mr. schaffer , schaffer & partner s.r.o

Mr. Schaffer,Schaffer & Partner s.r.o.1/43

Czech Republic and German Investment Incentives an Update Tax Regime

Mr. Schaffer, Schaffer & Partner s.r.o.2/43

Part A. Introduction

Schaffer & Partner, an international group of lawyers, tax advisors and auditorsbased in Nuremberg (Germany) and Prague (Czech Republic)

Founded in 1987, International team of over 100 experts.

Member of AGN International (also acting in Taiwan)

Schaffer performs:

Legal services Tax consultancy services Auditing services

Mr. Schaffer, Schaffer & Partner s.r.o. 3/43


Part B. Investment in Germany


1. Information on the country, population and economy of Germany

1.1 Why invest in Germany

Highly developed country Steadily growing economy even though in times of international crisis No limits on market asses Access to Europe: (27 nations with nearly 500 Mio. people) No restrictions on transferring capital into and out of Germany

1.2 Economic Data

Habitants: 82.0 Million

Biggest cities:1. Berlin (Capital) 3,42 Million2. Hamburg (Gate to seas) 1,77 Million3. Munich 1,31 Million4. Cologne 0,99 Million5. Frankfurt (European Central Bank) 0,66 Million

Gross domestic product: 2.489 Billion Euro (2008)Fourth largest economy in the world behind United States, Japan an People’s Republic of China

Gross national product per habitant: 30.300 EURO

Economic growth: 1,3% (2008)Unemployment rate: 7,1% (2008)

Currency: Euro (16 Nations with in the European Union)

1 Euro = 100 Cent1 Euro = 1,48 USD (September, 23 2009)



Labour cost: Employees with master degree start with gross salaries ofabout 38.400 – 39.100 EuroSecretaries: 30.500 – 32.700 EuroCraftsmen: 35.100 – 53.000 EuroConstruction: 30.000 – 32.800 EuroIT-development: 43.000 – 98.000 Euro

Rental cost: office space 10 – 25 Euro per square meter

Capital cost: 6% for 10 years

2. Doing Business in Germany

German law offers a broad variety of conducting a Business in Germany:

Direct Business

Sales Branch

Requirements: Notification to the local communityNotification to the responsible tax authorityIn certain cases application for registration to

commercial register

Major disadvantage: Unlimited liability of the owner (incl. private assets if private persons)

Partnerships- Civil-law partnership (GbR)- Commercial partnership (OHG)- Limited Partnership (KG)

Corporations- Limited Liability Company (GmbH)- Stock Corporation (AG)- Societas Europea (SE)



3. Taxation in Germany

NO DOUBLE TAXATION TREATY between Germany and Taiwan German tax law applies in full extent regardless of the taxable treatment in Taiwan

German tax law at a glance:

3.1 Income Tax

Natural persons whose domicile or normal residence is within Germany are subject to German income tax on their worldwide income.

Natural persons who have neither domicile nor normal place of residence in Germany are subject to tax on their German earnings only.

Progressive. tax rate from 14% to 44%

On business income additionally: Trade Tax at a rate of 15% to 20% depending on the community.


3.2 Corporate Income Tax

Corporations having their seat or management in Germany are subject to German corporate income tax on their worldwide income.

Corporations having neither their seat nor management in Germany are liable to corporate income tax only on their domestic income.

The tax rate is 15% plus 5,5% reunification surcharge, in total 15,825%Additionally trade tax of 15% to 20% total tax burden approximately 31% to 36%

Dividends distributed by a German corporation are subject to withholding tax (WHT) at a percentage of 25% plus 5,5% reunification surcharge, in total 26,375%


3.3 Taxation of foreign business activities in Germany

Taxation of direct business

Without having a permanent establishment in Germany no taxation in Germany

Sales BranchPermanent establishment in Germay taxation in Germany

- Natural persons: Income tax on their German earnings- Corporations: Corporate income tax on their German earnings

Partnerships

Partnerships are not subject to corporate income tax. For tax purposes they are considered as transparent. This means that it is not the partnership which is taxable but the partners on private income tax basis with their portion of the partnerships common income.

Beside this, partnerships are subject to Trade Tax on Income.

Taxation as mentioned for branches


Corporation

Taxable with worldwide income in Germany if corporated or management in GermanyTaxation as mentioned above

4. Structuring of Investments

Use of parent subsidiary directive:

If parent company and its subsidiaries are based in different EU member states, dividend payments of subsidiaries to parent companies are

- free of withholding taxes in the country of the subsidiary- basically tax free income in the country of the parent company.

Taking into account this tax regime, dividends can be distributed within the European Union tax free by using other advantages among the EU member states, e.g. differences in wage level, granting of subsidies etc.


