Simple Tax Guide for Americans in the Czech Republic

US Expat Taxes - Czech Republic

At Taxes for Expats we have been preparing U.S. tax returns for U.S. Citizens and green card holders working in Czech Republic for over 5 years. We have been checked by the State Department and are listed on the list of approved Tax Preparers by the US Consulate in Prague. Our clients mainly come from Prague but we also have a few from Brno, Plzen and Ostrava.

As a U.S. Citizen or green card holder you are legally required to file a U.S. tax return each year regardless of whether you already pay taxes in your residence country.

We offer professional tax services. That means we figure out the best and most optimal way to file your U.S. tax return and avail you of all possible exclusions and deductions. But just as importantly - avoid the errors that would allow IRS to disallow your return and levy fines & penalties on top. You can also do them yourself - not that we recommend it. For more information please see IRS. 

The expatriate Foreign Earned Income Exclusion can only be claimed if you file your tax return on a timely basis. It is not automatic if you fail to file and can even be lost.

We have many clients living in Czech Republic and know how to integrate your U.S. taxes into the local income taxes you pay. Any Czech income tax you already pay can be claimed as against the tax liability on your U.S. return on the same income.

As an expat living abroad you get an automatic extension to file until June 15th following the calendar year end. (You cannot file using the calendar year as is standard in Czech Republic for U.S. tax purposes). You must, however, pay any tax that may be due by April 15th in order to avoid penalties and interest. You can get an extension to file (if you request it) until October 15th.

There are other forms which must be filed if you have foreign bank or financial accounts; foreign investment company; or own 10% or more of a foreign corporation or foreign partnership. If you do not file these form or file them late, the IRS can impose penalties of $10,000 or more per form. These penalties are due regardless of whether you owe income taxes or not.

We have helped hundreds of expats around the world catch up with their past U.S. taxes because they have failed to file U.S. tax returns for many years. This is, in fact, our specialty and we offer a 10% discount to clients to wish to file multiple tax returns at once and get in full compliance with the IRS.

Work with a recognized expert to help you prepare your American tax return. We can also provide tax planning and advice with other expatriate tax; we look forward to working with you.

Below we include information on the Czech Tax System for the American Expatriates.


Czech Republic personal income tax rate is a flat 15%.


Czech Republic income tax is payable by Czech resident individuals on income derived from worldwide sources. Nonresident individuals are only required to pay tax on Czech sourced income. Residence is determined by reference to domicile or where the individual has spent at least 183 days of the relevant calendar year in the Czech Republic.

Czech Republic income tax is payable on assessable income less expenses and allowable deductions. Assessable income includes business income; employment income; other capital gains; dividends; rental; interest income; annuities and other income. Expenses cannot be claimed for employment income or capital gains (most of which are subject to withholding tax). Employment income cannot be reduced by losses of any other categories of income.

Basis – Residents are taxed on their worldwide income; nonresidents are taxed only on Czech-source income.

Residence – An individual is resident if he/she has a home address in the Czech Republic or stays in the Czech Republic for 183 days or more within a 12-month period.

Filing status – Joint assessment of married couples was abolished as from 2008.

Taxable income – There are 5 basic sources of income: employment, entrepreneurial activity, capital, leased property and "other".

General taxable income is defined as the difference between actual gross income and allowable expenses incurred in obtaining this income. Domestic-source dividend and interest income are taxed separately under a lump-sum withholding system.

Capital gains – Capital gains are generally taxed at a rate of 15%; however, gains are exempt if certain conditions are satisfied.

Deductions and allowances – Deductions are granted for mortgage interest, life and supplementary pension insurance, and gifts.

Personal allowances are available to the taxpayer, his/her spouse and children.

Tax Rate – 15%

Other taxes on individuals:

Capital duty – No

Stamp duty – No

Capital acquisitions tax – No

Real property tax – A real estate tax is levied on the occupation of real property or plots of land. The rate depends primarily on the size of the land.

Transfer tax – The only transfer tax is the real estate transfer tax levied at a rate of 3%.

Inheritance/gift tax – Progressive rates ranging from 7% to 40%. Certain persons (generally relatives) are exempt from the tax.

Net wealth/net worth tax – No

Social security contributions – Employees contribute 11% of gross income (4.5% for health insurance and 6.5% for old age pension). Self-employed individuals are subject to a mandatory contribution of 42.7% (13.5% for health insurance, a 28% old age pension and 1.2% for unemployment). The maximum assessment base for 2009 is CZK 1,707,048.

Filing and payment – Tax on employment income is withheld by the employer and remitted to the tax authorities. Self-employed individuals (entrepreneurs) must file a tax return. Tax returns must be filed by 31 March of the following year, but the deadline can be extended if the tax return is prepared and submitted by a registered tax advisor under a power of attorney (see under "Corporate taxation"). Upon application of the taxpayer, a 3-month extension to file a tax return may be granted at the discretion of the tax authorities.

