074 Acta všfs, 1/2011, vol. 5
Assessment of Consistency of the Czech Tax Law
with European Union Law with a View to NonResidents
Taxation
Hodnocení souladnosti českého daňového práva
s právem Evropské unie se zaměřením
na zdaňování nerezidentů
karel brychta
Abstract
This paper is focused on assessment of consistency of the present Czech legal regulation
with the European Union Law with a view to taxation of tax non-residents from other EU
Member States, above all with a view to incomes from dependent activity (employment)
and function benefits and from enterprise activities and other self-employed gainful activities.
The introduction of the paper presents attributes which the Czech regulation shall
satisfy in order it could be considered as consistent with the European Union Law. These
attributes are deduced from the relevant ECJ case law. Subsequently the reader is making
acquainted with some aspect of legal regulation of taxation of Czech Republic tax nonresidents.
The attention is above all granted to the description and assessment of the
impacts of changes connected with an amendment of the Act on Income Taxes which has
implemented a new regime of taxation for some incomes of tax non-residents from EU or
EEA Member States who are at the same time tax residents of some of these States. In conclusion
it is to observe that this amendment has significantly contributed to an advance
in reaching consistency of the Czech legal regulation with the European Union Law that
has been represented in the area in question above all by the ECJ case law.
The paper was produced with the financial support of GA ČR (Czech Science Foundation)
as a part of grant-aided project No. 402/09/P469 – Development and Competitiveness of
the Czech Tax System in the Area of Taxation of Natural Persons Incomes.
Keywords
Czech act on income taxes, European Court of Justice, natural persons, non-resident,
taxation
Abstrakt
Tento příspěvek se zaměřuje na zhodnocení souladnosti současné české právní úpravy
zdaňování daňových nerezidentů z jiných členských států EU s právem Evropské unie a to
zejména pro příjmy ze závislé činnosti a funkčních požitků a příjmy z podnikání a jiné
samostatně výdělečné činnosti. V samotném úvodu jsou prezentovány atributy, které by
075Acta všfs, 1/2011, vol. 5
měla tuzemská úprava splňovat, aby bylo možné ji považovat za souladnou s právem Evropské
unie. Uvedené atributy jsou odvozeny od směrodatné judikatury ESD. Následně
jsou v základních rysech přiblíženy vybrané aspekty zdaňování daňových nerezidentů
České republiky. Největší pozornost je věnována popisu a  zhodnocení dopadů změn
v souvislosti s novelou zákona o daních příjmů, kterou byl implementován nový režim
zdaňování některých příjmů daňových nerezidentů z členských států EU a států EHP, kteří
jsou zároveň daňovými rezidenty některého z těchto států. Závěrem lze konstatovat, že
tato novela významně přispěla k dosažení větší souladnosti české právní úpravy s právem
Evropské unie, které je v předmětné oblasti prezentováno především judikaturou ESD.
Příspěvek vznikl za finanční podpory GA ČR jako dílčí výstup grantového projektu
č. 402/09/P469 - Vývoj a konkurenceschopnost českého daňového systému z pohledu
zdanění příjmů fyzických osob.
Klíčová slova
český zákon o  daních z  příjmů, Evropský soudní dvůr, fyzické osoby, nerezident,
zdaňování
JEL classification
H24, H25, K34, P29
Introduction
Act No. 586/1992 Coll., on Income Taxes, as amended (hereinafter referred to as AIT) is
the basic material-law standard regulating the taxation of tax non-residents in the Czech
Republic. This act became effective on 01 January 1993 along with the foundation of the
independent Czech Republic (hereinafter referred to as CR). Since AIT became effective, it
has undergone a number of larger or smaller changes which also dealt with the issue of
taxation of incomes of tax non-residents from sources in the CR.
The issues of taxation of tax non-residents are affected significantly also by the Conventions
for Avoidance of Double Taxation (hereinafter referred to as CADT), the aim of which is to
remove or eliminate international double taxation.The Czech Republic has currently over 70
such contracts concluded (Ministerstvo financí ČR, 2009) [Ministry of Finance CR]. In this connection
it is useful to mention that the Czech Republic has concluded CADT with all Member
States of the European Union (hereinafter referred to as EU).The application priority of CADT
as international conventions does not only arise from AIT (Section 37), but directly from the
supreme legal force standard, namely from Article 10 of Constitutional Act No. 1/1993 Coll.,
Constitution of the Czech Republic, as amended. In this respect there is a question of the
compliance of these conventions with the Community Law (at present with the European
Union Law)1
, which is another basic source of law in the Czech Republic. This issue was dealt
with by a group of experts who have come to a conclusion that the situation in this respect is
quite complicated with regard to the large number of conventions, which actually represents
1	 Since the European Union acquired legal personality by becoming the Lisboan Treaty valid, we now speak
of the European Union Law instead of the Community Law.
076 Acta všfs, 1/2011, vol. 5
great obstructions and difficulties for taxpayers when fulfilling their basic freedoms arising
from the Treaty Establishing the European Community2
(European Commission, 2005).
The field of regulating direct taxes is, in particular, an expression of the sovereignty of
individual Member States which have retained a larger rate of autonomy in this field. This,
however, does not mean that the regulation in this area may be arbitrary. It is beyond any
doubts that despite of the missing explicit regulation of taxation of incomes of natural
persons adopted at the level of the European Community (now at the level of the European
Union), to which, for example, Meussen refers (2004, p. 158), it is necessary to emend
also this field in a certain way. The decisive role in this respect is played by the European
Court of Justice (hereinafter referred to as ECJ), which plays the role of the so-called indirect
harmonization (Široký, 2009, p. 27). The ECJ is an authority which ensures that when
interpreting and applying the Treaty3
, which in the Czech Republic as a Member State has
priority to the national regulation, is observed.
