CZECH REPUBLIC Law and Practice Contributed by: Petr Mlejnek, Robert Klenka, Matěj Manderla, Jan Wagner, Ivo Hartmann and Arbër Balliu, Tenacta, advokátní kancelář, s.r.o.
The principal taxes affecting businesses include: • corporate income tax; • value added tax (VAT); • withholding tax; • real estate taxation; and • sector-specific taxes where applicable. Corporate income tax applies to taxable profits derived from business activities and other taxable income sources. Businesses exceeding statutory thresholds may become subject to mandatory VAT registration. Vol - untary registration may also be available in certain circumstances. Withholding taxes may also apply to certain catego - ries of payments, including: • dividends; • interest; and • selected cross-border payments. The Czech Republic has implemented Pillar Two of the OECD’s Two-Pillar Solution in line with the EU Directive on global minimum taxation. Czech legisla - tion introduced both the top-up tax rules applicable to multinational enterprise groups and a Qualified Domestic Minimum Top-up Tax (QDMTT). The Czech QDMTT has also been included on the OECD central record as a regime meeting the requirements for safe harbour status. 5.3 Available Tax Credits/Incentives The Czech Republic offers several tax incentives and tax relief mechanisms, particularly in the areas of investment support, research and development, and employment. Investment incentives may include cor - porate income tax relief, cash support for job creation and employee training, especially in manufacturing, technology centres, and strategic service sectors. A significant incentive is the R&D tax deduction, allow - ing taxpayers to deduct eligible research and devel - opment expenses from their tax base in addition to standard accounting treatment. Tax relief is also avail -
able for certain environmentally friendly investments and vocational training activities. 5.4 Tax Consolidation In the Czech Republic, there is no general tax con - solidation regime for corporate income tax purposes. Companies within a group are generally taxed sepa - rately and cannot consolidate profits and losses for income tax purposes. However, Czech law recognises consolidation from an accounting perspective. Under the Czech Accounting Act, a parent company may be required to prepare consolidated financial statements if it controls one or more subsidiaries and the group exceeds certain statutory thresholds relating mainly to assets, turnover and number of employees. Small groups are generally exempt unless a public-interest entity is involved. 5.5 Thin Capitalisation Rules and Other Limitations Czech tax law contains thin capitalisation and related interest limitation rules that restrict the tax deduct - ibility of financing costs under certain circumstances. First, the Czech Income Tax Act includes specific thin capitalisation rules applicable primarily to related- party financing. As a general rule, interest on loans and credits from related parties may become tax non-deductible if the borrower’s debt-to-equity ratio exceeds statutory thresholds. For most companies, the ratio is generally 4:1, while stricter rules apply to banks and insurance companies. These rules aim to prevent excessive debt financing within corporate groups. 5.6 Transfer Pricing Transfer pricing rules are applicable in the Czech Republic and apply to transactions between related parties, both domestic and cross-border. The Czech transfer pricing framework is based pri - marily on the arm’s-length principle and broadly fol - lows the Organisation for Economic Co-operation and Development Transfer Pricing Guidelines. Under Czech tax law, prices agreed between related par - ties must correspond to prices that would have been agreed between independent parties under compa -
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