As we have informed you, most changes affecting income taxes that were adopted as part of the ‘2019 tax package’ will only enter into effect in 2020 or as of the tax period beginning after 1 April 2019. But if you have foreign relationships, there is one inconspicuous change that may also affect you – now.
Since 1 April 2019, a new notification obligation has applied to the payment of certain types of income to tax non-residents. This duty is stipulated in new section 38da of the Income Taxes Act (“ITA”) that has replaced the then applicable section 38d(3) with effect from 1 April 2019. The original notification (filed using the form “Taxpayer’s report on withholding tax”) has been significantly extended by this provision. Tax authorities must be notified not only of income paid aboard on which withholding tax has been paid (irrespective of the threshold!) but also of income that is generally subject to withholding tax in the Czech Republic but is tax-exempt or not subject to tax under a double taxation treaty and, at the same time, exceeds CZK 100,000. The threshold of CZK 100,000 is a monthly limit that applies to one non-resident and one type of income.
Typical types of income subject to withholding tax are dividends (shares in profit), licences and interest income. However, most types of such income were not reported before 31 March 2019, as they were either tax-exempt (such as dividends paid by a subsidiary to its parent company in the EU) or were subject to withholding tax (such as interest income) on the grounds that double taxation treaties granted the right to tax such income only to the country of the recipient of the supply. However, under the new rules, also such income must be reported if exceeding the above threshold. And that is not all.
According to interpretations which, unfortunately, reflect the wording of this inconspicuous provision in the ITA, the notification duty will also apply to some services if they are provided or carried out in the Czech Republic, such as advising, brokerage, architectural services, legal and other services, as well as activities of publicly performing artists and athletes and so on.
In our opinion, none of the deputies voting in the Parliament or the legislators have realised that the reporting obligation will be that broad. The explanatory report to the amendment does not contain any single reference to such enormous impact. According to the explanatory report, the reason for the amendment was to obtain and subsequently use additional relevant data for the mandatory automatic exchange of information required by laws that are binding on the Czech Republic. Another reason is a relatively high outflow of pensions from foreign direct investments, which is unique by international comparison, and, therefore, a tool should be adopted to monitor any events of unlawful tax optimisation.
First notification by the end of May
The notification must be filed by the end of the calendar month following the calendar month in which the taxpayer was to withhold the tax or should have withheld the tax if the income was not tax-exempt or was subject to tax in the Czech Republic.
Given the effective date of the amendment, the notification duty already applies to income on which the obligation to withhold tax would arise after 1 April 2019. As a result, the first notification should be filed for April by the end of May.
Save for exceptions, the notification must be mandatorily filed electronically using a prescribed form. In this context, however, the Ministry of Finance announced last week that the new electronic form would only be available in June 2019. Until the new electronic form is published, including its format and the structure of the data message, electronic notifications may be filed using the existing form “Taxpayer’s report on withholding tax”. The obligation to withhold and pay the tax remains unaffected.
In conclusion, we add for completeness that if the notification fails to be filed within the prescribed time limit, it will be considered a failure to discharge an obligation of an in-kind nature.
Yet there still is a possibility to request tax authorities, in justified cases, for release from the notification obligation for up to 5 years, we do not expect such request to be very successful.
If you have any questions regarding the above and as to what needs and does not need to be reported under this notification obligation, please do not hesitate to contact us.