previous
next

PART II. —TAXATION OF FOREIGN AND NATIONAL ENTERPRISES

A. FOREIGN ENTERPRISES

1. DEFINITION AND GENERAL PRINCIPLES

Czechoslovak legislation does not expressly define the term “foreign enterprise”, but, according to the Law of December 11th, 1919 (No. 12 of Collected Laws and Decrees 1920), an enterprise is national if it has its head office and centre of management in Czechoslovakia; otherwise, it is foreign.

A foreign enterprise is taxable in Czechoslovakia if it engages or participates in profit-seeking business in that country; and tax is levied only on profits from such business or interests. Accordingly, a foreign enterprise which has a branch, factory, purchase or sales office or agency within the country or does business there in some other form is, in principle, liable to tax on its profits from these establishments or operations. These profits will be subject to the general or special tax on profits according as the enterprise to which they accrue is liable by its nature to the one or the other of these taxes (see references to the matter in Part I).

The income tax is imposed upon all income earned in Czechoslovakia by an enterprise belonging to a single person and, in the case of enterprises belonging to a partnership, upon the proportion of income accruing to each partner. In the case of joint-stock companies or limited partnerships with share capital, income tax is levied on the shareholders’ dividends, only if they are domiciled in the country or have lived there for a year.

2. TAXATION OF CERTAIN KINDS OF INCOME

(a) DIVIDENDS

Dividends of Foreign Origin.—Foreign enterprises in receipt of dividends which do not originate in Czechoslovakia are taxable thereon in the following cases:

(1) When these foreign dividends are part of the receipts of an establishment possessed by the foreign enterprise in Czechoslovakia. In such case, the dividend is regarded as part of the total profits of the Czechoslovak establishment and is liable to the general or to the special tax on profits according to the kind of enterprise (see Part I), and, in certain circumstances, to income tax, as explained above under “Definition and General Principles”.

As an example, we may take the case of a bank whose head office is in Paris, but whose Czechoslovak branch has in its portfolio shares in a Roumanian company; the dividends paid on these shares will be regarded as part of the taxable profits of the establishment in Czechoslovakia.

(2) If the foreign dividends do not figure among the profits of the Czechoslovak establishment, they will be liable to the tax on capital yield, unless they can be shown to have paid abroad a special direct tax other than income tax.

(3) Capital yield tax will also be levied on these dividends if the foreign enterprise, though having no establishment in Czechoslovakia, nevertheless receives these dividends in that country through a bank established there.

Dividends of Czechoslovak Origin. — Dividends paid by Czechoslovak companies are, in principle, subject to the general or special tax on profits if they are part of the profits of the foreign enterprise’s branch or establishment in Czechoslovakia. By way of exception, however, enterprises which keep regular accounts and prove that they have for the two business years which precede the taxable business year uninterruptedly held at least 20 per cent of the shares, beneficiary shares, and others, of a Czechoslovak enterprise liable to the special tax on profits, and that they acquired these shares out of their own funds, may deduct the profits corresponding to such dividends from their income liable to the general or special tax on profits. If, however, the securities in question were not acquired out of the enterprise’s own funds, only the amount which exceeds the interest on capital borrowed for purposes of such acquisition may be deducted from the income liable to the one or the other of these taxes.

If dividends of Czechoslovak origin do not belong to the trading profits of the branch in Czechoslovakia, they are not liable to tax, having already been taxed as profits of the debtor enterprise.

The double-taxation conventions concluded by Czechoslovakia with Austria and Hungary expressly exclude shares from the provisions governing profit-making enterprises, with the result that dividends are never taxed as part of commercial profits, and a similar clause is contained in the convention with Italy. On the other hand, the conventions concluded with Germany and Poland have no such clause; the latter, incidentally, does not deal with the treatment of legal entities for purposes of direct taxation.

(b) INTEREST

Interest on debts secured on real estate situated in Czechoslovakia is in all cases taxable in the country.

If such interest figures among the profits of the branch or establishment of a foreign enterprise in Czechoslovakia, it will be subject to the general or special tax on profits, according to the kind of enterprise. If it is not part of the profits of a Czechoslovak branch or establishment, it will be subject to the tax on capital yield (collected on the basis of the taxpayer’s return) and in most cases to income tax.

The double-taxation conventions provide for no exceptions to this principle. In the case, however, of income tax, the convention with Germany stipulates that income from mortgage debts shall be taxed in the country where the creditor is domiciled.

Interest received by a foreign enterprise in Czechoslovakia on bonds and debts not secured on real estate will be liable to the tax on capital yield, unless it appears among the profits of a Czechoslovak branch or establishment of the foreign enterprise in question. In the latter case it will, along with the branch’s other profits, be liable to either the general or the special tax on profits, according to the kind of enterprise.

