Introduction
Unlike Ireland, Switzerland, Belgium, Luxembourg, Malta, the Netherlands and many other countries, the Czech Republic does not offer any special intellectual property (IP) tax regimes, but does offer a number of incentives with respect to aspects of IP research, development and investment.
Income from IP is taxable at the general corporate income tax rate of 19 percent. IP assets are generally depreciated for tax purposes on a monthly basis (18 to 72 months depending on the type of IP or over the period over which the taxpayer has a right to use; generally 32 months for software and results of R&D activities). IP assets that are being created for reasons other than trade or repetitive provision to third parties (e.g., software developed for internal purposes) is not activated and depreciated for tax purposes but is expensed, as expenses are accrued in accounting under GAAP.
The Czech Republic provides taxpayers with relatively generous research and development (R&D) incentives, general investment incentives, free services provided by CzechInvest (The Czech Investment and Business Development Agency) and, in some cases, no exit taxation on transfer of IP out of the Czech jurisdiction. These incentives, combined with lower labor costs of good qualified workers compared with other EU countries, offer beneficial business opportunities for investors in the Czech Republic in the area of IP.
Research and Development
R&D expenses are generally tax-deductible. Besides that, taxpayers performing R&D projects may be eligible for an additional 100 percent deduction of such expenses under certain circumstances.
R&D projects are defined by the Czech Income Tax Act as written projects drafted prior to the start of works on the project describing the activities, estimated costs and further details about the R&D project. Expenses eligible for an additional 100 percent deduction typically include labor or material costs. The additional deduction cannot be claimed in relation to royalty payments, services and intangible results of R&D acquired from other parties (with the exception of certification costs), or expenses covered by a subsidy from public resources, for example.
Unused R&D deductions can be carried forward for three tax periods immediately following the tax period in which the entitlement to a deduction arose.
R&D incentives should be enhanced as of 2014 under the proposed amendment to the Czech Income Tax Act, which is expected to be passed by the parliament later this year. For instance, it should be possible to claim 110 percent of costs in respect of qualifying R&D activities exceeding the costs in the previous tax period (as an incentive to increase R&D expenses) and certain services provided by certain third parties should also qualify for the additional deduction (most notably services provided by universities).
Besides the R&D tax incentives, corporate income tax relief for a period of ten years (tax holiday) can be claimed with respect to large-scale investments, in technological and strategic services centers (subject to conditions), among others. The conditions include, inter alia, the minimum amount of the investment, maximum amount of public subsidies or the fulfillment of EU public support rules.
Zero-Exit Taxation
Capital gains on alienation of IP would generally be combined with other income and expenses and taxable at a 19 percent corporate income tax rate. There is no exit taxation in the Czech Republic, which offers relatively straightforward tax planning opportunities for transfer of IP to more favorable tax jurisdictions once it is developed. In some cases, IP may be transferred out of the Czech Republic without hidden reserves being taxed at the 19 percent corporate income tax or any other form of exit tax.
For instance, there are no controlled foreign company (CFC) rules in the Czech Republic, and foreign subsidiaries of Czech companies achieving passive income (e.g., from holding IP) benefit from the same tax rules as subsidiaries achieving active income. Contributing IP held by a Czech company into a foreign (EU) subsidiary with a beneficial IP tax regime may serve as an example of a transaction that would result in the transfer of IP out of the Czech Republic that should not, in principle, trigger any taxes in the Czech Republic.
A cross-border merger with a company from another EU jurisdiction (being the successor company of the Czech one) may serve as another example of a transaction resulting in transfer of IP into a jurisdiction with more attractive IP taxation. Income from such IP should be taxable in the jurisdiction of the successor company as of the day of deletion of the Czech company from the Czech Commercial Register unless a permanent establishment to which the IP can be allocated survives in the Czech Republic.
A cross-border merger may even result in an increase of the IP value for tax purposes in the receiving jurisdiction, so further transfers may lead to lower capital gain taxation (a so-called tax step-up). This would be available, e.g., in cases where the successor company is a German, Luxembourg or Dutch tax resident (in general, the tax step-up would not work the other way around, if the Czech company acted as the successor).
Tax planning using zero-exit taxation may easily attract the attention of the tax authorities. For instance, OECD Transfer Pricing Guidelines are applied in the Czech Republic and should be obeyed carefully. It is also worth mentioning in this respect that the Czech tax law contains general anti-abuse rules (GAAR) and also the general law principle of law circumvention prohibition and substance over form are well-established in the Czech jurisdiction. Both the Supreme Administrative Court and the Constitutional Court are relatively consistent in enforcing these rules. Business (non-tax) reasons must be in place to justify the substance of every transaction, including tax-neutral cross-border mergers, otherwise the transaction can be reclassified by the tax authorities (e.g., as taxable alienation of IP) and taxed accordingly.
Conclusion
In summary, the Czech Republic may not provide for a special IP tax regime, but its R&D tax regime and investment incentives, relatively low corporate income tax rate (19 percent) and favorable labor market conditions may make it an attractive jurisdiction for investors intending to develop IP and is worth considering for IP tax planning in this particular stage of the IP business.