Penalties – Penalties and interest apply for under-declaring income, late payment of tax, failure to file or late filing.

 

Czech Republic Corporate Income Tax

Czech Republic corporate income tax rate is 19% in 2019.

Company tax is payable by Czech resident companies on income derived from worldwide sources. Non-resident companies are required to pay the tax on income sourced in the Czech Republic.

Resident companies are those which have their registered office in the Czech Republic.

The corporate income tax rate is 19% for 2019. A 5% tax rate applies for investment funds, pension funds and share funds. The fiscal year is the calendar year, or economic (business) year if agreed with the tax authority. Tax is due and payable in a single payment if the previous year's tax liability was under CZK 30,000; in six monthly advance payments if the previous tax liability was between CZK 30,000 and 150,000; or in quarterly advance payments if the previous tax liability was over CZK 150,000.

Tax returns of companies for which audited statement of accounts are not required under law are due by 31 March of the following year. For a company to which the 31 March deadline applies, the tax return can be filed on or before 30 June if the company authorises a tax advisor to prepare his return. In all other cases, the taxpayer is entitled to ask the Tax Administration for the due date to be postponed by up to three months.

Residence – A corporation is resident if it is incorporated or managed and controlled in the Czech Republic.

Basis – Residents are taxed on worldwide income; nonresidents are taxed on Czechsource income. Foreign-source income derived by residents is subject to corporate income tax in the same way as Czech-source income. Branches are taxed the same way as subsidiaries.

Taxable income – Taxable income is calculated according to Czech accounting rules, with adjustments for tax purposes. In general, all expenses incurred to generate, ensure and maintain taxable income are deductible, subject to limits specified in the corporate income tax law and in special legislation, if documented by the taxpayer.

Taxation of dividends – Dividend distributions between Czech companies are exempt from tax if the parent company maintains a holding of at least 10 of the distributing company for an uninterrupted period of at least 12 months.

As from 2008, inbound dividends at the level of the Czech parent company are exempt if: (1) paid by a subsidiary in an EU member state and the parent holds at least 10% of distributing company for an uninterrupted period of at least 12 months; or (2) paid by a subsidiary that: is tax resident in a country outside the EU that has concluded a tax treaty with the Czech Republic; has a specific legal form; satisfies the conditions for the dividend exemption under the EC parentsubsidiary directive; and is subject to home country tax similar to Czech income tax at a rate of at least 12.

Losses – Losses may be carried forward for 5 years. The carry back of losses is not permitted. Several anti-abuse provisions govern the utilisation of tax losses, i.e. tax losses may not be deducted when there has been a substantial change in the composition of the persons participating in the equity or control of the company, unless 80 of income is generated by the same activities for which losses were incurred.

Tax Rate – The corporate income tax rate is 19%, with a 5% rate applying to pension funds.

Surtax – No

Alternative minimum tax – No

Foreign tax credit – Foreign tax relief is available only under tax treaties. If relief is not available under a treaty, income tax paid abroad may be deducted as an expense in the following year provided it is imposed on income included in Czech taxable income.

Capital gains – Income from the sale of assets is generally included with other taxable income and taxed at the regular corporate income tax rate. As from 1 January 2009, if a foreign owner sells an investment in a company based in the Czech Republic, gains will be subject to tax as part of the aggregate tax base, regardless of the buyer´s residence, unless otherwise provided in an applicable tax treaty. The exemption applies when the seller is a company that is an EU tax resident (including the Czech Republic) that holds at least a 10% interest in the sold company for a 1-year period. Further, the participation exemption on capital gains is applicable under the same requirements as apply to the participation exemption for dividends.

Holding company regime – No

Tax Incentives – Investment incentives are available in certain circumstances and include a 5-year tax relief, job creation grants, grants for retraining employees and property-related incentives. Additional deductions of R&D costs may also apply.

Withholding tax:

Dividends – Dividends paid to nonresidents are subject to a 15% withholding tax, unless the rate is reduced under a tax treaty. Under the EC parent-subsidiary directive, dividends paid by Czech companies to parent companies located in other EU member states are exempt from withholding tax if the parent company maintains a holding of at least 10% of the distributing company for an uninterrupted period of at least 12 months.

The exemption also applies to dividends paid to parent companies in Iceland, Norway and Switzerland.

Interest – Interest paid to nonresidents is subject to a 15% withholding tax, unless the rate is reduced under a tax treaty or exempt under the EC interest and royalties directive.

Taxpayers from EU/EEA member states are allowed to file a tax return at year end where it will be possible to deduct costs related to interest payments.

