Have you received a dividend and are you enjoying your earnings? Before you start thinking about what to do with the money, remember one important thing. You still have to pay tax. Dividend taxation is simple in the case of shares in Czech companies. But if you invest in foreign shares, a more complex tax web begins to unravel. What are the rules for taxing Czech and foreign dividends? What can you do to avoid paying tax twice? And how to get everything right on your tax return?
A dividend is a share of profits paid by a public limited company to its shareholders. In other words, when you buy a share in a company, you become a part-owner – and if the company decides to distribute some of the profits to its owners, the dividend is the reward you get.
Most often, it is a sum of money that is paid out for each share owned. For example, if a company declares a dividend of CZK 20 per share and you own 100 shares, you will receive CZK 2,000. However, a company will only pay a dividend if its general meeting decides to do so – and this is usually once a year. The amount of the dividend often depends on the company’s profits, but this is not the rule. A company that is not currently making a profit may pay a dividend, and vice versa – a profitable company may not.
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You will never get the full amount of a dividend, as tax must be paid on it. Dividend tax is payable because a dividend is income to the investor – and like other income (such as salary, interest or rent) it is taxable. From the State’s point of view, it is therefore a way of ensuring that all forms of income, including that derived from investment and capital , are taxed fairly.
When a company pays a dividend, it means that it has distributed part of its profits to its shareholders. While this profit has already been taxed at the level of the company (e.g. corporation tax), from the point of view of the tax system, it is then taxed again on the part of the individual who receives the dividend – that is, you as an investor.
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Let’s take a closer look at what rules apply to dividend taxation in different situations:
The taxation of dividends from Czech companies is relatively simple and for most ordinary investors it is done automatically in the form of withholding tax.
When a Czech company pays out a dividend, it automatically deducts a 15% tax and pays this amount to the state. You, as a shareholder, then receive only the net amount after tax. So you don’t have to calculate or pay the tax yourself – the company or securities dealer will do it for you.
Your account will receive CZK 1 700 net.
The taxation of dividends from foreign companies is more complicated than for Czech companies, because it involves the tax system of the country where the dividend comes from, as well as the Czech tax system. This results in double taxation of dividends, which is in most cases resolved by double taxation treaties between the Czech Republic and the country in question.
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When and why do you have to tax dividends from abroad in the Czech Republic?
As a tax resident of the Czech Republic, you are obliged to tax all your income here – including dividends from abroad. However, if your total annual income outside of work (e.g. from dividends, rent or investments) does not exceed CZK 20,000, you do not have to file a tax return at all. But this rule only applies to ordinary employees; self-employed workers must always declare dividends, even if they are only worth a few euros.
Most countries will automatically deduct tax before the money reaches your account. This is called withholding tax and the amount varies from country to country – for example, 30% in the US, over 26% in Germany and even 35% in Switzerland.
If the Czech Republic has a double tax treaty with the country in question, the withholding tax is usually reduced.
Usually not twice, because double taxation treaties prevent this. However:
You have to provide a certificate showing that the foreign tax office actually withheld the tax. This certificate is provided by the tax authority of the country where the tax was paid.
You must also convert the dividend into Czech crowns, preferably using the uniform exchange rate published by the Ministry of Finance in the Financial Bulletin.
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In most countries, if you have tax withheld on a foreign dividend (e.g. 15%), you can “offset” the tax on your Czech tax return – and avoid double taxation.
However, some double taxation treaties (e.g. with Austria, the Netherlands, France) only allow you to offset a lower portion of the tax than was actually withheld. Typically only 10%, even if you have had 25% or 27.5% withheld abroad.
Let’s say you buy shares in a company based in France. When you pay a dividend, the French authorities automatically withhold 30% tax.
In your Czech tax return, you would theoretically want to say, “I have already paid the tax abroad, I don’t want to pay it again.” But here’s the problem: according to the treaty with France, you are only allowed to deduct 10% in the Czech Republic, even if you have had 30% withheld.
What does this mean for you?
Claiming a refund of overpaid tax from abroad is a rather complicated and administratively demanding process. First you have to fill in special forms required by the foreign tax authorities. You must then obtain official confirmation of your tax domicile (i.e. that you are a tax resident of the Czech Republic) issued by the Czech tax office.
All documents must then be sent to the relevant foreign tax office. The whole process can take several months and the outcome is not certain – there is no guarantee that the application will be approved and the overpayment refunded. Therefore, this option is only worthwhile if you have been deducted a relatively large amount.
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The United States is one of the most popular countries for Czechs to invest in. The rules for taxation are slightly specific.
If an American company (e.g. Microsoft, Apple, Coca-Cola) pays you a dividend, the United States automatically withholds tax on it – the so-called withholding tax. The basic rate of this tax is 30%, which would be very disadvantageous for foreign investors.
Fortunately, the Czech Republic has a double tax treaty with the US, which allows the rate to be reduced to 15%. However, in order to exercise this option, you must fill out and sign a W-8BEN form, which confirms that you are a tax resident of the Czech Republic. If you do not fill out this form, the US will automatically withhold the full 30%,
Filing a tax return requires a bit more work in the case of a foreign dividend, but it is not an insurmountable problem:
If a foreign company pays you a dividend, it will most often have already sent it to you taxed – that is, less withholding tax, which is retained by the state where the company is based.
You then have to declare the entire gross amount of the dividend on your tax return, including the portion you did not physically receive because it was taxed abroad. You will enter this income on line 38 of the main tax return form as it is capital gains income.
To avoid double taxation (i.e. paying tax on the same income both abroad and again in the Czech Republic), you will use the so-called tax credit method. This is to be completed in Schedule 3 of the tax return.
In this annex:
An incorrect tax return doesn’t have to mean the end of the world. Our article will tell you how to correct it.
A dividend is a share of a company’s profits that it pays out to shareholders – usually once a year. As it is income, it is taxable. For Czech companies, the situation is simple: tax of 15% is withheld automatically and the investor receives a net amount.
For dividends from abroad, taxation is more complicated. First, the so-called withholding tax is deducted in the country where the dividend originates (e.g. 30% in the USA, 26% in Germany). As a tax resident of the Czech Republic, you must declare this income in your tax return, even if you have already received the dividend taxed. International treaties are used to avoid double taxation – if your foreign tax does not exceed 15%, you can pay the difference in the Czech Republic. If it was higher, you can offset part of the tax and, if necessary, claim a refund of the overpayment.
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Ondřej is the attorney who came up with the idea of providing legal services online. He's been earning his living through legal services for more than 10 years. He especially likes to help clients who may have given up hope in solving their legal issues at work, for example with real estate transfers or copyright licenses.
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