Digital tax in Czechia – when it can be expected and what its administration will look like?

A grateful subject in the media recently has been the “digital” tax, also known as tax on digital services. How it will be administered and when it will be included in the Czech tax system?

In January 2020, the government’s bill on the tax on digital services passed its first reading in the Chamber of Deputies. With regard to the state of emergency currently declared in the Czech Republic, it is difficult to estimate when it will be approved. Given the expected shortfalls of the state budget, it can be expected that there will be an effort to introduce the new tax as soon as possible.

The government’s bill foresees the entry into force on the fifteenth day after the promulgation of the law, which is a relatively tight deadline both for the taxable entities concerned and for the tax authorities. These considerations are reflected in some of the amendments proposed by the MPs who propose that the entry into effect be set on a specific date (1 January 2021, 1 July 2021 or 1 January 2022). Postponing the entry into effect of the law could be problematic. According to the bill, the last tax period of the tax on digital services will be the tax period of 2024. In an extreme case, we would introduce the new tax only for two years.

Only large multinational internet companies with annual global turnover of more than EUR 750 million and annual sales in the Czech Republic for the taxable services provided in excess of CZK 100 million will be payers of the tax on digital services. Some of these companies do not even have a permanent establishment in the Czech Republic pursuant to the Income Tax Act, it is therefore no wonder that administrator for the tax on digital services will be the Specialized Tax Authority.

Taxpayers who are not established in the territory of a Member State of the European Union or the European Economic Area will be required to choose a service agent having their registered office or place of residence here. If the taxpayer fails to do so, the Specialized Tax Authority shall deposit the documents, if any, with itself, with the effects of delivery on the day of their issue.

If the taxpayer’s registered office is known, the Specialized Tax Authority will attempt to notify the taxpayer of the depositing. However, the notification attempt will be without prejudice to the running of the relevant time limits; the time limits shall begin to run on the date of issue of the document. Therefore, taxpayers should choose a service agent in their own interest.

It is proposed that the tax period will be a calendar year because the implementation of some services may take longer than a calendar month. The bill does not contain regulation of the deadline for filing the tax return. Therefore, the general rules of the Tax Code which also apply to income tax returns shall apply. For the purposes of the tax on digital services, taxpayers shall keep separate records in the structure required for the preparation of the tax return. This is an important obligation.

The taxpayer will also be required to make tax prepayments equal to one twelfth of the previous tax. For the first tax prepayment period, the amount of the tax prepayment is determined based on the potential amount of the tax on digital services for the last preceding financial period. The tax prepayments shall be due on a monthly basis, by the 15th day following the end of the month for which the advance is paid. The tax prepayments determined in this manner are a hybrid between tax prepayments paid by the employer for income tax on employment and income tax prepayments for other taxpayers.

It is unlikely that in the course of the legislative process, the bill will undergo other major changes related to the administration of this tax. The proposed amendments include, in addition to postponing the effectiveness of the law, reduction in the tax rate from 7% to 5% or to 3%. The purpose of the proposed amendment is to ensure that the rate corresponds to that of other European countries. The first rate was approved in Austria, the second in France. This would also improve the Czech Republic’s bargaining position with the US. The United States fundamentally disagrees with the bill and threatens the Czech Republic with retaliatory measures.

Parliamentary press 658 gov. bill on tax on digital services


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