The aim of this paper is to assess the compliance of the Czech current regulation (according
to the state valid and operative as of 01 December 2009) in taxation of tax nonresidents
from other EU Member States with a view to natural person and, in particular
to incomes from dependent activity (employment) and function befits (Section 6 of AIT)
and to incomes from enterprise and other self-employed gainful activities (Section 7 of
AIT). Special attention is paid to an important amendment which substantially modifies
the system of taxation of incomes acquired by tax non-residents from EU and having their
source in the Czech Republic (Act No. 216/2009 Coll.).
The article has the following structure. The next chapter presents attributes which the
Czech regulation shall satisfy in order it could be considered as consistent with the European
Union Law. These attributes are deduced from the decisive ECJ case law represented
by chosen ECJ rulings. The next chapter describes the system of taxation of tax non-residents
in the CR. Then the readers are acquainted with the relevant provisions of Act No.
216/2009 Coll., which have significantly corrected the system of taxation of the selected
types of incomes gained from sources in the CR by tax residents of other Member States
of the European Union (EU) and of the States of the European Economic Area (hereinafter
referred to as EEA4
). The impact of changes introduced by the above-mentioned amendment
of AIT is presented on a model example for the mentioned group of taxpayers.
The final chapter assesses the compliance of the current Czech legal regulation with the
European Union Law or more precisely with the selected ECJ case law, which is, due to
2	 Since the Lisbon Treaty became valid on 01 December 2009 the Treaty establishing the European
Community becomes the Treaty on the Functioning of the European Union.
Note: * Due to the fact that on the date of finishing this paper there was not available consolidated version
of the Treaty on European Union and Treaty on Functioning of the European Union as amended by the
latest version of the Lisbon Treaty, a version available in the Official Journal of the European Union 2008/C
115 was used.
3	 It used to be regulated by Article 220 et seq. of the Treaty establishing the European Community; since
becoming the Lisbon Treaty effective the functioning and role of the ECJ is newly regulated by Article 19 of
the Treaty on the European Union.
4	 The EEA includes, on top of the European Union Member States, also Iceland, Liechtenstein and Norway.
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an absence of a binding legal regulation at the level of the European Union, a standard
guideline for the issue in question.
1	 Attributes of Consistency with European Union Law
At the very beginning we start with the definition of tax residents and non-residents according
to AIT. As to the natural persons is concerned, the definition is provided in the
Section 2 of AIT. Tax non-residents (in the words of AIT: a person having a tax liability
related only to incomes from sources in the territory of the Czech Republic) are those
whose permanent residence is not in the CR and who usually do not stay in the CR or those
specified so by an international convention. The latter has a relation particularly to the
existing CADTs and their Article 4 designated as Resident or in older conventions as Tax
domicile. This article of the CADT determines the basic general criteria of tax residence5
,
but also it prevents that a taxpayer is regarded as a tax resident in both respective contracting
States. If such a situation happened and according to both national regulations
the taxpayer was regarded as a tax resident, owing to the application of criteria set as
a standard in Article 4 of the respective CADT, only one of the States will be determined
as the State of tax residence while in the other State the taxpayer’s status will be the status
of tax non-resident.
Apart from that, Section 2 paragraph 3 of AIT contains a special regime of tax non-residence.
It is a natural exception, or better to say exceptions. If a taxpayer only stays in
the Czech Republic for the purpose of a study or treatment, he is regarded as a tax nonresident
and his tax liability relates only to incomes from sources in the CR. Individual
criteria are detailed in both Section 2 of the AIT and the Instruction D-300 for the uniform
procedure in applying some provisions of the AIT.
The European Union Law in this respect, i. e. in setting of tax residency criteria, plays no
role so that there is given a discretion for the Member States limited by the general criteria
stated in relevant concluded CADT. On the contrary the European Union Law is affecting
other aspects relating taxation of tax non-residents in case they are at the same time nationals
of, and reside in, an EU Member State.
1.1	 ECJ Case Law
Since 1 May 2004, the Czech Republic has been a Member of the European Union, which is
built on a certain policy the aim of which is the actual realization of four basic freedoms –
a free movement of goods, people, services, and capital. This fact takes effect substantially
in the requirements placed on legislative regulations not only at the level of the European
Union (previously European Community), but also it affects directly national legislations of
the Member States because by their accession the Member States committed themselves
to adhere to acquis communautaire. Even if there are no directly explicit provisions affecting
the regulation of approach of the Member States to tax non-residents from other
5	 It usually covers criteria such as place of residence, permanent stay, a place of management, or any other
similar criterion. Further specifications (concretizations) of the criteria are given by domestic regulation of
the contractual States (i. e. States which concluded the CADT).
078 Acta všfs, 1/2011, vol. 5
Member States in the area of taxation of incomes from dependent activity (employment)
and function benefits and from enterprise and other self-employed gainful activities, it
does not mean that this area is not affected by the European Union Law. The proof of this
is a number of judgments of the ECJ which deal with the area in question. Some rulings
of the ECJ in relation to the area in question are stated below.
