A distribution of shares of profit disproportionate to the relevant share percentage of ownership in the registered capital of a corporation is subject to the standard tax regime and, thus, to withholding tax at a rate of 15%, according to a discussion paper authored in part by the tax administration.
The Coordination Committee of the General Financial Directorate and the Chamber of Tax Advisors addressed the taxation of profit distributions in situations when members of a limited liability company or shareholders of a joint-stock company receive profit share distributions that are disproportionate to their shares in the registered capital.
The Czech Republic’s Corporations Act allows for flexibility in determining the amount of profit shares. Usually, members of limited liability companies receive profit shares in proportion to their shares in the registered capital, unless a memorandum of association provides otherwise. The same applies to shareholders of joint-stock companies, who are generally entitled to profit shares proportionate to their shares in the registered capital, unless the articles of association provide otherwise for a specific class of shares.
The discussion paper aimed to clarify whether the payment of a share in profit disproportionate to the share in the registered capital between Czech tax residents is subject to a regular tax regime (15% withholding tax) with potential exemption from tax upon the payment of profit shares to the parent company. Another issue was whether such a share in profit may lead to the generation of other taxable income by the entity receiving the profit share.
The discussion paper concludes that the distribution of a share of profit that is disproportionate to the relevant ownership share in the registered capital of a corporation, when made in compliance with the Corporations Act, is subject to the standard tax regime—withholding tax at a rate of 15%. The exemption of profit share distribution paid out to the parent company may also be applied. It was also concluded that members or shareholders who receive shares in profit greater than their respective shares in the registered capital do not generate other taxable income.
Read an October 2017 report prepared by the KPMG member firm in the Czech Republic
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