Declaration of foreign income very likely includes a wider range of income than many businesses that meet the reporting obligation realise. It is important to note that we also pay abroad for services rendered. These services represent the income of tax non-residents who are taxed only in the other country under double taxation treaties. Therefore they are not subject to income tax in the Czech Republic. Do you also include this income in your tax return?
In our daily practice, you may not have noticed a change in the scope of the reporting obligation on foreign income. Taxpayers have long known that they have an obligation to notify the tax administrator when providing income from sources in the Czech Republic to a tax non-resident, from whom the tax is levied by deduction. They therefore report the withholding tax to the tax administrator. As of 1 April 2019, the provisions of the Income Tax Act were amended and the reporting obligation was extended to income that is exempt from withholding tax or is not subject to taxation in the Czech Republic based on a double taxation treaty. Income that is from sources in the Czech Republic may be subject to withholding tax and therefore subject to the reporting duty. Namely, they are defined in Section 22 (1) of the Income Tax Act, whereas there is a limit on the basis of which the taxpayer does not report such income, unless the income of one type exceeded CZK 100,000 per month against one non-resident.
There has been extensive discussion as to whether the income to be reported includes services provided by non-resident taxpayers in the Czech Republic, i.e. income from commercial, technical or other consultancy, management and mediation activities and similar activities. These services are subject to withholding tax under the Income Tax Act, but based on Articles 5 and 7 of the Double Taxation Treaties, they are usually taxed in the Czech Republic only if there is a permanent establishment. The meeting of the Ministry of Finance of the Czech Republic and tax advisors within the DPPO and International Taxation and Customs Departments in June 2019 confirmed a broader interpretation than was normally applied in practice. The reporting obligation also applies to income for services provided by a non-resident taxpayer in the Czech Republic, which is not taxed in the Czech Republic on the basis of double taxation treaties, unless a permanent establishment has arisen as a result of these services. At the same time, the obligation to notify ends when the non-resident permanent establishment is effectively registered. Practically, this means that the taxpayer is obliged to notify the tax administrator of the income from services coming from the territory of the Czech Republic provided by a non-resident taxpayer such as transportation, training, maintenance, consulting and advisory services, and audit services. Guideline GFD D-22 specifies that revenues from sources in the Czech Republic for services are not considered to be payments for activities carried out outside the Czech Republic, although the necessary knowledge, data and other inputs for their provision were obtained in the Czech Republic.
It is necessary to report each individual case separately on the appropriate form and it is not possible to use, for example, summary notification through the tax entity report. This can be a significant administrative burden for businesses. For income that is exempt from tax or income that is not subject to tax in the Czech Republic, the deadline for fulfilling the reporting obligation is the same as for income from which the tax is levied. The notification shall be submitted only electronically on Financial Administration Form No. 15.
There is a possibility to avoid excessive administrative burdens: the tax administrator can, upon request, exempt the taxpayer from reporting obligations for a maximum period of five years. At present, the tax administrator does not proceed according to a consistent methodology when processing applications. Experience has shown that the tax administrator is more likely to agree to simplify the reporting obligation when submitting an application, such as reporting quarterly or listing individual transactions for a given month, rather than relieve the taxpayer of the notification obligation altogether.