Notification of income sent abroad and exempt from withholding tax

Notification of income sent abroad and exempt from withholding tax

If a Czech entity is subject to the duty to withhold tax from income paid to/accounted to a foreign entity, then the Czech entity is obliged to report such income and the withheld tax.

What income is subject to the new notification obligation?

Since April 2019, the notification obligation applies to incomes of foreign persons who are not obliged to withhold tax because their income is tax exempt according to the Income Tax Act or a respective double taxation treaty which does not allow taxation of such income in the Czech Republic.

In reality, the notification obligation affects income from dividends, profit sharing, interest on loans and credits, and licensing fees (including income from renting real estate) paid to foreign entities. If such an entity is located outside the EU, the notification obligation can also take into account the difference between an agreed price and a market price which can be considered, under certain circumstances, profit sharing for income tax purposes.

Withholding tax applies also to other kinds of income of foreign entities, such as income from liberal professions or incomes of members of statutory bodies. However, in such cases, the withholding tax already applies and so the notification obligation is not a new thing.

What is the deadline for the notification?

The notification should be submitted by the end of the month following the calendar month in which the withholding tax duty would arise if the exemption or double taxation treaty is not applied. The moment decisive for the start of the period can depend on the kind of the income and it will depend on:

• The moment the profit sharing is paid, but at the latest by the end of the third month following the moment the decision about profit distribution is made; or

• The moment other kinds of income are paid, transferred, or credited to the foreign entity, but at the latest from the moment the respective liability is recorded in the accounting of the Czech entity according to the accounting rules.

How will the notification be submitted?

The notification will be submitted via a standard form which is used for the notification of income that is subject to withholding tax. The rule for submitting is, similarly to submitting tax returns, that entities with a data box or having a representative with a data box which was set up by law or those who are subject to a mandatory audit must submit the notification electronically in the form of a data message described by the financial administration (i.e. in principle, in xml format).

When does the notification not have to be submitted?

If the total amount of the respective income of a given kind received by a foreign entity does not exceed CZK 100,000 in a calendar year, the notification obligation does not apply. The entity that pays the income can in certain cases apply for exemption from the obligation at the tax authority.

What should you be careful about?

We recommend checking on the income paid to foreign entities whether or not they are subject to the above-described notification obligation. If yes, it is important to correctly determine the moment the period for the notification starts. An important thing could be when the respective liability (i.e. income) is recorded in the accounting, because the income does not need to be paid but the notification should still be submitted. A common example may be interest from loans or credits that are not paid continuously.