1.1.1 Case Schumacker
In the case Schumacker (Case C-279/93) the ECJ has observed that, “Although direct taxation
does not as such fall within the purview of the Community, the powers retained by the
Member States must nevertheless be exercised consistently with Community law. Accordingly,
Article 486
of the Treaty must be interpreted as being capable of limiting the right of a Member
State to lay down conditions concerning the liability to taxation of a national of another Member
State and the manner in which tax is to be levied on the income received by him within its
territory, since that article does not allow a Member State, as regards the collection of direct
taxes, to treat a national of another Member State employed in the territory of the first State in
the exercise of his right of freedom of movement less favourably than one of its own nationals
in the same situation.”.
The ECJ has further more observed that, “Although Article 48 of the Treaty does not in principle
preclude the application of rules of a Member State under which a non-resident working as
an employed person in that Member State is taxed more heavily on his income than a resident
in the same employment, the position is different in a case where the non-resident receives
no significant income in the State of his residence and obtains the major part of his taxable
income from an activity performed in the State of employment, with the result that the State
of his residence is not in a position to grant him the benefits resulting from the taking into account
of his personal and family circumstances. There is no objective difference between the
situations of such a non-resident and a resident engaged in comparable employment such as
to justify different treatment as regards the taking into account for taxation purposes of the
taxpayer’ s personal and family circumstances. It follows that Article 48 of the Treaty must be
interpreted as precluding the application of rules of a Member State under which a worker who
is a national of, and resides in, another Member State and is employed in the first State is taxed
more heavily than a worker who resides in the first State and performs the same work there
when the national of the second State obtains his income entirely or almost exclusively from
the work performed in the first State and does not receive in the second State sufficient income
to be subject to taxation there in a manner enabling his personal and family circumstances
to be taken into account.”.
The ECJ has concluded that, “Article 48 of the Treaty must be interpreted as precluding legislation
of a Member State on direct taxation under which the benefit of procedures such as
annual adjustment of deductions at source in respect of wages tax and the assessment by
the administration of the tax payable on remuneration from employment is available only
to residents, thereby excluding natural persons who have no permanent residence or usual
abode on its territory but receive income there from employment.”.
6	 After amendment Article 39 of the Treaty establishing the European Community. Since becoming the Lisbon
Treaty effective Article 45 of the Treaty on Functioning of the European Union is involved.
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1.1.2 Case Gschwind
The case Gschwind (Case C-391/97) related also to the issue of tax reliefs in connection
with Article 48 of the Treaty establishing European Community. In this case the ECJ ruled
that, “Article 48(2) of the Treaty (now, after amendment, Article 39(2) EC) is to be interpreted
as not precluding the application of national legislation under which resident married couples
are granted tax benefits while, in the case of non-resident couples, such benefits are subject to
the condition that at least 90% of total income be subject to tax in that Member State, failing
which, if that percentage is not reached, income from foreign sources and not subject to tax
in that State must not exceed a certain ceiling, the possibility being thus maintained for account
to be taken of the couple’s personal and family circumstances in the State of residence.
The fact that a Member State does not grant to a non-resident certain tax benefits which it
grants to a resident is not, as a rule, discriminatory since, as regards direct taxation, those two
categories of taxpayer are not in a comparable situation. Specifically, a non-resident married
couple - one of whom works in the State of taxation in question and who may, owing to the
existence of a sufficient tax base in the State of residence, have personal and family circumstances
taken into account by its tax authorities - is not in a situation comparable to that of
a resident married couple, even if one of the spouses works in another Member State.”.
1.1.3 Case Gerritse
The case Gerritse (Case C-234/01) related to the possibility to deduct business expenses.
Hence, the ruling can also be considered as a very important one. The ECJ States in its
ruling that, “Article 59 of the Treaty (now, after amendment, Article 49 EC7
) and Article 60 of
the Treaty (now Article 50 EC8
) preclude a national provision which, as a general rule, takes
into account gross income when taxing non-residents, without deducting business expenses,
whereas residents are taxed on their net income, after deduction of those expenses.”.
At the same time the ECJ has expressed to the issue of application of definitive tax at
a uniform rate deducted at source as follows, “Article 59 of the Treaty (now, after amendment,
Article 49 EC) and Article 60 of the Treaty (now Article 50 EC) do not preclude a national
provision which, as a general rule, subjects the income of non-residents to a definitive tax at
the uniform rate of 25%, deducted at source, whilst the income of residents is taxed according
to a progressive table including a tax-free allowance, provided that the rate of 25% is not
higher than that which would actually be applied to the person concerned, in accordance with
the progressive table, in respect of net income increased by an amount corresponding to the
tax-free allowance.”.
1.2	 Summary
The author thinks that with regards to the conclusions of the ECJ it can be summarized
that the basis for reaching the compliance of domestic regulation with the European Un-
7	 Article 56 of the Treaty on Functioning of the European Union.
8	 Article 57 of the Treaty on Functioning of the European Union.
080 Acta všfs, 1/2011, vol. 5
ion Law (previously with the Community Law) with a view to the taxation of incomes9
of
Czech Republic tax non-resident from another EU Member States who is at the same time
a national of, and resides in, another EU Member State includes, in general, two basic
attributes:
To secure by law stated possibility for this group of taxpayers to deduct, in relation to1.	
the reached income, the relevant expenses provided that also the tax residents of the
CR have this possibility (the opposite approach is, according to the author’s opinion,
in conflict with the basic supporting principle of the European Union, which is the
principle of prohibition of discrimination), and
To enable this group of taxpayers from other Member States to apply, under adequate2.	
conditions, also tax reliefs (non-taxable parts of tax base, tax abatements and tax allowance)
to which, as a standard, the tax residents of the CR are entitled.
