997 is the third taxation period in respect of which new tax deductible bad debt reserves arising from trading transactions may be created. If the due date of these receivables falls before the end of 1994, 10% of the receivable(s book value may be claimed as a tax-deductible item per year. For receivables with due date after 31 December 1994, tax provisions may generally be created for up to 33% of the value of receivables outstanding for 12 months or longer. If a petition for commencement of legal proceedings against debtor is submitted, a tax provision of up to 100% of the receivable(s value may be created, with the percentage depending on the amount of time the receivable has been outstanding. However, a company which acquired receivables through a contribution to capital after 1 July 1996 cannot apply for this bad debt tax relief.
Special bad debt reliefs are available to banking institutions.
DEPRECIATION
Czech tax law envisages a fixed life for tangible and intangible assets ranging from 4 to 45 years depending on the asset category as follows:
Depreciation Period of Example of Assets
Category Depreciation
1 4 years Office machines, computers, passenger
cars, software
2 8 years Machinery, trucks, furniture, vending
machines, licenses
3 15 years Structures and structural parts, air
conditioning equipment, patents
4 30 years Wooden or plastic houses and
buildings, pipelines
5 45 years Houses and buildings, highways, roads,
wells
These depreciation rates apply for Czech tax purposes, and may therefore differ significantly from Czech accounting depreciation.
Two methods are available for applying tax depreciation: straight-line, or alternatively a system based on residual value where the deduction is weighted towards earlier years (accelerated depreciation). The choice of method must be made on an asset-by-asset basis and, once made, cannot be changed.
INVESTMENT RELIEF
A 10% investment allowance (the so-called "investment relief") is deductible from the tax base on new equipment and machinery in the year of investment, based on the cost of investment. This investment relief can also be claimed for assets acquired under a financial leasing contract if the taxpayer is the first lessee and the lessor is the first owner of the leased asset.
Entities are also entitled to a 15% investment allowance deduction from the tax base on several specific kinds of assets (e.g. water treatment plant and sorting and treatment systems for reclamation of secondary raw materials).
However, the investment relief may not be claimed in respect of immovables, furniture, household electric appliances, passenger cars, tangible assets situated abroad for more than 183 days per tax year, if tangible assets are used only partly in generating the income liable to the tax, or if such assets are leased or disposed of within three years following the year when the deduction is claimed.
THIN CAPITALIZATION
The thin capitalization rules currently applicable for loans provided by related parties limit the tax deductibility of interest on borrowings which exceed the borrower's equity (share capital, share premium, retained profits) multiplied by four (or by six in the banking and insurance industry).
The ratio used for debt provided by unrelated, tax non-resident parties is 10 : 1. However, this rule does not apply in 1997 provided the actual calculated ratio does not exceed 15 : 1.
The thin capitalization rules do not apply to:
Loans provided by Czech tax resident unrelated parties.
Czech taxpayers in the year of their foundation and the following three years.
LOSSES
Losses incurred after 1 January 1993 may generally be carried forward for a period of up to seven years.
SOCIAL SECURITY
Czech legal entities and registered branch offices are required to make health and social security contributions on behalf of all employees on the local payroll at a rate of 35%. These contributions are deductible for corporate tax purposes. In addition, most Czech legal entities must make a small insurance payment (based on gross salaries of all employees) in respect of work-related accidents and illness.
CAPITAL GAINS
There is no special tax rate for capital gains, which are generally taxed at the normal corporate tax rate.
Capital gains from sales of bonds and deposit certificates are not taxable and accordingly any losses so incurred are not tax-deductible. This provision does not apply to convertible bonds.
Capital gains (both short-term and long-term) from sales of other securities are treated as normal income and taxed at the valid corporate tax rate. Mutual, investment and pension funds would tax such capital gains at 25%.
Capital gains realized by foreign entities on sale of Czech shares to Czech taxpayers are taxable in the Czech Republic, but are exempted from Czech tax under a number of double taxation treaties.
RETURNS AND PAYMENTS
Tax returns for each calendar year must be filed by 31 March of the following year. However, entities with the obligation to have a statutory audit receive an automatic extension for filing their tax returns to 30 June, while other entities (and individuals) may obtain an extension to 30 June if their tax return is prepared by an authorized tax adviser. Tax prepayments are required monthly, quarterly or semi-annually during the tax year depending on the previous year's tax liability.
TAX HOLIDAYS
No tax holiday legislation now exists in the Czech Republic. The government has announced that legislation granting such relief will not be introduced in the foreseeable future.
PERMANENT ESTABLISHMENT
The Czech Republic has far-reaching permanent establishment provisions. In addition to standard provisions concerning building sites and branch offices, Czech law states that a foreign entity will create a Czech permanent establishment if it has employees or persons working for it who spend, cumulatively, over six months in the Czech Republic in a twelve month period.
The Czech authorities are of the opinion that double taxation treaties do not protect such arrangements from creating permanent establishments. Particular care is therefore advisable in structuring the secondment of employees of foreign entities working in the Czech Republic.
The content of this article is intended to provide a general guide to the subject matter. It is therefore not a substitute for specialist advice.
For further information contact Paul Antrobus or Richard Fletcher, Arthur Andersen Prague, tel +42 2 2440 1300 or enter a text search 'Arthur Andersen' and 'Business Monitor'.