Written by Miroslav Kocman, LL.M.
The Czech Ministry of Finance has recently issued a Decree which will make the access to double tax treaty benefits for Czech tax non-residents more complicated than in past.
Under the current interpretation of the law, tax residency or non-residency status of foreign persons was questioned by Tax Offices only scarcely.
Application of a double tax treaty restrictive provisions was not overcomplicated and a tax resident/tax non-resident was entitled to benefit from the restrictive effects of the double tax treaty directly, without having to apply for an approval from the Czech Tax Office first. For example, a foreign individual who was assigned by his foreign employer to its Czech subsidiary could relatively easily opt for a Czech tax non-resident status according to the relevant double tax treaty and by doing so avoid the obligation to declare his world-wide income in the Czech Republic.
In order to benefit from the beneficial double tax treaty provisions after 1 January 2006 (the 2005 tax status remains unaffected), any Czech tax non-resident has to provide following documents:
– Certificate of tax domicile issued by the country of tax residency
– Declaration that he is the beneficial owner of the income according to the laws of the other country, i.e. the country of tax residency
– If the tax law of the home country or the relevant double tax treaty provides for further conditions, the tax payer has to provide a certificate that these conditions have been met
The above mentioned evidence need to be provided upon request to the Financial Office and translated into Czech language.
In case that the tax payer fails to submit the above mentioned evidence, he will not be entitled to double taxation relief guaranteed by the relevant double tax treaty. That means for him an obligation to declare the world-wide income in the Czech Republic where applicable, pay the full Czech tax rate without a chance for reduction and to pay the tax securement on certain types of income before the tax assessment takes place.
In light of this recent Decree it is recommendable to advise foreign tax payers with Czech source income to apply for a certificate of tax domicile issued by the country of tax residency before their 2006 tax filing so that the paperwork is available in case when the Czech Financial Office asks for