Before carrying out of the assessment of the consistency of the Czech legal regulation for
the tax area in question, there is presented a system of taxation of Czech non-residents
according to AIT in the next chapter.
2	The system of tax collection from tax non-residents
(natural persons)
The primary differences in the system of taxation of tax non-residents arise from whether
he/she is a tax resident of a contracting or non-contracting State (i.e. the State with which
the Czech Republic has or has not concluded CADT). Provided that it is a performance in
favour of a contracting State’s resident, the decisive criterion is the relevant provision of
CADT. The relevant convention may set that only one State is entitled for taxation or, conversely,
both States, i.e. the State of source (i.e. the CR) and the State of the taxpayer’s tax
residence. Before solving the method and amount of tax it is necessary to decide whether
it is possible to tax a particular income in the CR according to the respective CADT. The
following step should be an assessment whether it is an income from sources in the CR, i.e.
whether it is an income listed in the enumerating list in Section 22 paragraph 1 of the AIT,
according to which two basic categories of incomes can be identified. The first category
represents incomes that are regarded as incomes of tax non-residents from sources in the
CR regardless of from whom these incomes are gained (a classical example is incomes
from activities performed in a permanent establishment, incomes from the sale and lease
of real estate located in the CR). For this group of incomes it is not important whether they
are gained from a tax resident or a tax non-resident in the Czech Republic or from a permanent
establishment located in the Czech Republic. Conversely, incomes of non-residents
from the other category are only regarded as incomes from sources in the Czech Republic
provided that they are gained from tax residents of the Czech Republic or from permanent
establishments of tax non-residents located in the Czech Republic (e.g. licence fees).
9	 A necessary condition is that the income can be taxed in the territory of the Czech Republic according to
relevant CADT and the same time it comes under incomes stated under Section 22 paragraph 1 of ITA (for
more details see below).
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Only if CADT enables to tax a particular income of a tax non-resident and at the same time
it is an income from sources in the CR, it is possible to proceed to solving a particular tax
liability and the form of its settlement. It is obvious that when solving the relationship to
a tax non-resident of the Czech Republic from a non-contracting State, the first step, i.e.
the assessment of the relevant provisions of CADT, is omitted.
In many respects, the legal regulation of taxation of incomes of tax non-residents is based
on the decisive role of the payer – i.e. the entity that performs in favour of a tax nonresident.
Basically, we can distinguish three methods of taxation of incomes of tax nonresidents
in the CR by which they are taxed:
by a special tax rate (tax deducted at the source by the payer according to Section•	
36 of AIT),
through a tax return with the possible previous securing of tax (the obligation to file•	
a tax return of natural person incomes is regulated in Section 38g of the AIT, and the
tax securing institute then in Section § 38e of the AIT),
through withheld tax advances in the case of incomes from employment and function•	
benefits (specified in Section 38h of the AIT).
Ad a) Taxation by a special tax rate
Taxation by a special tax rate is one of the frequently used institutes in relation to the
tax liability of a taxpayer (tax non-resident) for incomes from sources in the CR. It is the
payer’s obligation – i.e. the entity that performs in favour of a tax non-resident – to withhold
(deduct) and transfer withheld tax to tax administrator. In AIT, the withholding tax
rate is currently uniform, except for one small exception, and it is 15%. The mentioned
exception is the income from rent in the case of financial leasing with the subsequent
purchase of the leased object for which the rate of 5% is set. However, the application
preference of CADT must be followed as it may set a different rate. It will be applied only
if the rate is lower than that stated in AIT. This fact is an expression of the principle that
a taxpayer must not be subjected to a higher taxation than that stated in AIT. It must be
noted that the tax rates stated in CADT are usually lower than those set in AIT. At this
point the author notes that a taxpayer may make use of the advantages arising from the
respective convention only if he/she is a resident of the respective contracting State and
also he/she is the so-called real owner of income (i.e. he does not act only as an agent,
etc.).
Basically, the withholding tax amount is calculated from gross income. The general rule
is that by withholding this tax (i.e. the tax according to Section 36 of the AIT), the taxpay-
er’s tax liability in relation to that income is assumed to be fulfilled. There are exceptions
from this general rule, some of them were introduced in relation to tax non-residents in
Act No. 216/2009 Coll. It implemented a new provision into Section 36 of AIT (namely its
paragraph 7), which offers tax non-residents of the Czech Republic who are at the same
time tax residents of some of the EU or EEA Member States a more advantageous tax
regime (for this issue see a separate relating chapter).
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Ad b) Taxation through a tax return with a possible previous securing of tax
From the view of the tax resident’s obligation to file a tax return of natural person income,
AIT does not distinguish between the taxpayer’s tax status; it is based on uniformly stated
conditions which are provided in Section 38g of the AIT. Under the conditions stated by
law (see Section 38e of the AIT) the filing of a tax return is preceded by the securing of tax.
The purpose of this institute is, as the name suggests, to secure the tax in relation to tax
non-residents who usually do not have such close relations to the State of the source of
the income. The obligation to secure tax is the obligation on the part of the income payer.
