Do you know that if you have a service contract with an executive director who is not a resident taxpayer of the Czech Republic, the taxation of such person shall not be subject to monthly advance tax payments? What other exceptions should you take into account in case of foreign executive directors?
Legal regulation for the performance of executive director’s office
According to the laws of the Czech Republic, an executive director is always regarded as a statutory body member. The legal relationship between an executive director and a company is governed by the so-called director’s service contract, the essentials of which are regulated by Act No. 90/2012 Coll., on Business Corporations (the “BCA”). A director’s service contract must be made in writing and approved by the General Meeting, including any amendments thereto (Section 59(2) of the BCA). The mandatory particulars of the contract (Section 60 of the BCA) include, without limitation, the following details concerning the remuneration:
• Specification of all remuneration components, including benefits;
• Specification of the remuneration amount or method of its calculation;
• Definition of rules for the payment of special bonuses and profit shares – where appropriate.
Moreover, it is strongly advised to specify any other consideration of an executive director directly in his/her service contract, particularly reimbursements of travel costs. Since the legal relationship between an executive director and a company is not governed by the Labour Code, these reimbursements are not automatically awarded to executive directors, in contrast to employees.
2) Taxation of executive director’s remunerations
Remunerations of an executive director – individual (natural person) are subject to tax in compliance with Act No. 586/1992 Coll., on the Income Tax (the “Income Tax Act”), in the same manner as in the event of employees. Therefore, these remunerations are included under income from employment (work-depandant income) pursuant to Section 6(1)(c) paragraph one of the Income Tax Act. In case an executive director receives any other consideration in addition to his/her remuneration, e.g. in the form of non-monetary income or the aforementioned reimbursement of travel costs, the taxation thereof shall be subject to the same rules as that of employees – both on the part of an employer and an employee.
However, the actual tax arrangements applicable to executive officers (unlike employees) vary depending on whether or not they are resident taxpayers in the Czech Republic.
Executive director – resident
In case an executive director is a resident taxpayer in the Czech Republic, his/her remuneration shall be subject to tax in the same manner as that of employees. Such remuneration shall be subject to Section 16(1)(g) of the Income Tax Act – i.e. at a tax rate of 15% (monthly advance tax payments); moreover, according to Section 16a of the Income Tax Act, it is increased by the solidarity levy for any income exceeding CZK 1,672,080 in 2020. Moreover, an executive director – resident may benefit from a monthly tax credit in the amount of CZK 24,840, as well as other tax credits, as appropriate.
Executive director – non-resident
In case an executive director is a non-resident taxpayer in the Czech Republic, his/her remuneration shall be subject to tax pursuant to Section 22(1)(g)(6) of the Income Tax Act; therefore, such remuneration shall constitute a separate taxable income subject to 15% withholding tax pursuant to Section 36(1)(a) of the Income Tax Act – particularly without any increase for the solidarity levy.
The tax rate may be reduced in connection with the applicable provisions of a specific double taxation treaty concluded with a country, where an executive director is a resident taxpayer.
Withholding tax is also associated with an obligation to file monthly statements to the competent tax authority on the withholding tax using an appropriate form and perform annual settlement of the tax withheld.
In determining the tax base, it is always necessary to use the so-called “super-gross” remuneration (wage) – both for resident and non-resident taxpayers – and increase the relevant income by mandatory insurance premiums payable on such income by the relevant company, irrespectively of whether such individuals contribute to the Czech social security/health insurance system or make such contributions abroad.
Tax domicile (residence)
For the sake of completeness, we should clarify the method of determining an individual’s residence for tax purposes. In order to qualify as a Czech resident taxpayer, a person must have a (permanent) place of residence or usually reside in the Czech Republic (for a period of more than 183 days).
In determining residence for tax purposes, the most complicated situations occur for individuals (natural persons). Consequently, the aforementioned double taxation treaties specify additional criteria that are gradually applied to determine tax residence, unless this is clear on the basis of a (permanent) place of residence or the usual period spent in a country. The criteria include, without limitation, centre of vital interests, centre of economic interests, and citizenship. In case an individual’s tax residence cannot be unambiguously determined on the basis of the aforementioned criteria, the parties (i.e. competent authorities) shall determine it based on their mutual agreement.