Use of tax advantages in EU member states

In order to reduce or avoid withholding taxes in case of dividend distributions from European subsidiaries to Taiwanese parent companies, the advantages of existing DTA’s between Taiwan and European countries or national tax advantages of other European countries can be used by setting up holding structures in the corresponding jurisdictions.

Taiwan has signed DTA’s with Belgium, Denmark, Netherlands, Sweden and United Kingdom. These DTA’ grant a 10% withholding tax rate on dividend distributions.

According to national tax law, Cyprus (Member of the European Union since 01.05.2004) grants a withholding tax exemption on the payments of dividends and interests to non- resident individuals and corporate entities.


5. Grants and incentives for investments in Germany

Incentives are given by the European Union, the federal government and the federal member states (with different main focuses).

Incentives for almost all sectors of economy. Specific subsidy programs have to be researched on

demand in specific data bases. The amount of the subsidies depends on the type of investment, the business sector and the investment location.

Examples for German incentives:

- Incentives for the eastern part of Germany by grants on investments of assets (Investitionszulage)

Example: Setting up of a new production plant in Dresden (Saxony, East Germany)Total capital demand: 8.000.000 EurosThereof Investment in new machinery 6.400.000 EurosDirect grant on the investment of newmachinery 12,5% 800.000 Euros


- Subordinated loans (Sonderdarlehen)

Example: For the Investment of 8.000.000 Euros a subordinated loan in the amount of 2.000.000 Euro may be availableConditions: Duration 10 years

Interest rate in the years 01 – 03 0,0 %Interest rate in the years 04 – 05 1,5 %Interest rate in the years 06 – 10 4,0 %

The incentives vary from region to region and are depending on the kind of investment anddepend partly on the creation of new jobs.More information available at: www.kfw-mittelstandsbank.de


6. Special requirements for inter company transactions

-In case of a holding structure, special transfer price requirements have to be observed according to the German tax law.

-Holding structures will be assumed by participations of 25% and more.

-German tax law requires that inter company transactions (e.g. sale of goods from Taiwanese parent company to German subsidiary) have to be conducted at arm’s length conditions.

If the transfer prices are not in accordance with the arm’s length principle, the tax law permits the tax authorities to adjust the taxable income.

Example:

A Taiwanese parent company is a producer of electric products and holds 100% of the shares of a German Limited Liability Company (GmbH). The German subsidiary is the wholesaler for the products of the parent company in Europe. In the year 2009, the parent company sells 50.000 pieces of drilling machines to its subsidiary. The inter company price charged for each machine is 70 USD. The production cost of each piece is 7 USD. The gross margin of the parent company is realised in a tax privileged region.


In a tax audit, the German tax authorities can substantiate undoubtedly that third parties would have charged 30 USD for each drilling machine.

Result: The German Tax authorities are allowed to increase the taxable income of the German subsidiary as follows:

50.000 pieces charged at 70 USD/piece 3.500.000 USD50.000 pieces at arm’s length conditions 30 USD/piece (1.500.000.USD)Adjustment of taxable income 2.000.000 USD

Additional Taxes for German Subsidiary (Corporate Income Tax 15,825% plus 15% trade tax, in total 30,825%; see above) 616.500 USD

- Regarding the determination of accepted transfer prices, the German tax law requires the consideration of principles which are in accordance with OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations.


Application of:

- Comparable uncontrolled price method- Resale price method- Cost plus method

-German transfer price rules are complex and have to be examined in each individual case.

- Beside rules for income adjustment, documentation requirements regarding the determination of the transfer prices have to be taken into account according to the German tax law.

Violating the documentation requirements may allow the tax authorities to increase the taxable income by profit estimations and to determine penalties in amounts between Euro 5.000 and Euro 1.000.000.

Mr. Schaffer ,Schaffer & Partner s.r.o. 19/43

7. Special requirements to transfer of functions

Germany has implemented a new regulation in 2008 in its tax law regarding transfer of “functions”.

According to that regulation, the transfer of company functions from Germany to other jurisdictions is subject to taxation.

Example:

A Taiwanese parent company holds 100% of the shares of a German Limited Liability Company(GmbH). During the last 10 years, the subsidiary has performed the research and developmentfunction as well as the production function within the company structure. The products have beensold all over the world. In consequence of a decision of the holding company, the subsidiary inGermany will stop all its activities in Germany in 2009 without liquidation. All activities continue in anew set up subsidiary outside of Germany where the wage level is at 30% of the German level.

Result: The transfer of the research and development function as well as the production function can be subject to taxation in Germany.

This rule is very complex and has to be verified individually in every single case.

