Czech Republic: Taxation of capital gains of German and Liechtenstein tax residents

Recently, the Czech Ministry of Finance has focused its attention on the taxation of certain types of capital gains, to generate further financial resources for the Czech state budget. One of them is the taxation of capital gains according to double-taxation treaties (“DTTs”).

The Czech Republic concluded DTTs with Germany and Liechtenstein with a specific regulation of taxation of capital gains in comparison to other DTTs. In the case of the two DTTs mentioned, gains derived by a resident of a contracting state from the alienation of shares or other interests in a company which is a resident in another contracting state may be taxed in that other state.

Due to the fact that the Czech Income Tax Act requires the taxation from the sale of shares or other interests, investors with their tax domicile in Germany or Liechtenstein that earn such type of capital gains are subject to tax in the Czech Republic. The gains are taxed within the framework of their income tax return (not: via WHT). Therefore, the registration of the subject at the Czech tax authority is necessary. The registration obligations should be completed within 15 days after the shares or other interests were disposed.

The income tax return has to be filed by 1 April of the following calendar year. The deadline is automatically extended to 1 July, if the investor employs a tax advisor.

The tax base is defined as the profit from the disposal of shares or other interests. The income is reduced by related costs (acquisition price, disposal costs, etc.). The corporate income tax rate amounts to 19%; the personal income tax rate is 15%.

Beneficial owner

On 1 June 2021, a new Act on Records of Beneficial Owners came into effect in the Czech Republic. The Registration Act was adopted in connection with the requirements of the 5th EU AML Directive, intended to improve the transparency and efficiency of the legal regulation of records of beneficial owners. The Registration Act therefore imposes on ‘registrants’ (basically meaning every legal person with a registered office in the Czech Republic and the trustees of trust funds) the obligation to ensure that all natural persons who meet the definition of beneficial owner are registered.

According to the new definition, a beneficial owner is any natural person who is an ‘end beneficiary’ or person with final influence. If it is not possible to determine a beneficial owner even after the registrant has undertaken all efforts that can reasonably be required of them (while the performance of such steps must be documented demonstrably), every person in the senior management of a corporation will be considered a beneficial owner.

The new Registration Act also regulates the proceedings for registration in the records of beneficial owners performed by register courts. There will now be partial public access to records of beneficial owners, i.e. anybody will be able to obtain a partial extract from the records showing information about the beneficial owner.

The Records Act introduces penalties for missing or incorrect entries in the Records of Beneficial Owners. Fines of up to CZK 500,000 (ca. 20,000 Euro) can be levied on both companies and actual beneficial owners.

The new legislation also affects a company’s internal relations and its members’ rights in a revolutionary manner. In the event of non-compliance with the obligations regarding beneficial owners, a company cannot pay out a dividend. The payment of a share of profit in conflict with this prohibition would, on the part of the company’s statutory bodies, be in conflict with the principle of diligence of a professional manager and would establish a personal duty to compensate for damage.

In a similar manner, if a company’s beneficial owner has not been recorded at the time of the corporation’s general meeting, the owner cannot exercise voting rights. A decision adopted in conflict with such prohibition would be invalid.

Digital Tax

The Czech Digital Tax Act is currently being discussed in Czech Parliament. The aim of the law is to settle the business environment in the digital services sector between companies based on so-called traditional models and companies based on digital models. The draft follows the original European Union concept of the draft Digital Services Tax Directive.

The tax would apply to selected Internet services provided in the Czech Republic, divided into 3 categories based on the Digital Services Tax model:

• placing targeted advertisement on the digital interface,
• use of a multifaceted digital interface,
• sale of user data.

The proposal originally provided for a uniform digital tax of 7% on internet services provided in the Czech Republic, with the proviso that it would be paid in the form of monthly advances, at a rate of 5%.

If you wish to discuss these topics, please contact: WTS Alfery s.r.o., Prague

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