Most of you are undoubtedly aware of the withdrawal of the United Kingdom of Great Britain and Northern Ireland from the European Union (“Brexit”). In the context of Brexit, countless questions have arisen about its tax implications. The text below summarizes the tax legislation changes that have been adopted in the Czech Republic in connection with Brexit.
On 14 March 2019, Act No. 74/2019 Coll. (“the Act”) was promulgated in the Collection of Laws, amending certain relations in connection with the withdrawal of the United Kingdom of Great Britain and Northern Ireland (“the United Kingdom”) from the European Union and addressing the implications of what has been called a hard Brexit, i.e. a no-deal Brexit. The Act was enacted at a time when it was unclear how the United Kingdom would leave the European Union. The primary aim of the Act was to determine how to address, in the event of a hard Brexit, matters such as
i) the residence of a United Kingdom national on the territory of the Czech Republic,
ii) income taxes in relation to the United Kingdom,
iii) the obtaining of Czech citizenship by a United Kingdom national,
iv) access of a United Kingdom national to the labour market and entitlement to unemployment benefits, etc.
Brief description of the provisions of the Act related to income taxes
Section 12(1) of the Act stipulates that a tax resident of the United Kingdom shall be considered a tax resident of a European Union member state for the tax period in which the Act took effect. However, this shall not apply to the withholding tax subject to a special tax rate and to tax payment guarantees – in this case, a tax resident of the United Kingdom shall be treated as a resident of a third country from the moment at which Brexit occurs.
Section 12(2) of the Act further stipulates that for the purposes of the taxation of an income tax payer who is not a tax resident of the United Kingdom, the United Kingdom shall be considered a member state of the European Union until the end of the tax period in which this Act shall expire.
Please note that under Section 30(2) the Act shall expire on the date of entry into force of an agreement on the withdrawal of the United Kingdom from the European Union or on 31 December 2020 (whichever occurs first). Since the United Kingdom has entered into an agreement on withdrawal from the European Union (AGREEMENT on the withdrawal of the United Kingdom of Great Britain and Northern Ireland from the European Union and the European Atomic Energy Community of 12 November 2019) (“the Agreement”), the existing wording of the Act is currently irrelevant.
On the basis of the Agreement, the United Kingdom left the European Union at midnight on 31 January 2020. The fundamental pillar of the Agreement for addressing the tax implications of Brexit is what is called the transition period until 31 December 2020. During this transition period, European Union law shall apply to and in the United Kingdom. Therefore, we may state that in terms of income taxes and value added tax the United Kingdom will, during the transition period, continue to be considered a member state of the European Union, as also confirmed by the Notice on the Tax Implications of the Withdrawal of the United Kingdom from the EU (BREXIT) issued by the Czech Financial Administration on 31 January 2020.
At first glance, the tax matters connected with the Brexit transition period may appear to be clear; however, that is not the case. The Chamber of Tax Advisers of the Czech Republic is now preparing a paper to be presented at the Coordination Committee (Selected Tax Implications of Brexit). The paper is expected to highlight the tax implications of Brexit in areas such as the use of donations as a tax-free portion of a tax base or as an item reducing a tax base, tax exemption on profit shares, tax exemption on the transfer of an ownership interest in a company, etc. We will bring you the latest from the General Financial Directorate on these matters through our newsletter.
To conclude, I wish to mention that Article 132 of the Agreement provides for an extension of the transition period by up to two years, i.e. until 31 December 2022. Therefore, it cannot be ruled out that for tax purposes the United Kingdom will continue to be considered a member state of the European Union even beyond 31 December 2020.
