Effects of Brexit on income tax in 2021

Although the United Kingdom already left the EU as of 31 January 2020, the transition period during which the United Kingdom is still viewed as an EU member state will end on the last day of 2020. It seems unlikely that the transition period will be extended at the end of the year, hence we can expect significant changes in income tax and other areas. Some of them we present below.

As for personal income tax, from 1 January 2021 UK tax residents working in the Czech Republic will no longer be entitled to some income relief and credits: the law only grants these to EU or EEA residents.

UK tax residents with more than 90% of worldwide income sourced in the Czech Republic will thus claim in their 2021 tax return only the basic tax relief (for the taxpayer themselves), and possibly relief for being a student (same as other tax residents of non-EU or EEA countries). They will no longer be able to, for example, reduce their tax base by charitable donations, or claim a tax relief for a dependent child or a spouse.

The fact that the EU will no longer be an EU member state may also affect the calculation of the super-gross wage, if this concept is maintained.  Employees who are covered by UK compulsory social security and taxed in the Czech Republic will not have their wages increased (for the purpose of calculating tax) by the actual UK social security contributions paid, but by a hypothetical compulsory insurance. However, if the super-gross wage is abolished, employers will no longer be increasing employees’ tax base by any insurance premium paid.

As for corporate income tax, the end of the transition period on 31 December 2020 will bring the following changes:

  • Dividend paid from the Czech Republic to the UK will always be taxed by a withholding tax and it will no longer be possible to apply the benefits of the implemented EU directive. Under the Double Tax Treaty (DTT) between the Czech Republic and the UK, a rate of 5% shall be applied to dividend payments if the recipient holds at least a 25% of the company's voting rights; in other cases, a rate of 15% shall apply.
  • Czech tax residents receiving dividend from the UK or income from the transfer of a shareholding in a UK corporation will under certain conditions still be able to claim the exemption, since the condition that the corporate tax rate must be at least 12% is fulfilled - at present, the tax rate in the UK is 19%.
  • When making interest and royalty payments, it will no longer be possible to apply the exemption under the EU directive. Rulings previously issued by the tax authorities to this effect shall cease to apply. Generally, the withholding tax rate for royalties is 15% and under the DTT may be reduced to 10% or even 0%, depending on the type of royalties. Interest payments are currently not subject to withholding tax in the CR, as under the DTT the interest is only taxed by the UK.
  • As regards the application of the EU Directive on business transformations, it will not be possible to apply certain special tax regimes (such as taking over an assessed tax loss of a company ceasing to exist) in cross-border transformations involving a UK resident company.
  • When making a gratuitous supply (donation) to a UK tax resident, its amount shall not reduce the tax base.
  • A Czech resident making payments to a UK resident of income sourced in the territory of the Czech Republic and not taxed by a withholding tax at a special rate will be obliged to secure the tax.
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