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Aplication of the provisions of Art. 36 subsection 7 of the Act No.: 586/1992 Coll., on Income Taxes in wording of later amendments (Income Tax Act)

The amendment of the Income Taxes Act No.: 216/2009 Coll. put into Art. 36 a new subsection 7, which enables tax payers – nonresidents of the Czech Republic to replace taxation by withholding tax with procedure of filing the tax returns and therefore they can reduce their tax base by related expenses/costs:

 

(7) If the tax payers determined in the Art. 2 subsection 3 and Art. 17 subsection 4, that are residents of EU member states or other states of European Economic Area, include into their tax returns incomes set in the Art. 22 subsection 1 letter c), f) or g) points 1, 2, 4, 5, 6 or 12, the withheld tax will be credited against their total tax liability relating to the incomes from sources in the territory of the Czech Republic, for which they file the tax returns in the Czech Republic. If the withheld tax or its part cannot be credited against their total tax liability because the tax liability arisen to the tax payer is equal to zero or the tax payer documented a tax loss or his total tax liability is lower than the withheld tax, there will arise an overpayment equal to the sum of tax liability, which cannot be credited35e). If the tax payer does not include the incomes set in the Art. 22 subsection 1 letter c), f) or g) points 1, 2, 4, 5, 6 or 12 into his tax returns till the end of the time limit pursuant to special legal act28b), the provisions of the Art. 38e subsection 7 will be applied analogically.

Since what tax period is it possible to apply this provision?

This provision will be applied at first for the taxation period of the year 2009 (the taxation period commenced during this year). For natural persons it is a taxation period starting by January 1, 2009 lasting up to December 31, 2009.

What persons/tax payers is this provision applicable to?

This provision applies to tax payers – natural persons determined in Art. 2 subsection 3 of the Income Taxes Act and legal persons determined in Art. 17 subsection 4 of the Income Taxes Act – nonresidents. These persons have to be tax residents of EU member states or other states of the European Economic Area (Iceland, Norway, Liechtenstein).

What kinds of incomes is this provision applicable to?

This provision can be applied to incomes set in Art. 22 of the Income Tax Act, concretely:

Subsection 1 letter c) the income from services except for realization of building and assembly projects, income from commercial, technical or other counseling, management and mediating activity and similar activities provided in the territory of the Czech Republic;

Subsection 1 letter f) incomes
1. from an independent activity, such as of an architect, doctor, engineer, lawyer, scientist, teacher, artist, tax or accounting consultant and similar professions executed in the territory of the Czech Republic;

2. from a personally executed activity in the territory of the Czech Republic or valorized here in case of a publicly performing artist, sportsman, artistes and co-operating persons regardless of to whom this income follows and what is the underlying relationship;

Subsection 1 letter g) income from payments from taxpayers referred to in Art. 2 subsection 2 and Art. 17 subsection 3 and from permanent establishment of the taxpayers referred to in Art. 2 subsection 3 and Art. 17 subsection 4, defined as
1. reimbursements for provision of a right to use or for use of an industrial property right, computer programs (software), industrial, technical and other economically useful knowledge (know how),
2. reimbursements for provision of a right to use or for use of a copyright or of a right related to copyright;
4. interest and other incomes from provided credits and loans and similar income following from other business relationships, from deposits and investment instruments according to a special legal regulation;71)
5. income from use of a movable thing or its part located in the territory of the Czech Republic;
6. remuneration of members of statutory bodies and other bodies of legal entities;
12. sanctions from contractual relationships.

The procedure pursuant to Art. 36 subsection 7 of the Income Taxes Act is applicable when achieving either only one of the above mentioned incomes or when achieving a combination of more kinds of the mentioned incomes.

Is it possible to claim related costs or expenses from the documented income?