Most of the double-taxation conventions provide that, when the State in which the interest has its origin deducts tax at the source, no tax may be levied by the other State. The convention with Poland alone allows the other State also to collect the tax. The convention with Italy lays down that the right to tax securities issued by the State, provinces, communes, other corporations, share companies, banks and credit institutions is vested in the State in which the creditor is domiciled.

(c) DIRECTORS’ PERCENTAGES

The taxation of directors’ percentages paid in Czechoslovakia (such as the percentages distributed out of the profits of the Czechoslovak branch of a foreign enterprise) was dealt with in detail in Part I under the heading “Directors’ Percentages Tax”. These percentages, however, if accruing to individuals, are also liable to income tax, even when they are paid abroad.

Further, the double-taxation conventions confer the right to tax directors’ percentages on the State in which the beneficiary is domiciled. An exception is the convention with Poland, according to which directors’ percentages are liable to all the taxes of the country in which they are paid.

(d) ROYALTIES FOR USE OF PATENTS, COPYRIGHTS, TRADE-MARKS, SECRET PROCESSES AND FORMULÆ AND SIMILAR INCOME

Authors and inventors and their heirs, legatees, assigns, etc., who themselves exploit their patents and copyrights are liable, if they have an establishment in Czechoslovakia, either to the general tax on profits and to income tax or to the special tax on profits. If there is no branch or establishment in the country, this income will be liable to the tax on capital yield, payable directly by the recipient of the income.

If the foreign holder of a patent or copyright, etc., grants the use of his rights in return for a periodical royalty, these payments will be subject to the tax on capital yield. If the remuneration takes the form of a single payment, it will be exempt from taxation.

(e) RENTS FROM REAL ESTATE, MINING ROYALTIES AND SIMILAR INCOME

Income from real estate — i.e., rents, mining royalties, annuities and other similar income from property situated in the country — is in all cases taxable in Czechoslovakia. Income from buildings is liable to the buildings tax and income from agricultural land to the land tax (see Part I). If the beneficiary of such income is an individual, he is also liable to income tax. Income from the lease of a business and other similar income not liable to either land tax or buildings tax is subject to the tax on capital yield.

If an enterprise liable to the special or to the general tax on profits leases a factory, mine or other property belonging to it, the income therefrom is liable to the one or the other of these taxes, after deduction of income already subject to land tax or buildings tax.

Profits from the exploitation of mines are liable either to the special tax on profits or to the general tax on profits and to income tax. The taxation of income from real estate situated abroad is treated under the heading (e) of page III.

All the double-taxation conventions lay down the principle that income from real estate is taxable only in the country in which the estate is situated.

(f) GAIN DERIVED FROM THE PURCHASE AND SALE OF REAL ESTATE, SECURITIES AND PERSONAL PROPERTY

The profits which a foreign enterprise derives either within Czechoslovakia or abroad from the purchase and sale of real estate, securities and personal property are only taxable if the sale was in the course of the business which the foreign enterprise conducts in the country — that is, if it was effected by a branch or establishment situated in Czechoslovakia. Should such gains be taxable, they will be liable to the general tax on profits and income tax or to the special tax on profits (according to the nature of the enterprise).

(g) SALARIES, WAGES; COMMISSIONS AND OTHER REMUNERATION FOR SERVICES

A person domiciled abroad who receives a salary or wage for services rendered in Czechoslovakia, for less than a year is not liable to tax. On the other hand, a person domiciled within the country or residing there for longer than a year is liable to income tax, and possibly to the tax on high salaries, in respect of all remuneration paid to him either within the country or abroad. The only exemption is in respect of salaries paid by foreign Governments. This exemption, however, is subject to reciprocity and is only granted if the salaries paid by the foreign country are taxable abroad.

All the double-taxation conventions concluded by Czechoslovakia lay down that salaries and other remuneration paid out of public funds shall be taxed by the country which makes these payments.

(h) INCOME FROM A TRUST

The taxation of “trusts”, as this term is understood by Anglo-Saxon law, is a question that does not arise in Czechoslovakia.

(i) INCOME FROM CARRYING ON A BUSINESS OR INDUSTRY

Through:

The double-taxation conventions are in accordance with the above principles and, except for the convention concluded with Italy, contain detailed provisions concerning what is meant by an establishment.

B. NATIONAL ENTERPRISES

1. DEFINITION AND GENERAL PRINCIPLES

According to the Law of December 11th, 1919 (No. 12 of Collected Laws and Decrees 1920), any enterprise is regarded as national which has its head office and centre of management in Czechoslovakia.

These enterprises are taxable in Czechoslovakia both in respect of profits they derive from operations in foreign countries where they have no establishment and in respect of profits from operations conducted within Czechoslovakia. The profits of a foreign establishment are not subject to direct taxation in Czechoslovakia if they are liable to a similar tax abroad. However, a certain fraction of the enterprise’s total profits is always deemed to have been earned within the country. This fraction is one-quarter for purposes of general tax on profits and one-tenth for purposes of special profits tax. The fact that an enterprise belongs to an individual, a partnership or a company is only of importance in determining the category of tax payable (see Part I with reference to the special tax on profits).

