Income tax – tax reinsurance

The institution of tax reinsurance is used in cases where there is a theoretical risk that tax will not be paid at all or in an incorrect amount,

or would be difficult to recover. Who is affected by the secured tax, who imposes the tax and at what rate? The secured tax regime is used where there is a theoretical risk that the tax will not be paid at all or in an incorrect amount or will be difficult to collect. A typical example is when a foreign person (non-resident) carries out an activity in the Czech Republic, sells property, earns taxable income here and the certainty of paying the correct tax would be low.

Such a foreigner should then only be paid a net amount less the amount of tax secured in accordance with Czech tax legislation, in particular the Income Tax Act (“ITA”). Although at first glance it might seem that there may be some discrimination in the taxation of foreign nationals, even those from the European Union (“EU”), this principle has been endorsed by the CJEU, in view of the principle of social solidarity. In other words, it has recognised the right of state policy to favour in some way citizens and companies falling under a given state tax policy.

To this end, the Czech tax legal system has introduced the so-called tax security, which is applied only to income recipients (taxpayers) who are Czech tax non-residents (in simple terms, they do not reside or usually stay in the Czech Republic, in the case of legal entities they do not have their registered office or place of management here).

Since a tax non-resident has only a limited tax liability in the Czech Republic, namely only for income derived from sources in the Czech Republic listed exhaustively in Section 22 of the ITA, the tax assurance will only apply to these non-residents in respect of such income. As such, tax residency is determined in principle according to the ITA and with the help of international double taxation treaties (“DTT”), if the Czech Republic has such a treaty with the country in question. ATAs usually relax the strictness of the ITA, so that residents from treaty countries may have a “softer” tax regime than Czech non-residents from a non-treaty country.

In general, income of non-residents from sources in the Czech Republic that is subject to the obligation to declare and tax in income tax returns, which would be difficult to collect, is subject to just the so-called tax assurance, which is to be carried out by the payer of the income under Section 38e of the ITA.

The taxation is carried out by the income taxpayer

In order to guarantee appropriate taxation in the Czech Republic with the minimum possible administrative burden on the tax administration and without the need to use international exchange of information, the ITA and the relevant ITA transfer the person responsible for taxation of the non-resident taxpayer’s income to the resident income taxpayer. This will make it possible to apply the enforceability of the state power not to the non-resident who is difficult to reach, but directly to the resident paying the income in question by withholding tax on the income paid to the non-resident, which is paid by the payer to the Czech tax office on behalf of the taxpayer (non-resident). On the withheld amount, by which the non-resident receives less, the Czech tax office will issue a certificate of tax paid in the Czech Republic to the foreign entity, which will thus have a certificate of tax paid and the use of the institute of possible avoidance of double taxation in accordance with the CET and its national tax legislation, if the bilateral treaty would apply to it.

Unlike withholding tax, which is a final tax and cannot be claimed in most cases, the secured tax allows foreign taxpayers who are required to file income tax returns in the Czech Republic to take advantage of the deductions and expenses allowed by law, provided they do so and file their returns properly in the Czech Republic. The secured tax may also become a refundable overpayment.

It is therefore not punitive taxation, but as the name suggests, it is only a precautionary “hedging” taxation in case the non-resident fails to comply with his/her obligation and does not file a return which subsequently allows him/her to take advantage of all the legal opportunities to properly settle the tax in the Czech Republic. The hedging of tax is not carried out in the following isolated cases, although according to the general principles the tax should be paid and neither advance tax nor withholding tax is paid:

• for Czech non-residents, if the taxpayer is an EU resident,
• if the taxpayer is a resident of a Contracting State and the FTA does not allow income in the Czech Republic
• to be taxed,
• retail sales of goods and services by a non-resident of the Czech Republic,
• rent paid by individuals for residential property.

Amount of tax collateral

According to the ITA, the basic amount of tax collateral is 10% of taxable income on which tax is not withheld at a special tax rate. The tax must be secured by the taxpayer upon payment, remittance or credit of the payment to a taxpayer who is not a Czech tax resident, at the latest on the date on which the taxpayer accounts for the debt in accordance with the special legislation.

Taxpayers are not obliged to secure the tax in the case where the advance payment is withheld from income from employment. This basic tax rate is practically the most used, namely on income from permanent establishments in the Czech Republic and on the sale and use of immovable property in the Czech Republic.

The tax regulations also provide for additional rates of tax collateral in specific cases (1%):

•  on income from the sale of investment instruments (e.g. securities) according to a special the special legal regulation regulating business on the capital market,
•  income from the payment of a claim acquired by assignment.

The income tax rate of 15% of the tax base applies to a partner of a public partnership (“v. o. s.”) or a general partner of a limited partnership (“k. s.”) who is a natural person – a tax non-resident (taxpayer under Section 2(3) of the ITA). If the taxpayer is a legal entity – a non-resident of the Czech Republic, we apply the 19% tax rate under Section 21 of the ITA. The amount of the tax reinsurance is rounded up to the nearest CZK. Technically, the tax is technically secured in the standard way so that the non-resident taxpayer is to receive income of, for example, CZK 1,000. When it is paid, remitted or credited, the taxpayer (paying the income to the taxpayer) will charge the liability for the tax reinsurance according to the above percentage rates. An exception is made for profit shares in v.o.s. and k.s., where the deadline is two months after the end of the tax year. Subsequently, after accounting for this liability, the taxpayer shall remit the secured tax to its tax office by the end of the month following the month in which the obligation to withhold the secured tax arose, and at the same time file a so-called taxpayer’s report on the withholding of the secured tax.

Deadline for payment of the amount of tax secured

The deadline for paying the amount of tax secured shall be the end of the following month for the preceding calendar month. At the same time as paying the amount of tax secured, the taxpayer must notify the tax authorities of the payment. On the basis of the request of the taxpayer (non-resident), the tax administration shall issue a ‘Confirmation of tax withheld by the taxpayer’. The taxpayer may also request the certificate through the taxpayer. The amount of tax collateral shall be transferred from the payer’s personal tax account to the taxpayer’s personal tax account without undue delay. In the event that the taxpayer fails to withhold and remit the tax collateral and the non-resident taxpayer fails to pay his tax in the Czech Republic that should have been collateralised, the amount will be recovered from the taxpayer by the competent tax authority, including penalty interest. However, if the non-resident taxpayer had paid his tax in the Czech Republic, the taxpayer will be penalised only with penalty interest on late payment according to the Tax Code. The taxpayer’s tax administrator may also decide to lower or waive the seizure in justified cases; the decision is binding on the taxpayer and cannot be appealed.

Author. Filip Sinecký

12. 5. 2017

Source: https://portal.pohoda.cz/dane-ucetnictvi-mzdy/dan-z-prijmu/zajisteni-dane/