Irrespective of whether the tax liability arises in the Czech Republic or in some other country, the tax must be assessed and declared in the country where it originates. The same rule applies to the payment. Generally, income that is liable to tax is specified in section 22 of the Income Taxes Act – this section regulates the maximum taxation that may be imposed on income, which may be moderated by a lower tax rate or exempted completely by a double taxation agreement.
The Czech Republic is not spared from the general tendency of tax administrations from all over the globe to transfer the liability for tax to the recipients of goods or services; as a result, in certain circumstances, customers may become obliged to pay the income tax on behalf of their foreign suppliers. For example, organisers who pay remuneration to artist performing in the Czech Republic have the duty to retain and pay their income tax to local tax authorities. The legislator intentionally placed the burden of the responsibility on the domestic contracting party, because this gives the tax administration a greater level of control over the flow of revenue and makes the anti-tax evasion measures much easier to implement.
There are three basic safeguards that aim to guarantee the payment of tax by non-residents by the income payer (customer): advance tax (for the payroll tax), withholding tax and tax security.
It is advisable to keep in check the following issues:
- At the beginning, enter into a contract that specifies the remuneration
- The artist needs a confirmation that the tax has been withheld and paid to the tax administration; this confirmation/certificate will be later presented to the local tax authority in his or her tax residence so as to avoid double taxation. The tax residence certification is presented in the official language of the relevant country.
- In some instances, the artist is exempt from the withholding tax or may apply for a refund.
Since organisers are required to withhold the income tax, they do not wish to bear the associated costs and hassle as well. Consequently, organisers prefer an agreement under which the tax is deducted from the overall remuneration (gross remuneration arrangement). At the same time, artists prefer to have their remuneration settled at net amount, without any deductions (net remuneration arrangement).
If both the artist and the organiser have their tax residence in the Czech Republic, the individual taxation of the artists does not affect the overall situation of the parties.