Royalties – Royalties paid to nonresidents are subject to a 15% withholding tax. The EC interest and royalties directive will be applicable as from 1 January 2011. As from 1 January 2009, taxpayers from EU/EEA member states are allowed to file a tax return at year end where it will be possible to deduct costs related to royalty payments.

Branch remittance tax – No

Other taxes on corporations:

Capital duty – No

Payroll tax – No

Real property tax – A real estate tax is levied on the occupation of real property or plots of land. The rate depends primarily on the size of the land.

Social security – Employers contribute 34% of the employee's gross salary to the state health and social security funds. A cap on the premium is available.

Stamp duty – No

Transfer tax – The only transfer tax is the real estate transfer tax levied at a rate of 3%.

Other – Road tax is imposed on entities that use vehicles. Gift tax is imposed on the gratuitous acquisition of property.

Anti-avoidance rules:

Transfer pricing – If prices in a transaction involving related parties differ from current market prices and the difference cannot be justified, the market prices are used for tax purposes. Advance pricing agreements may be obtained from the tax authorities.

Thin capitalisation – Thin capitalisation rules are applied to related persons and to loans and credits from other than related parties if related parties are obliged to grant a directly related loan or borrowing to an other than related party (i.e. "back-to-back" financing). The proportion of loans and borrowings to equity must not exceed 4:1 (6:1 if the debtor is a bank or insurance company).

Financial expenses related to loans and borrowings where the interest or the maturity are derived from the profit of the debtor remain fully nondeductible.

As from 1 January 2010, nondeductible interest will not be recharacterised as a dividend.

Controlled foreign companies – No

Disclosure requirements – No

Administration and compliance:

Tax year – Calendar year or fiscal year

Consolidated returns – Consolidated returns are not permitted; each company must file a separate return.

Filing requirements – The deadline for filing the tax return is the end of the third month after the end of the taxable period. This deadline may be extended to the end of the sixth month if the tax return is prepared and submitted by a registered tax advisor under a power of attorney. The power of attorney must be filed with the financial office by the end of the third month after the end of the taxable period. Upon application of the company, a 3-month extension to file a return may be granted at the discretion of the tax authorities. The deadline for companies that are subject to statutory audits is automatically extended to the end of the sixth month. Two or 4 advance payments are required, depending on the previous year's tax liability.

Penalties – Penalties and interest apply for under-declaring income, late payment of tax, failure to file or late filing.

Rulings – Advance rulings may be obtained, particularly for advance pricing agreements, the utilisation of losses when there has been a significant change to the shareholding structure and R&D projects.

DEPRECIATION

The tax law prescribes six groups of tangible assets for tax depreciation purposes using depreciation periods ranging from three to 50 years. Either straight-line or accelerated methods are available. The choice of a method is made by the taxpayer and, once selected, cannot be changed for the remaining life of the asset. Under certain conditions, special accelerated depreciation is available in the case of financial leases. Depreciation of intangible fixed assets is allowed where the acquisition cost exceeds CZK 60,000.

STOCK/INVENTORY

All trading stock is valued at purchase price, including ancillary costs incurred. Stock produced by the company's own operation is valued at internal costs. If a temporary reduction of stock value is non-tax deductible, corrective provisions are applied.

Accepted valuation methods include (FIFO), average procurement costs or predefined (planned) prices but not LIFO. Costs may reflect the liquidation of unusable stock for tax purposes.

INCENTIVES

Since 1 May 2000, incentives for investors including tax relief are governed by the Investment Incentives Act. Tax exemptions for a period of five years are provided (since 2 July 2007) for new investments. The minimum investment limit is CZK 100m with 60% or more invested in machinery. These limits are reduced for regions with higher unemployment rates. Besides investment incentives, a taxpayer may deduct from the tax base 100% of expenses (costs) incurred on the implementation of research and development projects. Tax relief is also provided depending on the number of disabled/handicapped people employed by a company.

 

Czech Republic Value Added Tax (VAT)

Rates – The standard VAT rate in Czech Republic is 20% and the reduced rate is 10%.

Taxable transactions – VAT is levied on the sale of goods and the provision of services.

VAT is levied on imported goods at the same rates as domestic goods. Exported goods to non-EU countries are an exempt supply.

Registration – A company must be registered for VAT if its taxable supplies exceed CZK 1 million for a period of 12 consecutive months or purchases of goods from other EU countries exceeds CZK 326,000 per calendar year. A company can register voluntarily even if its turnover fails to reach the threshold if it renders taxable supplies in the Czech Republic. These are general rules applicable to entities established in the Czech Republic. Different rules apply to non-Czech entities.

Filing and payment – The VAT return must be filed and tax paid within 25 days after the end of the taxable period. The taxable period is a calendar month or calendar quarter depending on taxpayer turnover.