The Czech Republic is poised to introduce a tax of 15 percent on multinational corporations operating within its borders, targeting companies with revenues exceeding 750 million euros (18.5 billion Czech koruna). The recently passed law, awaiting the president’s signature, empowers the state to levy up to 15 percent tax on these corporations if their effective taxation falls below this threshold.

This legislative move is in line with the implementation of an EU directive into Czech law, a change approved during the Czech Republic’s presidency in the EU Council in 2022. Finance Minister Zbyněk Stanjura emphasized that failure to enact this directive would lead companies to pay such taxes in states that adopted it, with the Czech budget missing out on potential benefits.

Stanjura noted that this tax measure for large multinational groups represents a crucial step in ensuring fair and balanced taxation in the country, preventing the diversion of corporate profits to so-called tax havens. He anticipates that the law will have an impact on several foreign groups.

The finance department estimates that approximately 3,200 companies, units of multinational groups, will be affected by the law, potentially generating an annual revenue of two billion crowns. However, the department acknowledges the difficulty of accurately predicting the measure’s actual impact. The primary objective of the law is to curb profit shifting by companies to other states to exploit tax benefits.

Under the existing tax rules, the government initially expected revenues of four to six billion crowns. However, the upcoming increase in the corporate income tax rate from 19 to 21 percent, part of the government’s consolidation package starting next year, is anticipated to generate about 22 billion crowns annually. Consequently, the expected annual revenue from the compensatory tax is likely to decrease as the higher tax rate raises effective taxation, causing fewer groups to fall below the threshold for the compensatory tax.

Article by Prague Forum