Today we would like to take a closer look at the taxation, if any, of license fees for software and hardware imposed upon Czech companies from another EU Member State; Germany.
Allocation of the right to tax under the Double Taxation Avoidance Act
According to Article 12 (License Fees) paragraph 1 of the Double Taxation Treaty between Germany and the Czech Republic (“DTA DE/CZ”), license fees may be taxed in the state of the license fee recipient. However, this is not an exclusive right to taxation, as Article 12(2) of the DTA DE/CZ also grants the source State a limited right to taxation of 5%. The definition of license fees under contract law is contained in Article 12(3) of the DTA DE/CZ and includes both software license fees and license fees for hardware “as industrial, commercial or scientific equipment”.
Taxation under the Czech Income Tax Act
Under the Czech Income Tax Act, user fees for the provision of software are subject to a withholding tax deduction, whereas fees for the use of standard software are generally tax-deductible business expenses. Standard software is designed for many users to use and usually does not require complex implementation and customization. Individual software, on the other hand, is tailored to the needs of a specific customer and is characterized by the fact that the right of use is granted only under certain conditions, such as time or location restrictions.
User fees for the provision of commercial, business or scientific equipment such as hardware are subject to withholding tax under the Czech Income Tax Act, as are user fees for custom software.
If your accounting records include costs of software, hardware and their license fees, we recommend that you look at this topic in more detail. If you are not sure, we will be happy to help you with this issue.
