Income from foreign sources

What is double taxation and why does it occur?

The Czech Republic currently has 99 double taxation treaties (DTTs) in force, which ensure that your income is not taxed twice. These treaties are mostly based on the 1963 OECD Model Tax Convention and represent an international standard for resolving tax conflicts between states. 

If you are dealing with the taxation of income from multiple countries simultaneously, setting up the right tax strategy can be quite complex. Our lawyers at ARROWS will help you assess your situation and propose an optimal solution – write to us at konzultace@arws.cz. 

What methods can you use to avoid double taxation?

Double taxation treaties contain three basic methods to eliminate double taxation:

The tax credit method allows you to reduce your Czech tax liability by the tax already paid abroad. We distinguish between an ordinary credit, where the maximum amount that can be credited corresponds to the Czech tax attributable to the foreign income, and a full credit, where the entire foreign tax paid is credited regardless of its amount.

The exemption method means that foreign income is not included in the Czech tax base at all. There is a full exemption and an exemption with progression, which affects the tax rate on other income. In the Czech Republic, due to the flat tax rate of 15% (or 23% for higher incomes), the effect of exemption with progression is practically the same as a full exemption.

Including tax in expenses is used for income from states with which the Czech Republic has not concluded a double taxation treaty. The tax paid abroad is then claimed as a tax-deductible expense.

How to correctly tax dividends from foreign investments?

Dividends paid by foreign companies are one of the most common types of foreign income for Czech investors. This income falls into the category of income from capital assets under Section 8 of the Income Tax Act and is subject to a 15% rate in the Czech Republic. 

You must report foreign dividends on your tax return at their gross amount, i.e., including the tax withheld abroad. If withholding tax was deducted abroad, you can credit it against your Czech tax liability, provided the conditions of the relevant double taxation treaty are met.

Since 2021, you have had the option to include foreign dividends in a so-called separate tax base under Section 16a of the Income Tax Act. This ensures that this income is always taxed at a 15% rate, regardless of the amount of your other income. This strategy is particularly advantageous for taxpayers with higher incomes who would otherwise exceed the threshold for the 23% tax rate (in 2025, this threshold is CZK 1,676,052).

How does the W-8BEN form work for US investments?

If you invest in US securities, the W-8BEN form is a key tool for reducing your tax burden. Without a correctly completed form, your dividends from the US would be subject to a 30% withholding tax. However, thanks to the double taxation treaty between the Czech Republic and the USA, this rate is reduced to 15%. 

The W-8BEN form serves to prove your tax residency outside the USA and to claim the benefits of the double taxation treaty. Most brokers will ask you to fill it out when you open an investment account. The form is valid for three years and must then be renewed.

By correctly completing the W-8BEN form, you will save half of the withholding tax on US dividends. This saving will also be reflected in your Czech tax return, where you can only credit the reduced rate of 15%, not any higher amount that may have been withheld in the US.

Preparing documentation for foreign tax authorities requires precision and knowledge of international regulations. The ARROWS law firm provides comprehensive legal advice on obtaining the necessary confirmations and forms for international investments. Connect with us at konzultace@arws.cz and get a tailor-made legal solution.

When can you benefit from tax exemption on the sale of securities?

Income from the sale of securities may be tax-exempt under certain conditions. New rules apply from 2025, which significantly affect investors' tax optimization.

The 3-year holding period test remains in place, i.e., if you hold a security for more than three years, the income from its sale may be tax-exempt. For business shares in companies, the holding period test is 5 years.

The CZK 40 million exemption limit is a new feature effective from 2025. Income from the sale of securities and shares that meet the holding period test is exempt only up to a total amount of CZK 40 million per tax period. Any amount exceeding this limit is subject to taxation at a rate of 15% or 23%.​

This limit is calculated cumulatively for the calendar year for all income from securities and shares. It is also important to know that the exemption is assessed at the time the income is received, not at the time of the sale itself.