The basic rate of tax securing is 10%. There are special tax rates for special cases. The rate
of tax securing of 1% will be used for incomes from the sale of investment instruments
and for incomes from payments of claims acquired by assignment. With regard to the
above-mentioned focus of the contribution on the taxation of incomes of natural persons,
it should be added that there is another tax securing rate, in the amount of the natural person
income tax rate (i.e. in the amount according to Section 16 of the AIT), which is applied
from the share in the tax base of the partner of a co-partnership or the general partner of
a special limited partnership who is a natural person (tax non-resident of the CR).
However, a  large number of incomes of tax non-residents are excluded from
the securing of tax. They include the following types of incomes:
Incomes of tax non-residents which are subject to a special tax rate (a logical provi-•	
sion, taxation has been made, but in a different form),
Incomes from employment and function benefits, when the tax advance is withheld•	
according to Section 38h of the AIT,
Payments for goods or services made in a  retail shop where the vendor is a  tax•	
non-resident,
Payment of rent paid by natural persons for residential rooms used for living and•	
related activities, and
Payment in favour of tax residents of the EU or EEA Member States.•	
The obligation to secure tax is the obligation of the payer, i.e. the entity that performs in
favour of a tax non-resident. As a standard, this amount acts as a tax advance, i.e. if a tax
non-resident of the CR files a tax return, he will credit the withheld amount of tax securing
against his tax liability. So it is the taxpayer’s interest to file a tax return. The advantages of
filing a tax return in this case are quite obvious for a number of cases as the tax securing
is again made from the gross amount.
In the filed tax return, the taxpayer may apply the respective tax expenses according to
AIT and at the same time he credits the amount of tax securing against the final tax liability.
Besides, it must be added that in accordance with Section 35ba of the AIT, a tax
non-resident may apply the basic tax relief, without fulfilling any condition, namely a tax
abatement per taxpayer is concerned, which is CZK 24,840 for the year 2009.
Even if a tax non-resident does not fulfil his obligation to file a tax return (which, however,
very often causes a breach of Section 38g of the AIT), Section 38e of the AIT solves also this
situation. In such case the tax administrator is entitled to consider the withheld amount
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of tax securing to be the fulfilled tax liability. However, the latter cannot be interpreted as
a possibility not to file a tax return.
Ad c) Through withheld tax advances in the case of incomes from dependent
activity (employment) and function benefits
There is a special regulation for this type of income, i.e. income from dependent activity
(employment) and function benefits (see Section 6 of the AIT). The obligation to withhold
tax advances is again the obligation on the part of the payer – i.e. in this case the employer.
Within determining the amount of the withheld tax advances, the employer may take only
two basic tax abatements in calculation – the tax abatement per taxpayer (Section 35ba
paragraph 1 letter a) of the AIT) and the abatement per student (Section 35ba paragraph
1 letter f) of the AIT). In the case of the latter abatement, it is, however, necessary to fulfil
what is set in AIT and for this issue related acts, i.e. the taxpayer is, briefly speaking, a student
continuously preparing for the future occupation by a study or prescribed training.
2.1	Tax return and the possibility to optimize the tax burden of a tax
non-resident (natural person)
In general, tax residents and tax non-residents are not quite equal in relation to
the possibility of tax optimization, nor in one of the three basic means of optimization of
the tax liability of natural persons, for which the author takes:
non-taxable parts of tax base (Section 15 of the AIT),•	
tax abatements (Section 35ba of the AIT), and•	
tax allowance per child (Section 35c of the AIT).•	
Some of the above-mentioned means of optimization of the tax liability of a tax non-resident
(natural person) may be applied under identical conditions existing for tax residents.
The so-called abatement per taxpayer (Section 35ba paragraph 1 letter a) of the AIT) has
a specific position as it may be applied by both tax residents and tax non-residents automatically,
without fulfilling any other condition. To apply other tax abatements, tax allowance
per child and non-taxable parts, fulfilling the conditions set by law is required,
whether by tax residents or tax non-residents. In regulation of tax reliefs there is obvious
the law-maker’s intent to encourage some activities of taxpayers (gifts for a certain type of
purpose; additional pension insurance, etc.), as well as to take the personal status of a taxpayer
into account (abatement due to taxpayer’s invalidity, due to the taxpayer’s studies,
etc.). These facts on which tax allowances are based must be of course proven in the
manner set by law.
Nonetheless, in relation to tax non-residents, the permission of most of the abatements,
a tax allowance per child and one non-taxable part of tax base is conditioned by a uniformly
set condition which is that the sum of incomes of a tax non-resident from sources
in the CR amounts at least 90% of all of his entire incomes. As a rule, the incomes from
sources in the CR do not include those that are exempted or are subject to a special tax
rate (tax deducted at source).
084 Acta všfs, 1/2011, vol. 5
A summary of the relevant information is shown in the following two tables (Table 1 and
Table 2) in which the symbol “ü” means that the application of the particular tax item is
allowed to tax non-residents (natural persons) under the same conditions as to tax residents,
while the symbol“90%”designates the situation when the application is bound by
fulfilling the condition of “90% of incomes from sources in the CR”.
Table 1: Non-taxable parts of tax base
Non-taxable part of tax base Year 2009
Gifts “ü”
Additional pension insurance “ü”
Private life insurance “ü”
Payments for examinations verifying further education “ü”
Interest on building saving credit and mortgage credit “90%”
Source: Own elaboration.
