The Czech Republic Corporate Tax Residence Michal Radvan, Johan Schweigl

The Czech Republic Corporate Tax Residence Michal Radvan, Johan Schweigl 1 Tax Residence in the Domestic Context 1.1 Civil Law, Corporate Law and Other Non-Tax Areas The continental system of law distinguishes two main areas of law, ie. private law and public law. The legal criteria for determining the State of residence (nationality/seat) of a company under corporate law, ie. the law whose corporate law governs the company (lex societas), are mainly regulated by laws belonging to the area of private law, in the Czech Republic. The concept lex societas is inextricably intertwined with the area of contract law. 1 In the Czech Republic the general provisions on the State of residence of a company is laid down in the Private International Law Act. 2 The respective provisions of the Private International Law Act, 3 as it will be shown below, need to be read in the light of certain terms outlined in the Act on Business Corporations 4 and the Civil code. 5 According to the Private International Law Act Legal personality of a legal person and responsibility of a person other than a physical person are subject to the laws of the State, according to which such a person was established. The terms of legal personality and legal person, are not defined in this particular act. Therefore, in order to understand this provision, one has to look into the Civil code and the Act on Business Corporations. The Czech Civil code defines the concept of legal personality and legal person. In the Czech legal order, legal personality is a capability to have rights and obligations. 6 Civil code recognizes legal person as an organized entity with legal personality granted or accepted by the legal order. Legal person may have rights and obligations that correspond to its character. 7 Legal person has legal personality from its creation to dissolution. 8 The process of establishing a legal person is regulated by both the Civil code and the Act on Business Corporations. The Civil code lays down rules for establishing and creation of a legal person, 9 whereas the Act on Business Corporations first sets forth the general rules applying to establishing a new business, 10 so that it could later outline detailed provisions on each particular type of a legal person. As explained above, there is a general rule set forth in the Private International Law Act that a company established according to the Czech law is governed by the laws of the Czech Republic. The Private International Law Act continues to state that such a legal entity shall be governed by the laws of the State, under which it was created. 11 These laws also govern also the name or title of that legal person and the internal relationships, including the relationship between the person and its owners (shareholders) or the mutual relationships among the owners or members. These laws also apply to liability of 1 G. MAISTO, Residence of Companies Under Tax Treaties and EC Law (IBFD 2009) p. 40. 2 CZ: Private International Law Act, 91/2012 Sb. 3 CZ: Private International Law Act, 91/2012 Sb., art. 30. 4 CZ: Act on Business Corporations, 90/2012 Sb. 5 CZ: Civil Code, 89/2012 Sb. 6 CZ: Civil Code, 89/2012 Sb., art 15/1. 7 CZ: Civil Code, 89/2012 Sb., art. 20/1. 8 CZ: Civil Code, 89/2012 Sb., art. 118. 9 CZ: Civil Code, 89/2012 Sb., art. 122-131. 10 CZ: Act on Business Corporations, 90/2012 Sb., art. 8-10. 11 CZ: Private International Law Act, 91/2012 Sb., art. 30/1.

such owners or members for the obligations of such a legal person and state who is entitled to act on behalf of that legal person, and how such a legal person may be dissolved. 12 The Private International Law Act further sets forth that, as for general acting, it is enough if such a legal person is entitled to carry out such acts under the laws enforced in the place, in which such an act was carried out. Although a legal person having a registered seat in the Czech Republic may only be established under the Czech laws, even legal entities that were established under foreign laws which have registered office abroad may relocate their registered office to the Czech Republic if such a relocation is allowed under an international treaty or a directly applicable law of the European union. 13 The legislative requirements for relocation of a company s registered seat are laid down in the Civil code. 14 A legal person which has its registered seat abroad may only relocate to the Czech Republic if the laws under which such a legal person was established allow it. A legal person that meets this core requirement sends application to a respective public register. Public register is a general name for several types of registers established under the Act on Public Registers, 15 ie. commercial register, register of associations, register of foundations, register of flat owners and register of charitable trusts. For business from abroad, the respective register is usually going to be a commercial register, as there are kept records about companies (businesses) and cooperatives in this register. 16 If a foreign business or its facility are recorded in the commercial register, the records should also contain information about the laws by which the business is governed. 17 The abovementioned application for relocation to the Czech Republic should contain a document, in which it expressed which legal form the business is to have according to the Czech law, and all documents required by the Czech law for establishment of the chosen form of legal person (company). This requirement complies with the requirements of the EU law, in light of the ECJ decisions. 18 After the relocation of a foreign business to the Czech Republic is completed, the internal relationships of a legal person are governed by the Czech laws, including liability of the owners (members) or board members for the debt of the company that occurred after the relocation. 19 Further requirements on relocation of seat are laid down in the Act on Transformation of Companies. 20 This act mainly sets the requirements for cross-border mergers, acquisitions and relocations. 21 12 CZ: Private International Law Act, 91/2012 Sb., art. 30/1. 13 CZ: Private International Law Act, 91/2012 Sb., art. 30/3. 14 CZ: Civil Code, 89/2012 Sb., art 138. 15 CZ: Act on Public Registers of Legal and Physical Persons, 304/2013 Sb. 16 CZ: Act on Public Registers of Legal and Physical Persons, 304/2013 Sb., art. 42. 17 CZ: Act on Public Registers of Legal and Physical Persons, 304/2013 Sb., art. 49. For special records concerning companies from the EU member states, see Act on Public Registers, art. 50. 18 HU: ECJ, 2008, C-210/06, CARTESIO Oktató és Szolgáltató bt. [2008] ECR I-09641. See the item 110: Thus a Member State has the power to define both the connecting factor required of a company if it is to be regarded as incorporated under the law of that Member State and, as such, capable of enjoying the right of establishment, and that required if the company is to be able subsequently to maintain that status. That power includes the possibility for that Member State not to permit a company governed by its law to retain that status if the company intends to reorganise itself in another Member State by moving its seat to the territory of the latter, thereby breaking the connecting factor required under the national law of the Member State of incorporation. 19 CZ: Civil Code, 89/2012 Sb., art 138/3. 20 CZ: Transformation of Companies Act, 125/2008 Sb. 21 CZ: Transformation of Companies Act, 125/2008 Sb., art. 59a.