However, this limit will be abolished for sales of shares in business corporations and securities from 1 January 2026.

Are you planning a major sale of shares or a stake in a company? The right timing and transaction structure can mean savings in the millions of crowns. Our lawyers at ARROWS will help you design an optimal strategy – contact us at konzultace@arws.cz. 

What are the specifics of ETF taxation?

Exchange-Traded Funds (ETFs) are a popular investment tool with specific tax treatment. Income from the sale of ETFs is taxed as other income under Section 10 of the Income Tax Act. 

Accumulating ETFs reinvest dividends back into the fund, so you do not have an ongoing tax liability from holding them. Taxation occurs only at the time of sale. 

Distributing ETFs pay out dividends to your investment account. You must report and tax these dividends on your tax return as income from capital assets. The tax treatment depends on the fund's tax domicile – most commonly Ireland or Luxembourg.

Irish ETFs are popular among investors, partly because Ireland does not withhold tax on dividends paid to non-residents. This means you receive the dividends in their gross amount and tax them only in the Czech Republic at a 15% rate.

How to tax income from renting out foreign property?

If you own property abroad and rent it out, you must declare this income in the Czech Republic as part of your worldwide income. Rental income is governed by the article on income from immovable property in the relevant double taxation treaty, which usually allows for taxation both in the state where the property is located and in the owner's state of residence.​

In practice, this means that the foreign state usually withholds tax on your rental income, and you then apply a method to avoid double taxation in the Czech Republic – most often, a credit for the foreign tax paid. Setting up the correct tax structure for foreign properties can be complicated, especially if additional obligations arise in that country, such as tax registration or filing a local tax return. 

In addition to the taxation of income itself, the tax implications of a potential sale of the foreign property must also be considered. The holding period test for exemption of income from the sale of property is 10 years in the Czech Republic (or 5 years if the residency condition is met), but the foreign country may have its own rules for taxing capital gains from real estate. 

This area requires careful coordination between both tax systems to avoid unexpected tax burdens. Thanks to the ARROWS International network, our Prague-based lawyers can help you ensure compliance with regulations in both countries – contact us at konzultace@arws.cz.

When must you file a tax return due to foreign income?

The obligation to file a tax return arises for a Czech tax resident if, in addition to employment income, they have other taxable income exceeding CZK 6,000 per year. For foreign dividends, interest, or income from the sale of securities, this threshold is quite easily exceeded. 

Even a single dividend from a US stock worth a few hundred dollars can put you in a situation where you must file a tax return.​

It is important to know that you report foreign income in Appendix No. 3 of the tax return, where you fill in the country of source, the amount of income in foreign currency, the exchange rate used for conversion, and the method for avoiding double taxation. Correctly completing this appendix is key to claiming a foreign tax credit. Errors in this part of the return are among the most common and can lead to an additional tax assessment or denial of the credit. 

If you are unsure about the correct procedure, our lawyers at ARROWS will help you prepare the complete documentation – write to us at konzultace@arws.cz.

How to avoid mistakes when filing a tax return?

Foreign income is one of the most complicated areas of a tax return. Errors in this area can lead to additional tax assessments, late payment interest, and high penalties. The penalty for late filing of a tax return is 0.05% of the assessed tax for each day of delay, up to a maximum of 5% of the tax, and can reach up to CZK 300,000.

For taxpayers with foreign income, there is an extended deadline for filing a tax return – until November 3rd of the following year. However, this deadline only applies if the foreign income actually affects the tax calculation (credit method), not if it is completely exempt from taxation.

The most common mistakes include:

• Failing to declare foreign dividends at their gross amount

• Incorrect application of the method for avoiding double taxation

• Incorrect calculations of amounts in foreign currency

• Failure to document tax paid abroad

The lawyers at ARROWS have extensive experience in preparing tax returns that include foreign income and in reviewing documentation for the tax office. Thanks to professional liability insurance of up to CZK 500,000,000, you can be sure that any errors in our advice are covered. Do not hesitate to contact our office – konzultace@arws.cz. 

