The Czech Republic Schaffer & Partner s.r.o. Mr. Martin Felenda

Speaker Name: Martin Felenda Title: CPA, tax advisor Company: Schaffer & Partner Prague Phone: + 420 221 506 300 E-mail: felenda@schaffer-partner.cz

Case study US company (consumer business) is doing business in the Czech Republic. The ultimate owner of the US company is an US individual. The Czech business operations create a net result of US$ 7 mio and after deduction of an at arm’s length US license fee for the use of the brand name (US$ 2 mio) a profit before tax remains of US$ 5 mio. The US company can set-up a (1) corporation or a (2) limited partnership in the Czech Republic. What are the tax consequences? What opportunities exist to mitigate the tax due?

Introduction: application of tax treaty CZ/US US company sets-up a branch office in CZ: The US company is considered to do business in the Czech Republic. The taxing rights to tax the profits realized in CZ are allocated to CZ based on the tax treaty. The US should provide an credit for tax paid in CZ US sets-up a company in CZ: The CZ company is a separate CZ tax payer of which the US is the shareholder. The US cannot tax the profits of this company. The US are able to tax dividend or royalty income paid by the Czech corporation the US as income.

Re 1: Tax consequences corporation Corporate income tax (CIT) due in CZ: Net result US$ 7,000,000 License fee US$ 2,000,000 – Profit before tax US$ 5,000,000 CZ CIT (19%) US$ 950,000 – Profit after tax US$ 4,050,000 Withholding tax (WHT) on license fee: Licence fees are subject to WHT 10% (DTT) – credit in US Dividend withholding tax (DWT) on dividend: Dividends are subject to WHT 5% (min. 10% shares or more)

Re 2: Tax consequences partnership (subject to tax in CZ) Corporate income tax (CIT) due in CZ: Similar like corporation (profit after tax US$ 4,050,000) Withholding tax (WHT) on license fee: Licence fees are subject to WHT 10% (DTT) – credit in US Dividend withholding tax (DWT) on dividend: Dividends are subject to WHT (0 or 5%)

Tax opportunity – income tax income tax for individuals in the Czech Republic 15% only US tax residents – taxable income + credit for the tax paid in CZ Holding structures To avoid WHT for dividends – holding company in NL, Cyprus Financing Interest CZ-US taxable in US only (no WHT) Depending on equity interest in CZ deductible

Thank you for your attention Ing. Martin Felenda Schaffer & Partner s.r.o. Vodičkova 710/31, CZ-110 00 Praha 1 Tel.: +420-221 506 300 E-mail: felenda@schaffer-partner.cz http://www.schaffer-partner.cz