The residence of a company may be challenged for several reasons. Aside from the obvious tax reasons, most of challenges may occur during the initial process of relocation to the Czech Republic. As it was stated above, the company to be relocated has to meet the requirements on companies according to the Czech law. Should a foreign company fail to comply with these requirements, the respective court that keeps the particular public register, eg. commercial register, would deny the application. The core requirements that apply to both companies established under the Czech laws and the foreign companies to be relocated to the Czech Republic are set forth in the Act on Public Registers. 22 If a company fails to submit documents requested by the court that keeps the particular public register, the court may impose a fine on the company for up to CZK 100.000 (approx. EUR 3.700). 23 As for crossborder mergers or acquisitions, should a company fail to comply with all the requirements set by the Act on Transformation of Companies, the respective court would reject the project of transformation. There are several other areas where the notion of residence (nationality/seat/registered office) is relevant. The concept of residence is important also from the view of contract law. The Czech Republic, as a member State of the European Union, is bound by the directly applicable Regulation on the Law Applicable to Contractual Obligations. 24 This regulation sets out rules for determining which national law should apply to contractual obligations in civil and commercial matters concerning cross-border issues. 25 The term of residence is crucial, because, as the regulation states: Where there has been no choice of law, the applicable law should be determined in accordance with the rule specified for the particular type of contract. Where the contract cannot be categorised as being one of the specified types or where its elements fall within more than one of the specified types, it should be governed by the law of the country where the party required to effect the characteristic performance of the contract has his habitual residence. 26 The regulation continues to state that for the sake of legal certainty there should be a clear definition of habitual residence, in particular for companies and other bodies, corporate or unincorporated. The requirement of legal certainty means that unlike Article 60(1) of Regulation (EC) No 44/2001, 27 which establishes three criteria, the conflict-of-law rule should proceed on the basis of a single criterion; otherwise, the parties would be unable to foresee the law applicable to their situation. The concept of residence is also important from the view of insolvency proceedings. In the Czech Republic, there is directly applicable the Regulation on Insolvency Proceedings, 28 where it is laid down a rule, according to which every creditor, who has his habitual residence, domicile or registered office in the Community, should have the right to lodge his claims in each of the insolvency proceedings pending in the Community relating to the 22 CZ: Act on Public Registers of Legal and Physical Persons, 304/2013 Sb., art. 75-107. 23 CZ: Act on Public Registers of Legal and Physical Persons, 304/2013 Sb., art. 104. 24 EU: Rome I (Regulation (EC) No 593/2008 of the European Parliament and of the Council of 17 Jun. 2008 on the law applicable to contractual obligations. 25 Regulation Rome I is connected to two other regulations: EU: Rome II (Regulation (EC) No 864/2007 of the European Parliament and of the Council of 11 Jul. 2007 on the law applicable to non-contractual obligations) and EU: Rome III (Council Regulation (EU) No 1259/2010 of 20 Dec. 2010 implementing enhanced cooperation in the area of the law applicable to divorce and legal separation), to determine the applicable law in these different matters. 26 Rome I, introductory provisions, item 19. 27 EU: Council Regulation (EC) No 44/2001 of 22 Dec. 2000 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters. 28 EU: Council regulation (EC) No 1346/2000 of 29 May 2000 on insolvency proceedings.

