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October 20, 2020
Czech Government proceeds with legislation on Digital Services Tax
The Czech Republic (CR) has announced it will proceed with its plan to introduce a Digital Services Tax (DST).
The Czech Government decided to introduce a domestic DST following the delay in a unified approach at both the global (Organisation for Economic Co-operation and Development) and regional level (European Union). The Czech DST is expected to apply temporarily, until an international approach is implemented.
The draft law was approved by the Government and is currently being discussed in the second reading in the Chamber of Deputies (the legislative process has not been completed and the legislation may still be amended).1
Czech tax professionals are debating whether the proposed tax could in fact be levied in the case of entities from countries that have concluded double tax treaties with the Czech Republic. Indirect taxes normally do not fall within the scope of such treaties.
Under the proposed legislation, the following activities would be subject to the DST:
The payer of the tax should generally be a member entity of a group (or a standalone entity) that has provided a taxable service rendered during the base period, if the following four thresholds are met:
The draft law specifies allocation keys – generally derived from payments by Czech users or ratio of activities of Czech users compared to activities of all users – based on which the remunerations attributable to the CR should be calculated.
The proposed tax rate is 7% (there is an amendment to reduce the rate to 5%).
In line with the proposed amendment the DST would come into effect on 1 January 2021 (the original intent was mid-2020).
For the assessment as to whether the proposed tax could in fact be levied in the case of entities from countries that have concluded double tax treaties with the CR, it is important to determine whether the proposed tax qualifies as a direct (akin to income tax) or indirect tax. The Ministry of Finance states in the Explanatory Memorandum that the tax is indirect (regardless of profit and income). As a consequence, double tax treaties will have no impact on the proposed tax. The answer to this question may still be open to interpretation.
1. You can monitor the legislative process here (in Czech): https://www.psp.cz/sqw/historie.sqw?o=8&t=658.
For additional information with respect to this Alert, please contact the following:
Ernst & Young, s.r.o., Prague