Why is the international exchange of information important?

Tax authorities today have extensive tools to monitor the foreign income of Czech tax residents. Under the CRS (Common Reporting Standard) system, states automatically exchange information about financial accounts held abroad by their residents.

The Czech Republic implemented this standard through Act No. 164/2013 Coll. on International Cooperation in Tax Administration. Since 2016, Czech banks have been obliged to identify and verify the tax residency of their clients and report data on non-resident accounts to the relevant foreign tax authorities.

This means that information about your investment account with a foreign broker will very likely reach the Czech tax office. Concealing foreign income is therefore not only unethical but also very risky in today's era of automatic information exchange.

Furthermore, as part of AML rules, banks check the origin of funds and may report suspicious transactions to the Financial Analytical Unit. If a financial institution does not have sufficient information to identify a client, it may refuse to establish a business relationship or execute a transaction.

How can a holding structure help?

For more complex investment activities, using a holding company can be advantageous. A properly structured holding company allows for: 

• Optimization of withholding taxes on dividends by applying double taxation treaties

• Exemption of dividend income between a parent and subsidiary company if conditions are met

• Effective asset management and protection

• Planning for intergenerational succession

Double taxation treaties play a key role in structuring holdings, as they allow for the reduction or elimination of withholding taxes on cross-border dividend payments. Under certain conditions, legal entities can benefit from dividend tax exemption by meeting the criteria set out in the EU directive and Czech law. 

The ARROWS law firm has more than 150 joint-stock companies and 250 limited liability companies in its portfolio. Thanks to the decade-old ARROWS International network, we are able to provide comprehensive legal services even for structures with an international element. We deal with cases involving an international element on a virtually daily basis and can help you design an optimal structure – write to us at konzultace@arws.cz. 

Why is it better to entrust international tax matters to experts?

International taxation is an area where Czech tax regulations, international treaties, EU law, and the regulations of foreign states intersect. What may seem like a simple procedure at first glance has, in practice, a number of hidden exceptions, procedural details, and connections that a layperson often does not see.

For example, the choice between the credit method and the exemption method can have a major impact on the amount of your tax liability. For taxpayers with higher incomes, the wrong choice can mean a difference in the tens of thousands of crowns. Similarly critical is the correct timing of investment sales with regard to the holding period test and the annual exemption limit.

The ARROWS law firm deals with international taxation issues daily. Our Prague-based lawyers will help you:

• Analyze your situation and propose an optimal tax strategy

• Prepare or review your tax return, including the appendix for foreign income

• Secure the necessary documentation from foreign institutions

• Represent you in communications with the tax office or in a potential dispute

• Design a structure for the long-term management of international investments

Thanks to professional liability insurance of up to CZK 500,000,000, it is safer for you to have the matter professionally handled. We also regularly partner with corporate lawyers to resolve special issues in the field of international taxation.

If you have an interesting investment or business opportunity, we will be happy to connect you with relevant partners from our client network. If you are looking for financing or a business partner for your project, do not hesitate to contact us.

Conclusion: How to proceed with the taxation of foreign income?

The correct taxation of income from abroad requires knowledge of Czech tax regulations, the relevant double taxation treaties, and practical procedures for their application. The key is to identify which country the income comes from, which method of avoiding double taxation applies, and how to optimally structure the tax return.

For foreign dividends, consider using the separate tax base to maintain the lower 15% rate. For the sale of securities, plan with regard to the three-year holding period test and the new CZK 40 million exemption limit. And don't forget to correctly fill out the W-8BEN form for US investments.

If you do not want to risk mistakes, penalties, or unnecessarily high taxes, you can safely leave the entire matter to the professionals at the ARROWS law firm. We have experience with dozens of international taxation projects and are ready to help you too. Just contact us at konzultace@arws.cz.