Zápočet zahraniční daně – rozdíly v okamžiku vzniku příjmu

Foreign tax credit - differences at the time of income generation

In today's alert, we would like to share with you one of the problems that can arise when crediting tax paid abroad.

Income of a taxpayer, a Czech tax resident, from sources outside the Czech Republic may be taxed not only in the Czech Republic but also in the source state. Such income would be taxed in two states. In order to avoid the double taxation, individual states conclude double taxation treaties with each other.

However, the taxation of income in two states entails several problems. One of them is the difference in the time of generation of taxable income. In practice, situations may arise where the tax to be paid in the source state is paid in a different taxable period from that in which the income is included in taxable income in the Czech Republic.

For example, the following situation may arise:

A foreign entity (A) rents movable property from a Czech tax resident (B) in its foreign territory (A). Such a lease is subject to foreign withholding tax both under local foreign legislation and under the respective double tax treaty.

A Czech tax resident (B) has issued an invoice for the rental of a movable asset for December 2022. This income will be subject to withholding tax in the country of source (A).

If similar rules apply in the country of source of income as in the Czech Republic, the foreign entity (A) withholds and pays tax only in the period following the period in which the Czech tax resident (B) booked the relevant income.

The question is whether, in such a situation, the foreign tax can already be credited against the Czech tax liability for the 2022 tax year.

According to the Coordination Committee of the Chamber of Tax Advisors and the Ministry of Finance of the Czech Republic (No. 148/04.10.06), it should be possible to credit income tax paid abroad even if the tax to be paid abroad was paid in a different tax year.

Since only tax paid abroad can be credited and the procedural process in the source country may take a relatively long time, Czech taxpayers with income subject to taxation abroad are allowed to request an extension of the filing deadline for the tax return for up to 10 months.

In conclusion, we would like to stress that the above brief commentary cannot replace a detailed tax assessment of a particular tax situation.

If you have any questions, please contact the authors of this article or the EY tax team with whom you regularly work.

Authors:

Viktória Böhmerová

Ladislava Zamazalová