As regards non-taxable parts of tax base, it is evident at first sight that prevailing are items
whose application possibility is the same for both tax residents and tax non-residents. But
it must be taken into account that the condition of application is mostly bound to fulfilling
of other conditions set by Czech Acts.
Table 2: Tax abatements and tax relief
Tax abatements and tax relief Year 2009
Per taxpayer (basic abatement) “ü”
Taxpayer is a student “ü”
Per spouse whose income does not reach the amount set by AIT “90%”
Taxpayer’s invalidity “90%”
Taxpayer is a ZTP-P* card holder “90%”
Tax relief per child “90%”
* Especially seriously disabled with accompaniment
Source: Own elaboration.
As regards tax abatements and tax allowance per children, the proportion is quite opposite.
The prevailing part is made up of items the application of which is conditioned
by reaching at least 90% of taxpayer’s income from sources in the CR. In relation to the
application of items designated with the specification “90%”, it can be stated that their
application is basically enabled to a taxpayer (who is a tax non-resident) only through
a tax return, which arises from the wording of Section 38g paragraph 2 of the AIT, which
sets that if a tax non-resident applies abatements to which the “90% rule” is applied and/
or a tax allowance per child and/or non-taxable part of tax base in the form of interest
on credit (see above), he/she may do so only in the form of a filed tax return. A relatively
085Acta všfs, 1/2011, vol. 5
specific situation is if a tax resident is a taxpayer gaining incomes from employment and
function benefits. However, with regard to the extensiveness of this issue and the focus
of this contribution, it is not dealt with here in details.
The above-mentioned conditions for the application of non-taxable parts of tax base, tax
abatements and tax allowance per child have remained unchanged also after becoming
of the Act No. 216/2009 Coll. effective. This act which substantially modifies the system
of taxation of tax non-residents who are tax residents of the EU or EEA Member States
can be considered as of great importance in relation to taxation of Czech Republic tax
non-residents.
3	 Act No. 216/2009 Coll.
Act No. 216/2009 Coll. became effective on 20 July 2009 and, as it arises from transitional
and final provisions of this Act, it will be used for the first time for the tax period of the year
200910
. Due to this amendment, the regime of taxation of incomes of tax non-residents
of the CR, which is subject to a deduction (withholding) of the tax at the source, is split
into two basic variants depending on whether taxpayer is or is not a tax resident of the
EU or EEA Member State. For the specified types of incomes, the taxpayer (tax resident
of the EU or EEA Member State) has now the possibility to use a more favourable regime
of taxation.
The payer’s obligation to deduct and transfer (pay) the tax withheld (deducted) at the
source to the tax administrator remains unchanged. However, the category of taxpayers
specified above has now the possibility to use the provision of Section 36 paragraph
7 of the AIT, which sets the following: “If taxpayers stated in Section 2, paragraph 3, and
Section 17, paragraph 4, who are tax residents of a Member State of the European Union or
other States that make up the European Economic Area, include incomes stated in Section 22,
paragraph 1, letters c), f) or g), points 1, 2, 4, 5, 6 or 12 in their tax return, the withheld tax will
be credited to their total tax liability relating to incomes from sources in the Czech Republic,
for which they file a tax return in the Czech Republic. If the withheld tax or its part cannot be
credited to their total tax liability because the taxpayer has a tax liability amounting to zero
or if he has reported a tax loss and/or his total tax liability is lower than the withheld tax, a tax
overpaid will occur in the amount of tax liability that cannot be credited. If the taxpayer does
not include incomes stated in Section 22, paragraph. 1, letters c), f) or g), points 1, 2, 4, 5, 6 or
12 in the tax return until the end of the time-limit set by a special legal regulation, Section 38e
paragraph 7 will be applied similarly.”.
Before analysing the provision, it must be pointed out to the importance of the last sentence
which has been mentioned above in a little different connection. This provision
must be interpreted in such a way that if a taxpayer does not file a tax return within the
time-limit set by Act No. 337/1992 Coll., on the Administration of Taxes and Charges, as
10	 It must be noted that in the explanatory report to this Act there is paid no attention to changes in relation
to the taxation of tax non-residents (tax residents of other Member States of the EU or EEA) – no reasons are
given for the changes made. The attention of the authors of the explanatory report is focused on the new
regime of tax amortization.
086 Acta všfs, 1/2011, vol. 5
amended, the withheld tax is regarded as a settled tax liability. Such a procedure of a tax
non-resident would be, however, in conflict with his interests as within the filed tax return
he/she may apply both the respective expenses and the basic tax abatement amounting
to CZK 24,840.
For a better orientation, individual incomes listed in Section 36 paragraph 7 of the AIT,
i.e. incomes for which the new regime has been introduced, are specified in the table
below (Table 3). Along with them, the table shows whether it is a type I income (regarded
as income of a tax non-resident regardless of from whom the tax non-resident gains the
income) or a type II income (regarded as income of a tax non-resident of the CR only if
gained from a tax resident of the CR or a permanent establishment in the CR). There is also
specified a relevant Article of CADT because respective CADT is another relevant source
of law affecting the way of the taxation of these incomes (see above).
