The ultimate beneficial owner of income and the exemption from withholding tax under Czech law

Even if license fee payments flow between two Czech residents, one still needs to establish the identity of the UBO of the income derived from such license fees.

Towards the end of last year, the Supreme Administrative Court handed down a judgment (AZ 10 Afs 140/2018 – 32) concerning the application of withholding tax on income which had been paid among two Czech tax residents on the basis of a sublicensing agreement.

A Russian non-resident company had granted license to Czech company A, which in turn procured the production from Czech company B based on the aforementioned sublicensing agreement. In its decision, the Supreme Administrative Court concluded that Czech company A which had cashed in on the license fees was in actual fact merely an intermediary, used to pass through certain income which ultimately benefited the Russian company.

The potential exemption from withholding tax is subject to demonstrating the identity of the ultimate beneficial owner (UBO) and its tax residency status. The above judgment is testimony to the fact that the financial authorities do not simply rely on pro-forma affidavits by the participants in transactions but actually undertakes enquiries to establish the UBO. The Supreme Administrative Court reasoned that, under the Czech Income Tax Act, it was the responsibility of company B (in its capacity as the payer of the income in question) to deduct and pay withholding tax in the correct amount. Company B was aware of the fact that the ultimate beneficial owner of the license fees was the Russian company – a non-resident – as opposed to Czech company A. Because of this, it should have deducted and paid 10% withholding tax under the applicable double taxation treaty. Most taxpayers will be aware of their duty to establish the UBO if they pay income from interest, license fees, dividends, etc. to a recipient abroad. However, the above court ruling shows that the same need to determine the UBO may exist even in the case of domestic payments, especially if there is reason to doubt whether the party which receives payment into their bank account is in fact the ultimate owner.

Is the ultimate beneficial owner automatically the party ostensibly at the very end of the transactional chain, or does one have to dig deeper? Better watch out when making income payments, and structure your transactions such that your company as the tax payer won’t be exposed to the risk of supplementary tax assessments.

Supreme Administrative Court judgment 10 Afs 140/2018 -32 of 12 November 2019

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