Tax residence

How the Czech Tax System Works: A Basic Guide for Foreigners

A tax resident of the Czech Republic has unlimited tax liability, meaning they are required to tax their worldwide income in the Czech Republic, regardless of the country in which it was earned. A tax non-resident has only limited tax liability and is therefore taxed in the Czech Republic only on income originating from sources within the Czech Republic.

Correctly determining this status is crucial not only for income taxation but also because non-residents may have limited claims to tax deductions and credits unless they meet strict conditions (for example, earning at least 90% of their worldwide income from sources in the Czech Republic).

Two Criteria for Establishing Tax Residency for an Individual

The status of a Czech tax resident for an individual is established if they meet one of the two basic criteria set by the Income Tax Act:

1. Domicile (Permanent Home): The person has a permanent home available in the Czech Republic where they intend to reside long-term. A permanent home is understood as accommodation that is not temporary.

2. Presence (183-day rule): The person is usually present in the Czech Republic, which is met if they spend at least 183 days in the Czech Republic within a calendar year (either consecutively or in total).

It is important to distinguish between the tax law and civil law concepts. The term "permanent home" is defined by tax law and requires continuous availability, not just formal ownership. Our Prague-based lawyers routinely conduct legal analyses to help you correctly assess whether your property meets this critical definition and whether you are unintentionally establishing tax residency. Do not hesitate to contact our firm at konzultace@arws.cz. 

The Risk of Retroactivity When Exceeding the Stay

According to the Instructions of the General Financial Directorate (e.g., D-22 or D-59), situations where a change in tax domicile occurs during the tax period are addressed. If an individual acquires unlimited tax liability by meeting the usual presence criterion (exceeding 183 days), this status applies retroactively to the entire tax period.

This mechanism poses a significant risk for high-capital investors. If a foreigner who completes a major transaction in January (e.g., selling a foreign stake, receiving dividends) only later exceeds the 183-day threshold of stay in the Czech Republic in August, their January income automatically becomes subject to Czech taxation. 

The ARROWS law firm provides legal consultations that protect against fines and audits and minimize retroactive tax impacts. Do not hesitate to contact us at konzultace@arws.cz.

For a complete overview of this service, visit our page HERE.

Dual Residency: When a Tax Conflict Arises

In an international context, it often happens that an individual meets the tax residency criteria in two countries simultaneously, which, if unresolved, would lead to the threat of double taxation on worldwide income.

This conflict is resolved by applying Double Taxation Treaties (DTTs). The Czech Republic has nearly a hundred of them in force, and these international provisions take precedence over national legislation.

DTTs define a set of hierarchical rules, known as tie-breaker rules (a technical term), which serve to resolve dual residency and determine tax domicile in only one state for the purposes of the given treaty.

Hierarchy and the Centre of Vital Interests (CVI) Criterion

The tie-breaker rules are applied progressively in the following order:

1. Permanent Home: The state where the taxpayer has a permanent home available is determined.

2. Centre of Vital Interests: If they have a permanent home in both states, the deciding factor is the state where the taxpayer has closer personal and economic ties.

2. Habitual Abode: If the CVI cannot be determined, the decision is based on the length of habitual abode.

3. Nationality and, as a last resort, an agreement between the tax authorities.

The centre of vital interests criterion is key for high-net-worth individuals (HNWI) and managers with global mobility. The Tax Authority examines factual ties—where the taxpayer's family is, where their main assets are located, and where they conduct their primary business activities. Case law shows that a strong burden of proof is required to demonstrate a CVI abroad.

The Complexity of CVI and the Need for a Robust Defence

Although the DTT rules in the OECD Model Convention are relatively clear, assessing the CVI is highly subjective and, in practice, requires in-depth knowledge of both local legislation and international tax practices. Moving assets or family, which may seem like simple steps, actually involves hidden procedural details and risks that a layperson often does not see.

In case of uncertainty or conflict with the Tax Authority, there is a risk that the states will be forced to initiate a lengthy and bureaucratic Mutual Agreement Procedure (MAP).

