Source: Havel & Partner, Tax Flash, 20 January 2022. Authors: Josef Žaloudek, Kamila Chládková
Do you know how to complete the form and what to include in the notification?
Please note that by the end of January 2022, it is necessary to file an annual Notification of Income Paid to a Foreign Country in 2021 that is exempt from withholding tax or on which the application of withholding tax is prevented by a double taxation treaty (“exempt income”). The annual form has replaced the original monthly report (last filed for 12/2020). Due to the nearly one-year “hiatus” since the last time this notification obligation was met, many may have forgotten about it.
However, in early January 2022, a new form for this filing was published, including basic instructions, which is based on an amendment to the Income Tax Act of late 2020. An increase in the limit of declared income to CZK 300,000 of the same type of income for one recipient per month and a change in the form was intended to reduce the administration of this agenda for taxpayers. We provide more detailed information on what income is usually reported in the Notification and recommendations on how to complete the new form in our article below.
THE BASIC RULES FOR REPORTING EXEMPT INCOME PAID TO A FOREIGN COUNTRY ARE AS FOLLOWS:
- The Notification generally applies to an income paid to a foreign resident referred to in Section 22 (1) of the Income Tax Act that is exempt from withholding tax or on which the application of withholding tax is prevented by a double taxation treaty.
- Such income may be, for example, dividends paid to the parent company, interest on loans, licence fees or remuneration for services performed in the Czech Republic by a foreign tax resident.
- According to our practice, the most common types of reported services are transport, training, maintenance services, installation services, consulting and advisory services or audit services performed physically in the Czech Republic.
- When preparing the form and identifying the income, we recommend consistently checking the link to the supplies that will be reported in the annex to the financial statements, the relations report or to the supplies reported for VAT purposes (Summary Report).
2021 INCOME FORM
- The new form,together with the basic instructions, was published in early January 2022 and an xml form is available on the Tax Administration’s website at https://adisspr.mfcr.cz/pmd/epo/formulare in the section Withholding Tax.
- The main change from the previous form is the option to include only the year as the date of payment in section 23 if the income to be notified is exempt income.
- The second change is the deletion of section 27a, where taxable income or the gross income amount was indicated. The gross amount of exempt income must be now indicated in section 27.
- The brief instructions for this Notification imply that the accounting rate applicable to each transaction should be filled in, i.e., with a monthly fixed rate, it would be formally correct to file one notification each month so that the correct rate can be indicated.
- At the same time, it can be inferred from the modification of sections 23 and 27a of the form and the explanatory memorandum to the related amendment to the Income Tax Act that the legislature, and consequently the tax administrator, intends to accept the filing of one notification for one type of income in respect of one entity in total for the entire calendar year. However, this possibility is not clearly provided for in the legislation.
- As the filing of the Notification does not give rise to a tax liability, taxpayers may consider whether to follow the simplified approach applying the “single” rate.
- Please note, however, that it is still necessary to file the Notification for each type of income such as dividend, interest, remuneration for a service, licence fee and against the recipient separately. We also remind you that this notification obligation applies to both affiliated and non-affiliated persons (suppliers).
- The deadline for filing the Notification is 31 January 2022 (electronically in an xml format).
- For failure to file or late filing of the Notification, the tax administrator may impose a fine of up to CZK 500,000 for violation of a non-monetary obligation.
Upon your request, the tax administrator may exempt the taxpayer from the notification obligation for a maximum period of 5 years in justified cases (e.g., if it is very difficult to identify the income in question in a particular case). However, our experience shows that there is no established methodology according to which the tax administrator would proceed when handling requests and to date it has not been used to any great extent by taxpayers. The request must be duly substantiated, and the exemption is usually issued for a period shorter than 5 years.
We will be happy to assist you in setting up the methodology for submitting the notification of income paid to a foreign country and related processes. Similarly, if you decide to apply for an exemption from the obligation to submit the notification of certain income for the next period and would like a consultation on the appropriate arguments, please do not hesitate to contact our team of specialists.