debtor's assets. 29 This right to lodge a claim should also apply to tax authorities and social insurance institutions. In the Czech Republic, as a member state of the EU, the notion of residence is also important from the view of regulation of financial markets. The Commission s policies in the field of regulation of banks contributed to the core ideas set forth in the financial services action plan of the EU Commission. These Commission s policies are grounded on the core principles of mutual recognition and the single passport. This means that there was created a system which allows banks legally established in one member State to provide their services in the other member states without having to apply for banking licence in the other EU member State. This EU rule was implemented into the Banks Act. 30 In this act, there is stated that banks having their registered seat in EU member States may, through their branches, carry on activities pursuant to this act within the territory of the Czech Republic without a licence granted by the Czech national bank, provided that they have been granted authorisation to carry on those activities in the country in which they have their registered office and provided that the foreign bank has complied with the procedure laid down in European Union law. 1.2 National Czech Tax Law Concerning the national legal regulation in the Czech Republic, the most important principle of preference of international agreements must be mentioned. Article 10 of the Constitution of the Czech Republic 31 embeds key provisions in relation to incorporation of international law into domestic law. It states that Promulgated international agreements, the ratification by the Parliament and the Czech Republic is bound, are part of the legal order, if an international agreement states something different than a national a law, international treaty shall prevail. Before the 'Euro-amendment' 32 had come into effect, it bestowed legal power akin to constitutional order onto international treaties on human rights and fundamental freedoms. The amendment has extended the treaties this applies to, and also granted them priority of application. 33 The above mentioned constitutional principle is repeated in Art. 37 of the Act no. 586/1992 Sb., Income Taxes Act, as amended. According to both provisions, all double tax treaties are having application priority over national regulation. And as it is obvious from the following text, the Czech Republic has almost the highest number of double tax treaties compared to other both developed and developing countries, especially because of the history of Czech Republic and (until 1992) Czechoslovakia. 34 29 Comp. EU: Council regulation (EC) No 1346/2000 of 29 May 2000 on insolvency proceedings, introductory provisions, item 21. 30 CZ: Banks Act, 21/1992 Sb. 31 Constitutional Act no. 1/1993 Sb., as amended. 32 So-called 'Euro-amendment' was passed as an Act no. 395/2001 on 18 Oct. 2001 and entered into effect on 1 Jun. 2002. It was one of the most important changes to the Constitution. Among others it added paragraph 2 into article 1, stating that the country abides by obligations arising from international law. Articles 10a and 10b have been added, providing guidelines on the conditions of transfer of powers to an international organization or organizations. With respect to obligations arising from the membership in such a body, the Cabinet has the duty to inform the Parliament, and both chambers of the Parliament have the right to give their opinion. Several other articles have been changed, including the list of laws that are binding for a judge of the Constitutional Court. See Wikipedia, Constitution of the Czech Republic: https://en.wikipedia.org/wiki/constitution_of_the_czech_republic (retrieved 30 Oct. 2016). 33 Wikipedia, Constitution of the Czech Republic: https://en.wikipedia.org/wiki/constitution_of_the_czech_republic (retrieved 30 Oct. 2016). 34 The independent Czech Republic and Slovak Republic were founded on 1 Jan. 1992.

The Czech domestic tax law determining the residence of companies for the tax purposes is set by the above mentioned Income Taxes Act. Art. 17 of this act defines corporate income taxpayers: Legal entity, Government organization; Mutual Fund established by the act governing the investment companies and investing funds; Sub-fund of a joint-stock company with changed basic capital according to the act governing the investment companies and investing funds; Pension Fund, by which is meant a fund administered by a pensions company according to the act governing the pensions savings and according to act governing additional pension savings; Trust Fund established by the Civil Code; Unit which is the taxpayer according to the legal order of the state where it was established; Fund administered by the Guarantee Scheme of Financial Market according to the law governing the recovery practices and solution of the crisis on the financial market. Similarly, to other countries, there are tax residents and tax nonresidents. Nowadays the corporate income tax resident is defined as an entity having its registered office (place of incorporation) or place of leadership (place of effective management), which is the address of the place from where the taxpayer is controlled (hereinafter referred to as "seat"), at the territory of the Czech Republic. A taxpayer who is not a legal entity, but it is incorporated or constituted under the laws of the Czech Republic, is considered to have the seat at the territory of the Czech Republic, ie. it is a tax resident. All Czech tax residents have a tax obligation which applies both to incomes arising from sources in the Czech Republic and incomes from sources abroad. Corporate income tax nonresident is defined as an entity not having its seat (ie. place of incorporation or place of effective management) at the territory of the Czech Republic. Other nonresidents could be defined by the international agreement. Non-resident taxpayers have a tax obligation, which applies only to incomes from sources at the territory of the Czech Republic. There were just two amendments of the statues dealing with tax residence in the history of the Czech Republic. Act no. 492/2000 Sb., effective since 1 Jan. 2001, broadened the criteria of the definition of tax residence. Until the end of taxable period of 2000, the only criterion was the place of incorporation; this amendment means that the other criterion is the place of effective management (place of leadership, which is the address of the place from where the taxpayer is controlled). This rule was adopted to prevent tax evasions consisting in the fact that the taxpayer registers abroad (in tax haven), but the effective management of the company is proved at the territory of the Czech Republic. Act no. 344/2013 Sb., effective since 1 Jan. 2014, was more or less technical concerning the definition of tax residence. It officially started using terms corporate income tax residents and nonresidents, even these were defined previously. As mutual funds, pension funds, and trust funds are having no legal personality / capacity, it was necessary to add the statue that these taxpayers who are not legal entities, but they are incorporated or constituted under the laws of the Czech Republic, are considered to have the seat at the territory of the Czech Republic, ie. they are tax residents.

