With this article we’d like to raise your awareness about capital gains tax implications for Liechtenstein & German funds upon disposal of Czech equities.
Notwithstanding its limited market impact, this change is interesting, as it may result in a new trend leading to similar changes in other jurisdictions.
Under Czech domestic tax legislation, capital gains arising from the disposal of shares or comparable interests in Czech resident companies are subject to Czech corporate income tax and triggers the obligation to file a tax return in the Czech Republic.
Whilst most double tax treaties eliminate this taxation and filing obligation (including the Swiss-Czech treaty), this is not the case for the Czech double tax treaties with, for example Germany and Liechtenstein.
Since this issue only affects a limited number of countries, KPMG has noticed that awareness of this Czech tax matter is not widely known on the market. Furthermore, with the information that the Czech tax authorities now receive under international tax transparency regimes, our Czech colleagues have started to see the Czech tax authorities launch investigations into non-compliance on this matter.
Czech capital gains tax implications
For entities based in Germany or Liechtenstein (in particular, investment funds) which invest into Czech equity securities (e.g. ISINs beginning with the prefix “CZ”), the following Czech tax implications arise upon disposal of the Czech equities (regardless of whether a capital gain or a capital loss is realised):
- Obligation to register in the Czech Republic as a taxpayer within 15 days of the disposal;
- Obligation to file a Czech tax return (standard filing deadline 1 April, but can be extended to 1 May if filed electronically, and to 1 July if professional tax advisor support is used);
- Obligation to pay any Czech tax liabilities due as a result of the disposal (standard corporate income tax rate is 19%, with deductions available for acquisition/disposal costs that can be properly evidenced);
- Once registered, it is necessary for the non-resident to file a Czech tax return every year within the above deadlines. If no income/gains are generated, a nil tax return has to be submitted. If no further Czech source income/gains are expected, the non-resident can apply for deregistration. After deregistration, the obligation to file (nil) tax returns ceases to exist unless further income taxable in the Czech Republic is generated.
Asset Managers that use Liechtenstein or German funds to invest into Czech equities should familiarize themselves with the Czech tax obligations, and ensure the proper registration and timely execution of the tax return filing requirements, since sanctions can be applied in the case of non-compliance (late payment interest, fine for late submission and penalties).
For future investments, structuring advice should be considered to understand the options available to benefit from the Czech double tax treaty network that allows for exemption from such taxation.
Raising tax liabilities from non-residents in this manner is an easy (and politically attractive) approach and is a trend that we expect to see continue as more and more governments seek to recover revenues in the wake of the economic impact of the COVID-19 pandemic.