If the Income Tax Act does not exclude this possibility (it is excluded for example in the case of remuneration of members of statutory bodies or interests or other income from provided credits or loans), the tax payer can claim/deduct the expenses in the actual sum or he can proceed pursuant to Art. 7 subsection 7 of the Income Taxes Act and deduct the expenses calculated as a percentage of the income.
When ascertaining the tax base it is possible to proceed pursuant to the accountancy (Act No.: 563/1991 Coll. on accounting in wording of later amendments), to tax evidence (Art. 7b of the Income Taxes Act) or to the records of incomes and expenses. Generally it is stated, that expenses respectively costs must be the expenses or costs incurred in generating, assuring and maintaining the relevant income.
If the tax payer is a natural person, he can claim the expenses as a percentage pursuant to Art. 7 subsection 7 of the Income Taxes Act instead of recording a tax evidence.

How is it possible to document or prove the amount of income and already paid tax (es)? The tax payer will prove the income amount and the amount of the withheld tax when submitting :

 

  • the Certification of withholding Tax under Art. 38d subsection 7 of the Income Taxes Act (Form No. 25 5231 MFin 5231 – model No.8). The taxpayer can ask the local tax administration for this Certification directly or via the withholding agent , which is kept on file by this local tax administration. This Certification is issued by the local tax administration to the withholding agent, who provides it to the tax payer. 
or
  • in case of the payment from dependent activity a certificate in accordance with Art. 38j subsection 3 if the Income Taxes Act, issued by the withholding agent (employer) on request of tax payer.

 

The mentioned Certificates should be preferably attached to the tax return, because the tax payer documents correctness of the tax assessed. Furthermore apposition of the adequate documents will speed up the procedure as regards a refund of the overpayment, that could arise while applying the procedure pursuant to Art. 36 subsection 7 of the Income Taxes Act.

When is the tax payer obliged to submit a tax return?

The time-limits to submit a tax return are defined in Art. 40 of the Act No.337/1992 Coll., on Administration of Taxes, as amended (hereafter “Tax Administration Act”).
Pursuant to this provision a tax return shall be filed at the latest:

three months following expiry of the annual taxable period;
the time limit is extended to six months, if the tax payer´s return is prepared and submitted by his tax advisor (this applies only if a power of attorney authorizing such representation is submitted to the tax administration within the current three month period before the unextended due date expires) .
The tax return can be submitted at the latest within the time for assessment of a tax, at maximum three years from the end of the taxable period during which the tax liability to file a tax return arose

How and to whom is it possible to submit a tax return (local competence)?

A tax return shall be filed on a printed form issued by the Ministry of Finance. This printed form is available on the websites of the Czech Tax Administration http://www.financnisprava.cz/en/ under the link Tax forms.
For foreign citizens the English translation of the form is available; however English version is only a supporting instrument for foreign citizens. For purpose of the valid filing of the tax return it is necessary to fill in the Czech version of the tax return! Both versions are the same visually and also in content.
A tax return may be filed also electronically by means of the following Czech Tax Administrations website: Daně elektronicky (E-Tax) – EPO elektronické podání (Electronic Submission, e-Tax) – Eletronické podání pro daňovou správu (e-Tax).

A tax return shall be submitted to the local competent tax authority – tax office. Pursuant to Art. 4 of the Tax Administration Act the local competence shall be determined as the following:

 

  • Art. 4 subsection 1: in case of a legal entity by the location of its registered office (i.e.seat); in the case of an individual by his home address (place of residence) in the Czech Republic, otherwise by the place where he usually stays;
  • Art. 4 subsection 3: if local competence cannot be established under above mentioned subsection, it shall be determined according to the place in which the person liable to tax carries out his main activity in the territory of the Czech Republic - for the list and scope of all tax offices see the attachment of the Act no. 531/1990 Coll., on Local Tax Authorities;
  • Art. 4 subsection 4: where local competence cannot be determined under above mentioned subsections, the competent tax administrator shall be the Financial Office for Prague 1 (Finanční úřad pro Prahu 1, Štěpánská 28, Praha 1, PSČ 112 33).

 

What follows, when the taxpayer does not submit the tax return?

If the tax payer does not submit the tax return pursuant to Art. 36 subsection 7 of the Income Taxes Act within the time-limits for assesment of a tax, the withheld and paid tax is then considered as assessed and covered.