Period Criteria 1.1.1993 31.12.2000 place of incorporation 1.1.2001 - nowadays place of incorporation and/or place of effective management Table 1: Criteria for corporate income tax residence in the history of the Czech Republic There is no hierarchy between these two criteria, both are used without any priority. Other criteria like location of the parent company, place of work of the company s (senior) employees, location of the bookkeeping, residence or nationality of the shareholders, residence or nationality of the directors, or location of the company s assets are not used at all. The same regulation is applied for all types of companies, incl. those with scarce physical presence (digital economy, etc.). In practice, the place of incorporation is always clear, as all the legal entities are registered in the Commercial Register or other similar registries in abroad. Instruction no. D-286 to the Taxation of Income of Non-residents from Sources in the Czech Republic states that the taxpayer is obliged under the relevant tax proceedings (eg. tax audit) to demonstrate all the circumstances, in particular a certificate of tax residence in given state issued by a foreign tax authority. 35 If the entity is not registered in the Czech Republic, or if it is necessary to examine because of the existing double tax treaty, the place of effective management is examined. According to the Communication from the Ministry of Finance, the place of effective management can be defined as the place where key management and commercial decisions necessary for the implementation of industrial and commercial business and unchangeable by lower levels of management are actually made. The place of effective management is usually the place where the director of a company or a group of its representatives (eg. the management board) adopts its decisions, in other words, a place where the activities to be carried out are determined. More generally, it can be defined as a place where the practical business policy with the ultimate effect is formulated and prescribed. At this place there are usually appropriate material and personnel resources for such activities. It is obvious that the company may have only one place of effective management unlike local places of management; definitely company may have more those units. Local places of management are then considered in terms of tax treaties for permanent establishments. 36 But it is necessary to mention that double tax treaty (if exists) has always the application priority. Most of information concerning the given issues is gathered from the sources of Financial Administration of the Czech Republic. However, this information is only general and very sketchy. The article by Brychta, Sojka & Svirák is more or less a copy of information available in the materials published by Financial Administration of the Czech Republic. The 35 General Financial Directorate, Instruction no. D-286 to the Taxation of Income of Non-residents from Sources in the Czech Republic: http://www.ucetni-portal.cz/pokyn-c-d-286-ke-zdanovani-prijmu-danovych-nerezidentuplynoucich-ze-zdroju-na-uzemi-cr-51-x.html (retrieved 3 Nov. 2016). 36 Ministry of Finance, Communication from the Ministry of Finance on the issue of the terms "place of effective management" and "beneficial owner" no. 251/122 867/2000: http://www.ucetni-portal.cz/sdeleni-mf-kproblematice-pojmu-misto-vedeni-a-skutecny-vlastnik-104-x.html (retrieved 30 Oct. 2016). See as well K. Brychta, V. Sojka & P. Svirák, Zdaňování příjmů daňových rezidentů kritéria daňového rezidentství a řešení kolizních situací (Income Taxation of Tax Residents Criteria of Tax Residence and Conflict Situations Solving), Daně a právo v praxi (Taxes and Law in Practice) 3 (2013) p. 13.

same could be said about the book by Sojka. 37 After the examination of existing case-law in the Czech Republic, it is obvious that given area was not examined at all by Czech courts. The only useful information is that the argument of the taxpayer, that in case of conflict between the place of incorporation and the place of effective management there is a priority of the place of effective management, was disproved by the County Court in Brno. 38 The level of the academic debate is really low in the Czech Republic. The reason is partially in the low number of research centers law and economic schools, and researches dealing with these issues, partially in non-existence of tax law as an independent branch of law. On the other hand, there is a new generation of authors like Nerudová, Brychta, Balco, etc. who are definitely increasing the level of science in the area of international taxation. Concerning the advance rulings, the Czech regulation is really very limiting. The advance ruling is available only in cases exactly defined by law and there is quite a high administrative fee to be paid in advance (CZK 10.000 approx. EUR 400). In the given area of tax residence, the advance ruling is not available according to de lege lata regulation. As the criterion of place of effective management is used in the Czech Republic, it is necessary to deal with this issue more in details. The nature of company decisions to be relevant for the application of the criterion is generally strategic: the top management decides on key management and commercial decisions, creates the business policy with the ultimate effect is formulated and prescribed. Day to day decisions are taken by lower levels of management and they do not influence the tax residence. Of course especially in case of multinational group it could be difficult to decide what is the decision and business policy for the group (taken by the group headquarters) and for the individual company as a part of such a group. Then the relations in the group, the level of independence of individual companies, the scheme of decision taking, etc. are to be examined. But generally it is possible to say that the impact of decision taken by the members of the multinational group is sufficient for the status of residence in the Czech Republic based on the criterion of place of effective management. The burden to prove all facts in tax proceedings in the Czech Republic has always the taxpayer. The same rule is applied for all circumstances connected with the definition of place of effective management incl. the actual location of the meeting and the time when the decisions were actually taken. There are no special rules applied in case of meetings by telephone, videoconference or per exchange of emails. Nevertheless, tax administrators are having unlimited possibilities to find all proofs by themselves; examining the tax residence of the company, they are very often cooperating with tax authorities in other countries. If there is a double tax treaty, the model of cooperation is described in the text of the treaty. Moreover, the European regulation in given area is used, namely Council regulation (EU) No 904/2010 of 7 Oct. 2010 on Administrative Cooperation and Combating Fraud in the Field of Value Added Tax and Council directive 2011/16/EU of 15 Feb. 2011 on Administrative Cooperation in the Field of Taxation and Repealing Directive 77/799/EEC implemented into the national regulation in Act no. 164/2013 Sb., on International Cooperation in Tax Administration and on Amendments to other Related Laws, as amended. On 1 Feb. 2014, the Convention on Mutual Administrative Assistance in Tax Matters become valid in the Czech Republic. 39 The Convention is applicable in relation to the tax periods beginning on 1 Jan. 2015 inclusive or later and where there is no taxable period, it 37 V. Sojka, Mezinárodní zdanění příjmů (International Income Taxation) ch. 1.2.1 (Wolters Kluwer CR 2008), Aspi. 38 CZ: KS Brno, 26 Mar 2015, 30 Af 32/2013-138. 39 Ministry of Finance, Convention on Mutual Administrative Assistance in Tax Matters: http://www.mfcr.cz/cs/legislativa/mezinarodni-spoluprace-v-oblasti-dani/umluva-o-vzajemne-spravnispolupraci-mca/umluva-o-vzajemne-spravni-pomoci-v-danov (retrieved 5 Nov. 2016).