A significant fact also in the case of this regime introduced by the Act No. 216/2009 Coll.
is that the Czech Republic has concluded CADT with all Member States of the EU and EEA,
except for Liechtenstein. This fact is apparent particularly in relation to incomes according
to Section 22 paragraph 1 letter c) and letter f) point 1 of the AIT, as these incomes of tax
non-residents from sources in the CR are generally subject to taxation only if a permanent
establishment come into being here – not until the origination of a permanent establishment
in the territory of the Czech Republic. However, the taxation of incomes of a permanent
establishment is subject to a quite different taxation regime (see Section 22 paragraph
1 letter a) of the AIT) and its incomes naturally are not included in the list in Section 36
paragraph 7 of the AIT. So in this respect, i.e. in relation to given incomes, at first sight the
existence of this regime may seem unnecessary. On the other hand, it must be taken into
account that the above mentioned is an expression of the law-maker’s carefulness in case
a specific stipulation of a CADT deviates from this general regulation and also due to the
fact that the CR has not concluded CADT with Liechtenstein.
The fact that the CR has concluded CADTs with all the Member States of the EU and with
Iceland and Norway (as the States of the EEA) has an effect on the amount of the withholding
tax rate which may be withheld by the respective payer. The CADT usually specifies the
maximum tax rate for certain types of incomes (e.g. licence fees). At this point the author
reminds that if CADT sets a higher rate than AIT (which is a rather hypothetical situation),
the lower rate in AIT will be applied. If a taxpayer errs and withholds the tax rate according
to AIT which is higher than that set in the relevant CADT, then the tax that may be
credited subsequently in the tax return is the tax set in the relevant CADT. This solution
is also valid for the situation when the so-called refunding system is applied in relation
to the withheld tax. This is the situation when the payer withholds tax according to the
national regulation and the taxpayer has the possibility to apply for the refund of the tax
overpaid (i.e. the tax amount above the limit set in the CADT), if any.
087Acta všfs, 1/2011, vol. 5
Table 3: Incomes that are liable to a new tax regime
Provision of
Section 22, AIT
Income type
Corresponding
CADT Article11
for
the given type of
income
TypeI
paragraph
1 letter c)
Incomes from services except for carrying out
construction and erection projects, incomes from
marketing, technical or other consultations, managing
and agency activities and similar activities in
the Czech Republic,
Article 5
– Permanent
Establishment
Article 7
– Business
Profits
paragraph
1 letter f)
1. from independent activities, for example, of an
architect, physician, engineer, lawyer, scientist,
teacher, artist, tax or accounting adviser, and similar
professions, carried out in the Czech Republic,
2. from personally performed activities in the
Czech Republic or here evaluated of a publicly
performing artist, sportsman, artiste and co-performing
persons, regardless of who receives these
incomes and from what legal relationship,
Article 17
– Artistes and
sportsmen
TypeII
letter g)
1. compensations for granting the right for using or
for using an industrial ownership object, computer
programs (software), production and technical and
other economically usable knowledge (know-how),
Article 12
- Royalties
2. compensations for granting the right for using or
for using a copyright or a right similar to copyright,
4. interest and other revenues on granted credits
and loans and similar incomes gained from other
business relations, from deposits and from investment
instruments according to a special legal
regulation regulating the capital market business,
Article 11
– Interest
5. incomes from using a movable or its part in the
Czech Republic,
Article 12
- Royalties
6. remunerations of the Members of statutory bodies
and other bodies of legal entities,
Article 16
– Director´s fee
12. sanctions from liability relations,
CADT Article1111
for the given type of income
11	 * The model OECD convention has been chosen with regard to the fact that conventions concluded
with Member States are based on this model and even if there are some differences (e. g. an absence
of a special regulation for some type of income), the existing CADT are basically very similar.
** Due to the wording of the respective CADT and AIT, some of the incomes may fall under other than the
cited articles (e.g. some conventions have a special provision for so-called independent occupations, e. g.
CADT with Italy). The wording of a specific CADT and the relevant provision of AIT are decisive.
Source: own elaboration.
088 Acta všfs, 1/2011, vol. 5
3.1	 Advantage of the new regime
In spite of the fact that the explanatory report to Act No. 216/2009 Coll. does not contain
any reasoning of adoption of this regulation, the author thinks that this regulation has
been adopted to reach greater compliance with the Community Law. Before introducing
the new regime relating to tax residents of the EU and EEA Member States, this group was
strongly disadvantaged compared to tax residents as it could not apply related expenses
in a number of cases (the tax liability was assumed to be fully settled by withholding the
tax at the source by the payer). To demonstrate the advantage for tax non-residents who
are at the same time tax residents of an EU Member State, a model example is further
considered. The model example compares the taxation of the selected type of income,
included under new Section 36 paragraph 7, according to the regulation until 19 July 2009
and from 20 July 200912
.
Example:
The taxpayer is a tax resident of a Member State of the EU and he has gained an income
from sources in the CR as a publicly performing artist. The respective CADT enables to tax
this income in the CR.
According to the original regulation (designated as the “old” taxation regime),1.	
the payer would have withheld a withholding tax from the gross income in the amount
of 15% and the taxpayer’s tax liability would have been fully settled in this way.
According to the new regulation (designated as the“new”taxation regime) the payer2.	
will also withhold a withholding tax at the source from the gross income. However,
this income in the gross amount is included by the taxpayer in his tax return where
the respective expenses according to AIT may be subtracted from it and the withheld
tax amount may be credited to the final tax liability. Of course only expenses eligible
according to AIT may be applied.