The various exceptions to these principles resulting from double-taxation agreements are mentioned under the next heading and Part III.

2. TAXATION OF CERTAIN KINDS OF INCOME

(a) DIVIDENDS

Dividends from foreign securities are, in principle, liable to the tax on capital yield (see above, page 106), unless it can be shown that they have already paid a special direct tax abroad.

If, however, these dividends are included among the profits of an enterprise situated in Czechoslovakia, they will be subject, like the whole of the enterprise’s profits, to either the general or the special tax on profits. This does not apply to dividends forming part of the profits of an establishment situated abroad, since these profits, as already mentioned, are not taxable in Czechoslovakia.

Further, dividends accruing to an individual domiciled in the country or resident there for more than a year will also be liable to income tax.

The references to dividends in the double-taxation conventions were dealt with on page 107.

(b) INTEREST

Interest on debts secured on real estate situated abroad is not as a rule exempt from taxation in Czechoslovakia.

If it forms part of the profits of a foreign establishment of a Czechoslovak enterprise, it is treated in the same way as the other profits of that establishment (see “Definition and General Principles” above).

Otherwise, it is subject to the tax on capital yield, provided it has not already paid a special direct tax abroad.

The conventions, except that concluded with Germany, confer the right to tax this interest on the country in which the real estate serving as security for the debt is situated.

Interest on unsecured debts and personal securities is normally taxed according to the same rules as dividends.

The exceptions provided in the conventions were mentioned under the corresponding heading referring to “Foreign Enterprises” (see page 107).

(c) DIRECTORS’ PERCENTAGES

Percentages distributed by foreign companies to persons domiciled in Czechoslovakia or resident there for more than a year are subject to income tax. The convention with Poland, as already explained (page 108), provides an exception to this rule. These percentages are also liable to directors’ percentages tax in the circumstances explained in the chapter of Part I dealing with that tax.

(d) ROYALTIES FOR USE OF PATENTS, COPYRIGHTS, TRADE-MARKS, SECRET PROCESSES AND FORMULÆ AND SIMILAR INCOME

(e) RENTS FROM REAL ESTATE, MINING ROYALTIES AND SIMILAR INCOME

Income from real estate situated abroad (rents, mining royalties, etc.) is not taxable in Czechoslovakia if it has already paid income tax or some similar tax abroad. This condition, however, is subject to reciprocity. If the income is part of the profits from a foreign establishment of a Czechoslovak enterprise, it is governed by the rules explained under the heading “Definition and General Principles” on page 109.

Rentes secured on real estate situated abroad and accruing to persons domiciled in Czechoslovakia are liable to the tax on capital yield (unless already subject to a special direct tax other than income tax abroad) and, if received by individuals, are also subject to income tax.

(f) GAIN DERIVED FROM THE PURCHASE AND SALE OF REAL ESTATE, SECURITIES AND PERSONAL PROPERTY

Gain from the sale of personal or real property abroad is liable to income tax, if the sale was in the nature of a speculation.

While leaving it to the taxpayer to prove the contrary, the law assumes speculation if real estate is sold less than two years after it was bought, and if personal property (especially securities) is sold within three months of purchase.

If the transactions are ordinary business deals, as, for instance, in the case of real estate transactions, the profits are liable to income tax, the general tax on profits or the special profits tax, unless the operation was conducted by an establishment situated abroad.

(g) SALARIES, WAGES, COMMISSIONS AND OTHER REMUNERATION FOR SERVICES

The salaries and wages paid abroad to taxpayers domiciled in Czechoslovakia are liable to income tax, and possibly to the tax on high salaries. Special provisions concerning salaries paid by foreign Governments were referred to above (see page 109).

(h) INCOME FROM A TRUST

The taxation of “trusts”, as this term is understood by Anglo-Saxon law, is a question that does not arise in Czechoslovakia.

(i) INCOME FROM CARRYING ON A BUSINESS OR INDUSTRY

A national enterprise which does business abroad through a local commission agent or independent dealer is liable in respect of the profits from such business to the general tax on profits and income tax or to the special tax on profits, according to its status.

If the national enterprise does business abroad through persons attached to it by a contract and permanently established abroad, or through permanent representatives, the profits from these operations will be treated in the same way as those of an independent establishment situated abroad. If these profits are liable abroad to a tax similar to the general or special tax on profits, they will, in principle, be exempt from these taxes in Czechoslovakia. If it is further shown, that they are liable to income tax or a similar tax abroad, and if the foreign country grants reciprocal treatment, they will be exempt from income tax in Czechoslovakia.

previous
next