covers the tax liability incurred from 1 Jan. 2015 inclusive. Not only in the Czech Republic, the Convention is the most comprehensive multilateral instrument available for all forms of tax cooperation to tackle tax evasion and tax avoidance. The Convention allows all forms of international administrative cooperation, ie. information exchange on request, automatic and spontaneous, simultaneous tax examinations, presence during tax inspections abroad, requests of the enforcement and interim measures, and delivery of documents. As the Convention requires to mutually agree on the scope of the automatic exchange of information and the procedure to be complied with, the Czech Republic cooperates within the Multilateral Competent Authority Agreement on the Exchange of CbC Reports for the automatic exchange of Country-by-Country Reports, and the Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information for the automatic exchange of financial account information pursuant to the Common Reporting Standard. 40 There are no examples of arbitration procedures on the issue of residence in the Czech Republic. Being considered a resident company in the Czech Republic and in Czech domestic income tax law implies taxation on a worldwide basis. In most cases, the regulation in the Czech Republic is the same for Czech residents and residents from any EU European Economic Area member state. For example, the withholding tax (Czech resident as a payor pays to the non-resident entity) for these subjects is generally 15 %. But the withholding tax is 35 % for taxpayers who are not resident in another EU member state or another country in the European Economic Area, or third country or jurisdiction with which the Czech Republic concluded a double tax treaty, treaty or agreement on information exchange in tax matters in the area of taxes on income or that is a party to multilateral agreements containing provisions on the exchange of tax information with respect to taxes on income. 41 The residence of a company is usually challenged if the tax administrator has any doubts about the residence, ie. the place of incorporation or (and much more often) the place of effective management is not clear. As the Czech Republic has no general anti-avoidance rules, the general principle of substance over form is being applied. Taxpayers carry the burden of proof for any fact they claim in the tax return using the tax self-assessment procedures. This process is called reproach proceedings (proceedings to remove doubts): if there are doubts about the correctness, truthfulness, substantiation or completeness of the tax return, the tax administration informs the taxpayer about these doubts and calls upon him to give his views or complete the incomplete data, etc. The tax administration should set an appropriate time limit in its call, not shorter than 15 days. The tax administration has more possibilities to assess the tax: it can conduct a tax control or local tax examination; it can hear the witnesses; it can go through the paper proofs, etc. At the end of these proceedings, the tax administration sets the tax base, prescribes the amount of tax and notifies the taxpayer of the reasoned tax assessment. The tax is payable within 15 days after the tax assessment becomes legally effective. 42 Within the reproach proceedings, if the taxpayer is requested to document any data or information that has been used for self-assessment, he must satisfy the tax officer s request by any means stated by the law. Instruction no. D-286 to the Taxation of Income of Nonresidents from Sources in the Czech Republic states that the taxpayer is obliged under the 40 Ministry of Finance, Multilateral Competent Authority Agreement and Common Reporting Standard: http://www.mfcr.cz/cs/legislativa/mezinarodni-spoluprace-v-oblasti-dani/umluva-o-vzajemne-spravnispolupraci-mca/mnohostranna-dohoda-mcaa-a-spolecny-stan (retrieved 5 Nov. 2016). 41 CZ: Income Taxes Act, 586/1992 Sb., art. 36/1/c. 42 L. Morvec & M. Radvan, Czech Republic, in Surcharges and Penalties in Tax Law (R. Seer & A. L. Wilms, eds., IBFD 2016).