The model of determining an effective tax rate from which the graphs below (Diagram 1
and Diagram 2) result is based on the following starting points and simplifications:
The basic tax abatement per taxpayer is applied in the amount of CZK 24,840 (Section•	
35ba paragraph 1 letter a) of the AIT), to which the taxpayer (including a tax nonresident)
is entitled without having to fulfil any other conditions;
other forms of tax reliefs (tax abatements, tax allowance per child or non-taxable•	
parts of tax base) are not considered;
expenses amounting to CZK 0.00 are considered, i.e. the tax base is identical to the•	
gross income from which the tax was withheld;
the range of the gained annual tax base (income) is considered from CZK 96,000 to•	
CZK 1,800,000;
the effective tax rate (ETR) is given as the ratio of the final tax liability to•	
the tax base.
12	 Author reminds already given fact that the new regime of taxation can be used already for the year 2009.
089Acta všfs, 1/2011, vol. 5
Diagram 1: Comparison of the effective tax rate for the “old” and “new” tax regime
Source: Own elaboration
The diagram above shows a clear advantage of the new tax regime for tax non-residents.
However, this consideration does not include possible costs of tax non-residents connected
with filing a tax return and other administrative costs. This advantage for the tax
period is given particularly by a high amount of the basic tax abatement per taxpayer.
The effective tax rate has a progressive character for the “new” tax regime, which is given
by the fact that the relative percentage of this abatement decreases with the growing
income. Even if we consider the situation when a taxpayer does not deduct any relevant
expenses (i.e. the gross income is equal to the tax base itself), it happens that up to the
gross income of CZK 165,600 the final tax liability of a tax non-resident is zero. The following
diagram (Diagram 2) represents the amount of tax savings of the “new” regime
compared to the “old” one.
Diagram 2: Relative tax savings resulting from the newly introduced regime
Source: Own elaboration.
0%
2%
4%
6%
8%
10%
12%
14%
16%Effectivetaxrate
Total tax base (in thousands of CZK)
New tax
regime
Old tax
regime
0%
2%
4%
6%
8%
10%
12%
14%
16%
Relativetaxsavings
Total tax base (in thousands of CZK)
090 Acta všfs, 1/2011, vol. 5
In conclusion, it may be stated that the regime according to Section 36 paragraph 7 of the
AIT for tax residents of the EU and EEA Member States for the tax period of 2009 for whom
it will be used for the first time is advantageous. If we extend these considerations by taking
the time factor into account, then it is true that the advantages for a tax non-resident
will follow from this tax regime with a certain time delay. It must be taken into account
that the tax withholding by the payer will be also realized – in this there is no difference to
the “old”tax regime. So the taxpayer will only be able to dispose of the net income (gross
income minus the withheld tax). He will be able to use the advantages of the newly introduced
regime only within the filed tax return where the withheld tax amount will be
credited to the final tax liability.
Conclusion
To sum it up one can observe that even the area of direct taxation of incomes from employment
and from enterprise and other self-employed gainful activities is affected by
the European Union Law despite the fact that there is no regulation or directive for this
issue. In this respect, the sovereignty of a Member State to set its own regulation has been
broken on the part of European Union13
with the aim to ensure factual fulfilment of basic
freedoms that represent headstones for EU functioning.
Author thinks that with regards to the conclusions of the ECJ it can be summarized that
the basis for reaching the compliance of the taxation of a tax non-resident who is at the
same time a national of, and resides in, another EU Member State includes two basic
attributes:
to secure the possibility for this group of taxpayers to deduct, in relation to1.	
the reached income in the territory of the Czech Republic, the relevant expenses
provided that also the tax residents of the CR have this possibility and
to enable this group of taxpayers from other Member States to apply, under adequate2.	
conditions, also tax reliefs (non-taxable parts of tax base, tax abatements and tax allowance)
to which, as a standard, the tax residents of the CR are entitled.
With regard to what has been mentioned above, author thinks that in many respects AIT
at present fulfils both of the mentioned attributes. Also the changes brought by Act No.
216/2009 Coll. have positively contributed to this. When speaking of Act No. 216/2009
Coll. it is to stress that this amendment to AIT brought positive changes for a tax resident
of an EU Member State. In this respect we can observe with high probability that most of
tax residents of EU Member States are those who are at the same time nationals of some
of EU Member States. However, there still can be a group of taxpayers who are nationals
of some of EU Member States but who are not at the same time tax residents of some of
an EU Member States. Such taxpayers, according to the Czech valid and effective regula-
13	 The relevant ECJ case law which represents a source of law for taxation of aforesaid incomes relates to cases,
where discrimination between a national of the State of the source of respective income and a national from
another Member State occurs. At the same time it is necessary to observe that it does not mean total equality
between nationals of different member States.
091Acta všfs, 1/2011, vol. 5
tion, will not be able to use the new regime of taxation implemented by Section 36 Para
7 of AIT.
In relation to the other above-mentioned points, it is useful to note that with effect since
01 May 2004 (the CR’s joining the EU), the so-called “90% rule” has been applied in AIT,
i.e. the possibility to apply other tax reliefs by tax non-residents14
provided that the summary
of their incomes from sources in the Czech Republic according to Section 22 of the
AIT amounts at least 90% of their entire incomes. Concerning the tax residents of another
Member State the AIT also states, with effect since 01 January 2004, the exclusion of securing
the tax according to Section 38e of AIT in a case a payer performs on behalf of a tax
resident of an EU or an EEA Member State.
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Contact address / Kontaktní adresa
Ing. Karel Brychta, Ph.D.
Dep. of Finance
Brno University of Technology
Faculty of Business and Management
(brychta@fbm.vutbr.cz)