Thanks to the ARROWS International network, built over ten years, the ARROWS law firm handles cases with an international element on a daily basis, from applying DTTs in the context of Spanish legislation to resolving German tax domicile. This way, we can prevent lengthy procedures. 

Therefore, it is better to have legal opinions prepared by ARROWS, which will take into account current case law and guarantee your tax certainty. Our Prague-based lawyers are ready to help you—write to us at konzultace@arws.cz. 

Obligations of a Tax Resident: International Compliance and Capital Reporting

The obligations for wealthy individuals and investors do not end with the correct determination of tax residency. Czech tax residents with significant capital must fulfill specific reporting obligations in accordance with global standards.

Reporting Exempt Income for HNWI

Individuals who are Czech tax residents are obliged to report to the Tax Office any income that, while exempt from tax (e.g., income from the sale of assets or investments after a holding period test), exceeds the statutory limit of CZK 5 million.

This reporting obligation applies to worldwide income and must be fulfilled by the deadline for filing the tax return. Failure to comply is penalized with high sanctions.

The penalty for non-reporting can reach up to 15% of the amount of the unreported income if the taxpayer fails to comply even within the grace period. ARROWS will ensure the preparation of documents required by law for correct reporting and the protection of your capital. For an immediate solution to your situation, write to us at konzultace@arws.cz. 

International Reporting and Passive Entities

Czech tax residents are subject to the global standards of CRS (Common Reporting Standard) and FATCA. These agreements ensure the automatic exchange of information about financial accounts and assets held abroad.

Tax authorities thus obtain data on residents' foreign accounts, which significantly increases the risk of undisclosed income being discovered. Moreover, corporate structures that hold significant assets or capital (e.g., holding companies) may be classified as so-called passive entities. This triggers further specific reporting obligations at the level of banks and financial institutions. 

Our firm provides expert training for employees and management, including certification, regarding the global exchange of information and assists with setting up compliance.

Risk Management for Corporations: Manager Postings and Split Residency

For corporations sending senior managers (CEOs, CFOs) to the Czech Republic, it is crucial to correctly resolve their tax status to avoid an additional tax assessment or the risk of creating a permanent establishment.

Complications in Relocation (Split Residency)

When a manager relocates to the Czech Republic during the year, a situation of so-called split tax residency occurs. This division requires precise allocation of income and application of tax credits to the respective time periods, which is administratively very demanding.

Errors in income allocation and in determining the tax base can lead to problems during a tax audit and an additional tax assessment for the posted employee. This represents a significant risk and administrative burden for the employer. ARROWS can help you prepare or review contracts to ensure the tax status reflects reality and minimizes risk.

Protection of Corporate Capital and ARROWS Insurance

Tax issues with an international element are far more complex in practice than they may seem at first glance. Assessing criteria such as the CVI and implementing DTTs require detailed expertise and knowledge of case law.

The ARROWS law firm handles these matters daily, which allows us to significantly reduce time and minimize the risk of errors for our clients. Our experience from long-term service provision to a portfolio that includes more than 150 joint-stock companies and 250 limited liability companies enables us to provide fast and effective solutions. 

It is therefore safer for the client to have the matter professionally handled, as ARROWS is insured against damages up to CZK 500,000,000. We are an active partner for our clients and are happy to connect them if they have interesting investment or business opportunities.

Conclusion: Handle Your Tax Residency with Certainty

Correctly determining tax residency is a fundamental pillar of international tax planning. Ignoring or incorrectly assessing the criteria of a permanent home and centre of vital interests leads to the risk of double taxation, fines, and prolonged disputes with tax authorities, both in the Czech Republic and abroad.

If you, the reader, do not want to risk mistakes, damages, or fines, you can safely entrust the entire matter to ARROWS. We handle the entire process, from initial legal consultations, through the preparation of internal guidelines and legal opinions, to obtaining the necessary permits and representing clients before courts and administrative bodies.

Our Prague-based lawyers protect your capital and minimize the risk of fines. Contact the ARROWS firm at konzultace@arws.cz and secure your international tax certainty.