Practical information on the new reporting obligation pertaining to incoming flowing abroad

The tax package for 2019 significantly expanded the reporting obligation in relation to income paid abroad by Czech payers. In accordance with the Income Tax Act (hereinafter referred to as the “Act”), the reporting obligation only pertained to income from which withholding tax was paid. In accordance with an amendment to the Act, payers are now obligated to report all income from sources in the Czech Republic that is paid abroad and subject to withholding tax, even if such income is exempt from tax in the Czech Republic or an international agreement stipulates that such income is not subject to taxation in the Czech Republic.

The following exemptions from the obligation to submit a new report 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 particular treaty on limitation of double taxation if the total value of the given type of income flowing to one recipient does not exceed CZK 100,000 in the calendar year.
• income of a tax non-resident of the Czech Republic based on a contract on work performance or so-called “small-scale” income (i.e. up to CZK 3,000 per month).
• the tax administrator releases the payer from this obligation upon request for a maximum period of five years (only in legitimate cases).

The following types of income of tax non-residents are subject to taxes collected through withholding:

• income from short-term services provided in the Czech Republic which do not constitute permanent operations.
• income from independent activities (e.g. architect, physician, attorney, tax or accounting advisor) and from the activities of artists and athletes performed in person in the Czech Republic.
• compensation for the provision of the right to use or for the use of a copyright, the subject of industrial property, computer programs (software), production-related technical and other economically usable knowledge (know-how).
• rental of movable property located in the Czech Republic.
• income from holding stock and shares (profit shares, settlement shares, shares in the liquidation balance of business corporations).
• interest from provided loan financial instruments.
• remuneration of members of the bodies of legal entities (regardless of the kind of legal relationship from which such remuneration is derived).
• sanctions from liability relationships.
• income from trust funds and from family foundations.
• gratuitous income (donation).

Taxpayers are obligated to report to the tax administrator income flowing to tax non-residents from sources in the Czech Republic by means of a new form (Report on Income Flowing Abroad). Payers of income are obliged to submit reports by the end of the month following the calendar month in which the obligation to withhold tax arose or, as the case may be, the month in which such obligation would have arisen if the exemption or the relevant provision of a treaty on limitation of double taxation had not been applied. The decisive moment for the running of this period may depend on the type of income and is derived particularly from the moment of payment, remittance or crediting of income to a foreign entity or from the moment the relevant liability is entered in accounts by the Czech payer in accordance with the accounting regulations. Tax subjects thus had the obligation to submit the first report for income paid or, as the case may be, entered liabilities in April, with the reporting period running until 31 May 2019.

Reports are submitted on a form issued by the Ministry of Finance. The electronic report format was made available by the Financial Administration on 27 June 2019.

If the taxpayer would like to request from the tax administrator an exemption from the reporting obligation, it is necessary to submit an official request containing the specific reasons for such request. Unfortunately, it is apparent from current practice that the tax administrator is more likely not to grant requests that state reasons only in general terms, e.g. increased administrative burden.

For the purpose of completeness, we add that the new report fully supersedes the previously valid Taxpayers’ Report on Income Tax Collected through Withholding.

For failure to submit a report or for delayed submission of a report, the tax administrator may impose a fine of up to CZK 500,000 for non-fulfilment of a non-financial obligation.

We recommend that, in your company, you focus increased attention on identifying income flowing abroad that is subject to this new reporting obligation.

Authors: Zuzana Studničková and Lucie Berglová, Czech tax team, ASB Group, member of the Association for Foreign Investment