relevant tax proceedings (eg. tax audit) to demonstrate all the circumstances, in particular a certificate of tax residence in given state issued by a foreign tax authority. 43 According to the principle of cooperation and collaboration, the active role of tax administration is expected in the process of residence proving. If the non-residence is proved, the tax must be recalculated and both criminal and tax sanctions could be applied. Only intentional offences with the damage higher than approximately EUR 2,000 can be classified as tax criminal acts. Tax Code states that if the tax is additionally assessed by the tax administration because the tax was incorrectly self-assessed by the taxpayer, the penalty of 20 % is applied, calculated from the amount of additionally assessed tax. The time limit to apply the penalty is 3 years from the end of the time limit for submission of the tax return (or the time limit for paying the tax if there was no duty to submit the tax return), ie. the same as the time limit for assessing the tax. In the Czech Republic, there are no anti-avoidance rules aiming at denying the benefit of certain tax provisions normally applicable to residents to certain types of companies, or on the contrary at considering subjecting the income of non-resident companies to full domestic taxation, as if they were resident companies. Controlled Foreign Corporation (CFC) rules were still not implemented into the national regulation; it is probable only if CFC rules are adopted by EU regulation and then it will be inevitable for the Czech Republic, too. The rules for corporate income tax residence as described above are applied for all forms of corporate incomes incl. withholding taxes. It should be mentioned that in the Czech Republic there is not any other special income tax, neither at the local level. The definitions of taxpayers of all other direct taxes (immovable property tax, tax on acquisition of immovable property, road tax motor vehicle tax), charges (local, administrative, court, other) and insurance (social and health) paid by companies are specific, completely different, with no relation to the corporate income tax residence. There is no need to make any differences in the regulation for companies having or not having the place of incorporation or the place of effective management in the Czech Republic. In case of indirect taxes, these are fully harmonized with the European directives. 2 (Tax) Residence in an International (Cross-Border) Context 2.1 Residence in (Tax) Treaties There are currently more than eighty (double) tax treaties valid in the Czech Republic. There are still some treaties that were entered into in the communist era, i.e. before November. 1989. Most of the treaties, however, were concluded in the last two decades. In general, the tax treaties that the Czech Republic is a signatory, mostly follow the provisions on tax residence and permanent establishment set forth in the OECD Model Tax Convention. 44 The tax treaties usually first need to define the notion of person so that it could later specify the term residency. For example, we refer to the Tax convention between the United States of America and the Czech Republic, which entered into force for the Czech Republic on 23 Dec. 1993, the term person is defined as follows: person includes an individual, an estate, a trust, a partnership, a company, and any other body of persons. 45 The term company is further explained as: any body corporate or any entity which is treated as a body corporate 43 General Financial Directorate, Instruction no. D-286 to the Taxation of Income of Non-residents from Sources in the Czech Republic: http://www.ucetni-portal.cz/pokyn-c-d-286-ke-zdanovani-prijmu-danovych-nerezidentuplynoucich-ze-zdroju-na-uzemi-cr-51-x.html (retrieved 3 Nov. 2016). 44 Organisation for Economic Co-operation and Development (OECD) Model Convention with Respect to Taxes on Income and Capital. 45 See Tax convention between the United States of America and the Czech Republic, art. 3.

for tax purposes. 46 The convention does not define a term residency, but specifies a term resident of a Contracting State. Such a person is any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, place of management, place of incorporation, or any other criterion of a similar nature. 47 The Czech national law outlines the term resident. A tax resident is then a legal person having its registered seat or place of management in the Czech Republic. The term place of management is further explained as a place from which the tax resident is managed. Tax nonresidents are legal persons not having their seat in the Czech Republic. Tax residents are subject income tax from the sources in the territory of the Czech Republic and the income from the sources abroad. Tax non-residents are only subject to income tax from the sources in the territory of the Czech Republic. 48 Investment agreements usually contain a clause stating residents of the State are those having their seat in that State. For example, we refer to the Investment protection treaty between the United States of America and the Czech and Slovak Federal Republic, which defines a company of the Party as any kind of corporation, company, association, state or other enterprise, or other organization, legally constituted under the laws and regulations of a Party or political subdivision thereof whether or not organized for pecuniary gain, or privately or governmentally owned. 49 As an additional example, we refer to the Agreement between the government of the Czech Republic and the government of the United Arab Emirates for the promotion and protection of investments, which after defining the term investor as the Government of a Contracting State or any of its natural or juridical persons who invest in the territory of the other Contracting State, also defines a juridical person as any entity established in accordance with and recognized as juridical person by the law of that Contracting State, such as public and private companies, corporations, business associations, authorities, partnerships, foundations, firms, institutions, establishments, agencies, development funds, enterprises, cooperatives and organizations or other similar entities irrespective of whether their liabilities are limited otherwise. 50 The article 4(1) OECD model convention understands the term resident of a Contracting State as any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, place of management or any other criterion of a similar nature, and also includes that State and any political subdivision or local authority thereof. This term, however, does not include any person who is liable to tax in that State in respect only of income from sources in that State or capital situated therein. As we manifested with the example of the Tax convention between the United States of America and the Czech Republic, the treaties to which the Czech Republic is a signatory usually follow to some extent the respective provision of the OECD model convention. A person liable to tax refers to the taxpayer. The Czech law does not leave the meaning given to that term in the OECD model taxation; this applies to legal practise, case-law and most of the literature. The Czech Republic tax legislation corresponds with the ideas set forth in the OECD model convention commentary on the term full tax liability. The 46 Tax convention between the United States of America and the Czech Republic, art. 3. 47 Tax convention between the United States of America and the Czech Republic, art. 4. 48 CZ: Income Taxes Act, 586/1992 Sb., art. 17. 49 Treaty between the United States of America and the Czech and Slovak Federal Republic Concerning the Reciprocal Encouragement and Protection of Investment of 19 Dec. 1992, as amended by the Protocol of 10 Dec. 2003, art. 1/1/b, 50 Agreement between the Government of the Czech Republic and the Government of the United Arab Emirates for the Promotion and Protection of Investments, art. 1/2 (entered into force for the Czech Republic on 25 Dec. 1995).

