CIT base calculation
The starting point for the calculation of the CIT base is the accounting result as per the Czech accounting standards. If the company uses International Financial Reporting Standards (IFRS), which is obligatory for some companies (such as those that issued publicly traded securities), the IFRS accounting results need to be recalculated for CIT purposes to what they would have been under Czech accounting standards.
The tax non-deductible costs are then added and non-taxable revenues deducted from the accounting result.
No separate capital gains tax is levied in the Czech Republic. Capital gains (i.e. gains from sale of shares and other assets) are included in the CIT base and taxed as ordinary income in the year in which they arise, unless they are exempt under the participation exemption (see below).
Dividends received by Czech tax resident corporations from non-resident entities are subject to a special tax rate of 15%, unless exempt under the participation exemption regime (see below).
Dividends paid by Czech tax resident corporations to Czech resident entities are subject to 15% final withholding tax (WHT), unless exempt under the participation exemption regime.
Dividends paid by Czech tax resident corporations to Czech non-resident entities are subject to 15% final WHT, unless exempt under the participation exemption regime or unless the WHT rate is decreased under the relevant DTT. An increased WHT rate of 35% applies to dividends paid to entities that are not tax residents in any EU or European Economic Area (EEA) member state or in a country with which the Czech Republic concluded a DTT or tax information exchange agreement (TIEA).
Participation exemption regime
Dividend income or income from the sale of shares in a subsidiary may be exempt from Czech taxation (i.e. WHT when a Czech company is paying dividends, CIT when a company is receiving dividends or generates the capital gain) if all of the following conditions are met:
- The Czech or EU parent holds at least 10% of the shares of the subsidiary for at least 12 months; this time test may be met both prospectively and retrospectively.
- The subsidiary is a tax resident of the Czech Republic or another EU member state.
- Both the parent and the subsidiary have one of the legal forms listed in the Annex to the EU Parent/Subsidiary Directive.
- The parent or the subsidiary are not exempt from corporate taxation or may not choose to be exempt, and the tax rate applicable to their income is greater than 0%.
Regarding dividends paid by a Czech subsidiary, provided that the conditions above are met, the exemption also applies when dividends are paid to a parent in Switzerland, Norway, or Iceland.
Regarding dividends received or capital gains generated by a Czech parent company, the participation exemption may also be applied if the subsidiary is a tax resident of a country where a DTT with the Czech Republic is in place, the subsidiary has a legal form similar to a limited liability company or a joint stock company, it is subject to CIT at the nominal rate of at least 12% in a year when dividends are paid, and the time test of holding at least 10% share for at least 12 consecutive calendar months in that subsidiary is met.
Interest and royalty income
Interest and royalties received by Czech tax residents are included in the standard tax base subject to the 19% CIT rate.
Czech-source interest and royalty income received by Czech tax non-residents is subject to 15% WHT, unless subject to domestic exemption or a DTT stipulates otherwise. An increased WHT rate of 35% applies to interest and royalties paid by Czech tax residents to entities that are not tax residents in any EU or EEA member state or in a country with which the Czech Republic concluded a DTT or TIEA.
Under domestic law (in line with the EU Interest and Royalty Directive), interest and/or royalty income is exempt if it is paid by a Czech resident to an EU resident recipient who is a beneficial owner of the interest and/or royalty income, provided that for at least 24 months before the payment:
- the payer is in at least a 25% parent-subsidiary or at least a 25% direct sister relation to the recipient of the income and
- the interest and/or royalty is not attributable to a Czech PE of the recipient.
The exemption is applicable subject to approval by the tax authorities.
Exchange gains and losses
Realised foreign exchange gains and losses are accounted for in profit and loss accounts and represent taxable revenues or tax-deductible costs, respectively. The same treatment applies to unrealised foreign exchange differences. The default functional currency is the Czech koruna. A Czech company cannot opt for any foreign currency to be the functional currency for tax purposes.
The CIT base of the company can also be increased by income generated by foreign direct or indirect subsidiary of the company under the CFC rules. See the Group taxation section for more information.