EC Requests End To Discriminatory Czech Republic Tax Provisions

by Ulrika Lomas, Tax-News.com, Brussels

23 February 2009

The European Commission has formally requested that the Czech Republic change its tax provisions, which tax certain non-residents' income of Czech origin on a gross basis, whereas residents may deduct expenses related to the same income.

In a release the Commission stated that it considers the prescribed tax provisions to be incompatible with the EC Treaty, which guarantees the freedom to provide services and the free movement of capital. The Commission has therefore sent a request in the form of a reasoned opinion to the Czech Republic (second step of the infringement procedure provided for in Article 226 of the EC Treaty). If there is no satisfactory reaction to the reasoned opinion within two months, the Commission may decide to refer the matter to the Court of Justice of the European Communities.

According to the Czech rules, the tax on certain types of income of legal persons and individuals resident in another EU Member State or EEA/EFTA state is assessed on a gross basis, while the tax on the same kind of income earned by Czech residents is assessed on a net basis. This concerns, in particular, income from rewards and remuneration paid to independent professions, royalties, lease of movable property and from the provision of services, consultancy, advisory, managing, intermediary and other activities.

The Commission is of the opinion that these rules may prevent non-residential taxpayers from providing services or making investments in the Czech Republic and thus restrict the freedom to provide services and the free movement of capital. The Czech Republic thus fails to fulfil its obligations under Articles 49 and 56 of the EC Treaty and Articles 36 and 40 of the EEA Agreement.

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