Czech Republic: Tax implications for German funds on disposal of Czech equities

Czech Republic: Tax implications for German funds

There may be capital gains tax implications for German and Liechtenstein funds on disposals of Czech Republic equities. The Czech tax authorities have launched investigations into non-compliance with these reporting and payment obligations.

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Summary

Czech domestic tax law provides that capital gains realized from the disposal of shares (or comparable interests) in Czech resident companies are subject to Czech corporate income tax and trigger an obligation to file a tax return in the Czech Republic. Most income tax treaties eliminate this taxation and filing obligation—but not the income tax treaties with Germany and Liechtenstein.

For entities based in Germany or Liechtenstein (in particular, investment funds) that invest into Czech equity securities (in particular those with 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 realized):

  • 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 is 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 documented acquisition or disposal costs)

Once registered, the non-resident must file a Czech tax return every year (under the above deadlines).

  • If no income or gains are generated, a “nil” tax return must be filed.
  • If no further Czech source income or 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.

KPMG observation

Asset managers that use German or Liechtenstein funds to invest into Czech equities need to be familiar with the potential Czech tax obligations. Penalties can be assessed in instances when there is not proper registration and timely filing of tax returns.

Read a January 2021 report prepared by the KPMG member firm in Switzerland

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