Mr. Felenda, Schaffer & Partner s.r.o. 20/43

Part C. Investment in the Czech Republic


Key Data

Habitants: 10,46 MillionArea: 78 867 km² Density of population: 132 per km²

Biggest cities:1. Prague (Capital) 1,24 Million2. Brno 0,37 Million3. Ostrava 0,31 Million

Member in EU since 1.5.2004 Member in Schengen countries since 21. 12. 2007


Economic data

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

GDP, % y/y, constant pr. -0,7 -0,8 1,3 3,6 2,5 1,9 3,6 4,5 6,3 6,8 6,0

Industry, PPI, % y/y . . . x 6,7 1,9 5,5 9,6

6,7 11,2 9,0

ILO general unemployment rate, %, avrg.

4,8 6,5 8,7 8,8 8,1 7,3 7,8 8,3 7,9 7,1 5,3

Average monthly gross wages, CZK

10 802 11 801 12 797 13 614 14 793 15 866 16 917 18 041 18 992 20 219 21 694

Inflation rate, %, y/y 8,5 10,7 2,1 3,9 4,7 1,8 0,1 2,8 1,9 2,5 2,8

External trade balance (goods), mil. CZK, current pr.

-150,4 -80,2 -64,4 -120,8 -117,4 -71,3 -69,8 -26,4 38,6 39,8 87,9

Electricity, final consumption, million kWh

48 007 47 485 46 800 47 958 49 432 49 497 50 655 52 730 53 729 55 541 55 856 1)

Housing construction (dwellings completed, total)

16 757 22 183 23 734 25 207 24 759 27 292 27 127 32 268 32 863 30 190 41 649

Mobile telephones per 100 inh.

5,1 9,4 18,9 42,3 67,6 84,4 95,1 104,7 114,7 124,2 121,6 1)

Highways, total length, km 486 499 499 499 517 518 518 546 564 633 657


Current economic data

Indicator Period Year-On-YearIncrease/Decrease

(%)

Gross domestic product 2nd quarter of 2009 -5,5

Consumer price index August 2009 0,2

Inflation rate August 2009 2,6

Industrial output July 2009 -18,2

Construction output July 2009 -4,4

Receipts from sales of retail trade(CZ-NACE 45, 47) July 2009 -4,9

Average gross wages and salaries: Nominal

Real2nd quarter of 2009

2,8

1,4


Exchange rates

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

CZK/EUR 36,88 35,61 34,08 30,81 31,84 31,90 29,78 28,34 27,76 24,94

CZK/USD 34,60 38,59 38,04 32,74 28,23 25,70 23,95 22,61 20,31 17,04


Exchange rates


Why invest in the Czech Republic?

Strategic Location Stabile Economic Performance Educated Work force Competitive Infrastructure Investment Incentives Supplier Base Developed Real Estate Market Quality of Life Czech Invest´s Support

http://images.google.cz/imgres?imgurl=http://www.minibar.cz/pohoda_pics/original/LIA_112400030.jpg&imgrefurl=http://www.minibar.cz/cs/vlajky/LIA_112400030/&usg=__OG3CM6lSRPDdo7CgvnvioK9Uwqs=&h=472&w=472&sz=75&hl=cs&start=109&um=1&tbnid=ryVnnl51pGszpM:&tbnh=129&tbnw=129&prev=/images%3Fq%3Dvlaka%2B%25C4%258Desk%25C3%25A9%2Brepubliky%26ndsp%3D21%26hl%3Dcs%26lr%3D%26sa%3DN%26start%3D105%26um%3D1


Doing Business in the Czech Republic

Czech law offers a broad variations of conducting a Business in the Czech Republic:

Direct Business

Sole trader business or Sales Branch

Partnerships

Civil-law partnerships

Commercial partnership

Limited Partnership


Corporations

The Czech law provides two major forms of corporations.

Limited Liability Company

Corporate entity form most commonly used by foreign investors in the Czech Republic Wide range of possibilities to structure the articles of incorporation Minimum share capital: CZK 200.000 (appr. EUR 8.000). No liability of the shareholder for companies obligations Legal bodies: managing director, general meeting of shareholders and (supervisory board).


Stock Corporation

Minimum share capital: CZK 2 M. (appr. EUR 80.000) Legal bodies: board of managing directors, general meeting of shareholders and

supervisory board. Limited liability of the shareholders as mentioned above.

incorporation takes: 4-6 weeks

SE (European Company)

The seat can be very easy transferred to another EU country More steps for establishment are necessary

Other Forms

Beside the forms mentioned above a foreign investor can use hybrid forms, Joint Ventures or

acquire existing companies.


Taxation in the Czech Republic

No Double Taxation Treaty between Taiwan and the Czech Republic.