abovementioned commentary states: Generally the domestic laws of the various States impose a comprehensive liability to tax full tax liability based on the taxpayers personal attachment to the State concerned (the State of residence ). This liability to tax is not imposed only on persons who are domiciled in a State in the sense in which domicile is usually taken in the legislations (private law). The cases of full liability to tax are extended to comprise also, for instance, persons who stay continually, or maybe only for a certain period, in the territory of the State. Some legislations impose full liability to tax on individuals who perform services on board ships which have their home harbour in the State. The Czech law is based on a very same model. As it was explained above, the Czech law distinguishes between a tax resident and tax non-resident. Tax residents are subject income tax from the sources in the territory of the Czech Republic and the income from the sources abroad. Tax non-residents are only subject to income tax from the sources in the territory of the Czech Republic. 51 The tax treaties to which the Czech Republic is a signatory started follow the trend of including anti-avoidance provisions whose purpose is to avoid so-called treaty shopping. In this respect, we refer to the anti-abuse rules that were introduced in the Action plan on Base Erosion and Profit Shifting by OECD. 52 The Action plan elaborated two core legal institutes that have been more or less used before, i.e. limitation of benefits and principal purpose test. Both of these concepts were included in some of the tax treaties that the Czech Republic entered into; the former may be found, for example, in the Tax convention between the United States of America and the Czech Republic, whereas the latter is used, for instance, in the Agreement between the Czech Republic and the Republic of Cyprus for Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Income Tax. The tax treaties concluded by the Czech Republic generally contain a tie-breaker rule clause for dealing with dual resident companies. The wording often follows the one set forth in the OECD Model tax convention, art. 4 (3), which uses the notion of effective management as the decisive criterion. The tax treaties into which the Czech Republic entered often used the same notion. For instance, we refer to the Convention between the Czech Republic and the Republic of Austria, 53 which contains a provision identical to the one set forth in OECD Model tax convention. The respective provision of the tax treaty with Austria reads: Where by reason of the provisions of the paragraph 1 a person other than an individual is a resident of both Contracting States, then it shall be deemed to be a resident of only of the State in which its place of effective management is situated. 54 The identical provision may be found in numerous tax treaties concluded by the Czech Republic. 55 Some tax treaties use a criterion different from the one used by OECD Model tax convention. 56 51 CZ: Income Taxes Act, 586/1992 Sb., art. 17. 52 OECD, Action plan on Base Erosion and Profit Shifting: https://www.oecd.org/ctp/bepsactionplan.pdf (retrieved 3 Nov. 2016). 53 The Convention between the Czech Republic and the Republic of Austria for the Avoidance of Double Taxation and the Preservation of Fiscal Evasion with Respect to Taxes on Income and Capital entered into force for the Czech Republic on 22 Mar. 2007. 54 The Convention between the Czech Republic and the Republic of Austria for the Avoidance of Double Taxation and the Preservation of Fiscal Evasion with Respect to Taxes on Income and Capital, art. 4/3. 55 To name a few other tax treaties, in which the identical provision is included, we refer to the tax treaties that the Czech Republic concluded with Austria (comp. art 4/3), Jordan (comp. Art. 4/3), Syria (comp. Art. 4/3), Iran (comp. Arti. 4/3, and many others. 56 For example, the Tax convention between the United States of America and the Czech Republic set the respective tie-breaker rule concerning dual resident companies as follows: Where by reason of the provisions of paragraph 1 a company is a resident of both Contracting States, then if it is created under the laws of a Contracting State or a political subdivision thereof, it shall be deemed to be a resident of that State. Comp. Tax convention between the United States of America and the Czech Republic, art. 4/5.