The tax system in the Czech Republic is very complicated. To get a first insight here are some basic information:

Income Tax

Natural Persons whose domicile or normal residence is within the Czech Republic are subject to Czech income tax on their worldwide income.

Natural Persons who have neither domicile nor normal place of residence in the Czech Republic are subject to tax only on their Czech earnings.

Income tax is levied on a yearly basis.

For natural persons the income tax is linear : 15%

No municipality tax, no “church” tax.


Corporate Income Tax

Corporations that have their seat or management in the Czech Republic are subject to the Czech Republic corporate income tax on their worldwide income.

Corporations that have neither their seat nor management in the Czech Republic are liable to corporate income tax only on their domestic income.

The Corporate income tax is also levied on a yearly basis.

The tax rate is 20% (from 2010 19%)

No municipality tax, no trade tax

Dividends distributed by a Czech corporation are subject to withholding tax (WHT) at a percentage of 15%


The Czech tax system includes the following taxes:

Income tax VAT Consumption tax (tobacco, alcohol, gasoline) Real estate tax Real estate transfer tax Gift tax Inheritance tax Road tax Ecological/energy tax


Practical issues for Taiwanese investors considering the entrance in the Czech Republic

withholding tax for dividends 15% Taxation in case of selling the whole business (company) in the Czech Republic Withholding tax for interest paid by the Czech company 15%

Services provided by Taiwanese Parent company to the Czech subsidiary:

Permanent establishment if any long – term activity in the Czech Republic Consultants active in the Czech Republic are basically obliged to tax their income in the Czech Republic Withholding tax 15% for any services provided by Taiwanese company in the Czech Republic

Mr. Havle, Schaffer & Partner s.r.o. 36/43

Part C: VAT principles and rules in EU


The VAT legislation in EU member states should follow general principles and requirements according to EU VAT directive

Exemptions are possible only in case it is approved by EU council


VAT = indirect tax, calculated based on realized inputs and outputs

No connection with profit/loss realized by taxpayer

Main principles:

VAT from inputs can be claimed based on the assumption that the relevant supplies are used for economic activities of taxpayer (i.e. for realizing of taxable supplies/outputs)

It is possible that claiming of VAT from some kinds of inputs is prohibited (based on local rules of relevant EU country)

e.g. entertainment, refreshment in case of the Czech Republic

VAT payer is obliged to add/charge the VAT from its supplies (outputs) based on relevant legislation and kind of supply in question


VAT rates

Usually two different rates (the Czech Republic: 19% and 9%) Lower rate is used for some kinds of goods (e.g. food) and services (e.g. building services -

only flats and houses) VAT rates are not the same within EU

Zero rate (0%) - used in the following cases:

Supplies realized by local VAT payer but a place of taxable supply in question is outside the Czech Republic

e.g. delivery of goods from the Czech Republic to other EU member state (customer = VAT payer in some EU country except the Czech Republic) >> Czech VAT = 0%

VAT free supplies in general Some kinds of services, e.g. bank services, post services etc. Companies providing of these VAT free services cannot claim the VAT from their inputs


VAT registration

Generally, each company realizing economic activities in some EU country has to be registered as a VAT payer there (based on relevant rules of a country in question)

This rule applies also for foreign companies!

The Czech Republic - registration requirements:

Local company > after establishment, based on an abstract from the Czech Commercial Register

Foreign company - main documents required:

Original certificate of VAT registration in other EU country (if any), with official translation to English language

Original of trade license, with official translation to English language

Original of abstract from business/commercial register, with official translation to English language


VAT filing in the Czech Republic

On a monthly or a quarterly basis

Based on turnover

Foreign VAT payers > always on a quarterly basis

Deadline for filing of VAT return: 25th day of the month following the relevant taxable period (i.e. 25th February for VAT return for January, 25th April for VAT return for 1st quarter etc.)

Payments of the VAT: deadline = deadline for filing


Main kinds of supplies

Local supplies > with local VAT

Delivery (selling) of goods (services) to other EU member state > usually without local VAT

Purchase of goods (services) from other EU member state > reverse charge system

Imports

Exports


Other reports connected with VAT filing in the Czech Republic

EC Sales List - deliveries of goods to other EU member states

Proposed change: it will include services as well

Intrastate reports - statistical purposes

Declaration of flows of goods within EU

These reports are generally used in other EU countries as well

Mr. Havle, Schaffer & Partner s.r.o.

Welcome to EU

Questions…?

mr. schaffer , schaffer & partner s.r.o

Documents

introduction schaffer

german income tax

tax rate

tax advisors

trade tax

taiwangerman tax law

taiwan german tax law

business income