The term place of effective management (in Czech: místo hlavního vedení ) is, however, the most popular within the tax treaties. The term is interpreted in compliance with the Commentary to OECD Model tax convention, which understands the place of effective management as place where key management and commercial decisions that are necessary for the conduct of the entity s business as a whole are in substance made. All relevant facts and circumstances must be examined to determine the place of effective management. An entity may have more than one place. There are currently no major discussion (neither by academics, nor by the politicians) about the recommendations made in the Action plan on Base Erosion and Profit Shifting by OECD on Action 6 to abandon the tie-breaker provision based on the effective place of management and to leave the matter to be settled by mutual agreement. 2.2 Tax Implications of the Cross-Border Change of Residence Company migration has a number of consequences for both the company and its shareholders under the Czech law. As we already mentioned, one of the core changes that a migrating company faces is that the company s internal relationships are subject to Czech law. 57 This also includes liability (within the extent that applies on the Czech companies) of its owners (members) or the board members for the debts of the company that arose after the relocation to the Czech republic. The owners and members of the relocated company thus have to comply with the requirements imposed on the owners and members of the companies established under the Czech law. The relocated companies are then subject to the Czech tax legislation. The shareholders who are tax residents of the Czech Republic are, in principle, subject to taxation of the dividends received from the positions they hold. Different treatment is usually stated by the international tax treaties, but, as it was stated above, the Czech Republic often follows the principles introduced in the OECD Model tax convention. As for the legal persons, the issue of their seat is also important for identifying their tax residence. According to the Czech Income Tax Act, legal person that is a tax resident of the Czech Republic has a tax obligation which applies both to income arising from sources in the Czech Republic as well as income from sources abroad. Non-resident taxpayers have a tax obligation, which applies only to income from sources in the Czech Republic. These core rules, again, may be subject to different treatment according to international tax treaty. Valuation of the relocated company s assets, liabilities and own funds is regulated mainly by the following fundamental laws in the Czech Republic, i.e. the Accounting Act 58 and the Accounting Ordinance 59 and the Act on Transformation of Companies. 60 The Accounting Act regulates the process of valuation in general. 61 In respect to cross-border transformation, it refers to the ordinance that extend the rules set forth in the Accounting Act. The most important ordinance concerning the Accounting Act is the abovementioned Accounting Ordinance. The Act on Transformation of Companies introduced the notion of cross-border relocation of seat in 2012. Since then the cross-border relocation of a company seat is understood as a form of transformation of a company. A company relocating to the Czech 57 CZ: Civil Code, 89/2012 Sb., art 138/3. 58 CZ: Accounting Act, 563/1991 Sb. 59 CZ: Ordinance which extends some of the provisions of the Accounting Act, 500/2002 Sb. 60 CZ: Act on Transformation of Companies and Cooperatives, 125/2008 Sb. 61 CZ: Accounting Act, 563/1991 Sb., art. 24.

Republic shall prepare its financial statements. 62 The company shall mainly keep up to the requirements on capital imposed upon the Czech established companies. As for the assets of the company to be relocated, the assets shall be assessed by an official expert. The official expert has to state whether the assessment of the assets corresponds at least to the core capital of the company. The amount of the core capital of the company cannot exceed the value of the assets found by the expert. 63 The official expert who carries out such an evaluation shall be an expert appointed by the Czech court. 64 Such an evaluation by the expert is, however, not requested if the assets of the foreign company are valuated according to the IFRS rules. The process of valuation followed by a written statement issued by public notary that the respective company complies with the requirements to be met in order to relocate. 65 The Czech legislation follows the principles prescribed by the EU legislation. Although it is hard to state that it was the EU case law that helped to shape the existing Czech laws, it is typical that the judicial acts of the CJEU sooner or later reflect in the national laws of the Czech Republic. The consequences of company emigration are set forth mainly in the Act on Transformation of Companies. 66 A Czech company may relocate abroad without having to be liquidated. The status of the company and its form remain to be governed by the Czech law after the relocation if the laws of the new home state do not state otherwise. Such a relocation, however, cannot be made after insolvency proceedings against such a company were opened. Relocation enters into force as of registration of the company in the business register of the state to which it relocated. 67 There are no special consequences for the shareholders under the Czech law. There are no exit or trailing taxes recognized in the Czech Republic. The EU (case) law is gradually reflected in the Czech laws. The EU merger directive has been transposed into the Czech legal order, mainly into the Act on Transformation of Companies. 2.3 Policy Issues Tax residence of companies is really not a topic of public debates in the Czech Republic. Checking the most important professional fora focused on law and economics, there is hardly anything to find on given issues. Most of the articles is just descriptive, offering solutions for basic problematic aspects of residence. Most frequent news portals are informing usually about tax havens and numbers of Czech companies seated there. There are approx. 13,500 Czech companies in tax heavens; moreover, the number is decreasing. The reason is probably combination of several factors: The Czech Republic is an EU member state, with cheap manpower, economically developed, with relatively stable economic growth, stabile legal system and especially low taxes compared to other European countries. According to the statistics of Bisnode company, there are only 13 states worldwide with more than 100 Czech companies incorporated there: Belize, British Virgin Islands, Cyprus, Honk Kong, Lichtenstein, Luxembourg, Malta, Marshall Islands, Netherlands, Panama, Seychelles, United Arab Emirates, and United States of America. 68 Very probably, not always lower taxes are the 62 CZ: Act on Transformation of Companies and Cooperatives, 125/2008 Sb., art. 59e, 384b, 364, 364a, 367, 368 and 371. 63 CZ: Act on Transformation of Companies and Cooperatives, 125/2008 Sb., art. 384b and 367. 64 CZ: Act on Transformation of Companies and Cooperatives, 125/2008 Sb., art. 384b/2. 65 CZ: Act on Transformation of Companies and Cooperatives, 125/2008 Sb., art. 384d/2. 66 CZ: Act on Transformation of Companies and Cooperatives, 125/2008 Sb., art. 384f -384p. 67 CZ: Act on Transformation of Companies and Cooperatives, 125/2008 Sb., art. 384o. 68 V. Doskočilová, Počet firem v daňových rájích klesá (The Number of Companies in Tax Havens Decreases): http://www.mesec.cz/aktuality/pocet-firem-v-danovych-rajich-klesa/ (retrieved 6 Nov. 2016).