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

Czech Republic and German Investment Incentives an Update Tax Regime. Mr. Schaffer , Schaffer & Partner s.r.o. 1/43. Part A. Introduction. Mr. Schaffer , Schaffer & Partner s.r.o. 2/43. Schaffer & Partner , an international group of lawyers , tax advisors and auditors

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

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  1. Czech Republic and German Investment Incentives an Update Tax Regime Mr. Schaffer,Schaffer & Partner s.r.o. 1/43

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

  3. Schaffer & Partner, an international group of lawyers, tax advisors and auditors • based 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

  4. Part B. Investment in Germany Mr. Schaffer,Schaffer & Partner s.r.o. 4/43

  5. 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 Mr. Schaffer, Schaffer & Partner s.r.o. 5/43

  6. 1.2Economic Data Habitants: 82.0 Million Biggest cities: 1. Berlin (Capital) 3,42 Million 2. Hamburg (Gate to seas) 1,77 Million 3. Munich 1,31 Million 4. Cologne 0,99 Million 5. 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 Cent 1 Euro = 1,48 USD (September, 23 2009) Mr. Schaffer, Schaffer & Partner s.r.o. 6/45

  7. Labour cost: Employees with master degree start with gross salaries of • about 38.400 – 39.100 Euro • Secretaries: 30.500 – 32.700 Euro • Craftsmen: 35.100 – 53.000 Euro • Construction: 30.000 – 32.800 Euro • IT-development: 43.000 – 98.000 Euro • Rental cost: office space 10 – 25 Euro per square meter • Capital cost: 6% for 10 years Mr. Schaffer, Schaffer & Partner s.r.o. 7/43

  8. 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 community Notification to the responsible tax authority In 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) 8/43 Mr. Schaffer, Schaffer & Partner s.r.o.

  9. 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. Mr. Schaffer, Schaffer & Partner s.r.o. 9/43

  10. 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% Mr. Schaffer, Schaffer & Partner s.r.o. 10/43

  11. 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 Branch Permanent 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 Mr. Schaffer, Schaffer & Partner s.r.o. 11/43

  12. Corporation Taxable with worldwide income in Germany if corporated or management in Germany Taxation 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. Mr. Schaffer, Schaffer & Partner s.r.o. 12/43

  13. 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. Mr. Schaffer, Schaffer & Partner s.r.o. 13/43

  14. 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 Euros • Thereof Investment in new machinery 6.400.000 Euros • Direct grant on the investment of new • machinery 12,5% 800.000 Euros Mr. Schaffer, Schaffer & Partner s.r.o. 14/43

  15. - 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 available • Conditions: 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 and • depend partly on the creation of new jobs. • More information available at:www.kfw-mittelstandsbank.de Mr. Schaffer, Schaffer & Partner s.r.o. 15/43

  16. 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. Mr. Schaffer, Schaffer & Partner s.r.o. 16/43

  17. 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/piece3.500.000 USD 50.000 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. Mr. Schaffer, Schaffer & Partner s.r.o. 17/43

  18.  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. 18/43

  19. 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 development function as well as the production function within the company structure. The products have been sold all over the world. In consequence of a decision of the holding company, the subsidiary in Germany will stop all its activities in Germany in 2009 without liquidation. All activities continue in a new 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. Schaffer ,Schaffer & Partner s.r.o. 19/43

  20. Part C. Investment in the Czech Republic Mr. Felenda, Schaffer & Partner s.r.o. 20/43

  21. Mr. Felenda, Schaffer & Partner s.r.o. 21/43

  22. Mr. Felenda, Schaffer & Partner s.r.o. 22/43

  23. Key Data Habitants: 10,46 Million Area: 78 867 km² Density of population: 132 per km² Biggest cities: 1. Prague (Capital) 1,24 Million 2. Brno 0,37 Million 3. Ostrava 0,31 Million Member in EU since 1.5.2004 Member in Schengen countries since 21. 12. 2007 Mr. Felenda, Schaffer & Partner s.r.o. 23/43

  24. Economic data Mr. Felenda, Schaffer & Partner s.r.o. 24/43

  25. Current economic data 25/43 Mr. Felenda, Schaffer & Partner s.r.o.

  26. Exchange rates Mr. Felenda, Schaffer & Partner s.r.o. 26/43

  27. Exchange rates Mr. Felenda, Schaffer & Partner s.r.o. 27/43

  28. 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 Mr. Felenda, Schaffer & Partner s.r.o. 28/43

  29. 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 Mr. Felenda, Schaffer & Partner s.r.o. 29/43

  30. 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). Mr. Felenda, Schaffer & Partner s.r.o. 30/43

  31. 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. Mr. Felenda, Schaffer & Partner s.r.o. 31/43

  32. 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. Mr. Felenda, Schaffer & Partner s.r.o. 32/43

  33. 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% Mr. Felenda, Schaffer & Partner s.r.o. 33/43

  34. 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 Mr. Felenda, Schaffer & Partner s.r.o. 34/43

  35. 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. Felenda, Schaffer & Partner s.r.o. 35/43

  36. Part C:VAT principles and rules in EU Mr. Havle, Schaffer & Partner s.r.o. 36/43

  37. The VAT legislation in EU member states should follow general principles and requirementsaccording to EU VAT directive • Exemptions are possible only in case it is approved by EU council Mr. Havle, Schaffer & Partner s.r.o. 37/43

  38. 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 Mr. Havle, Schaffer & Partner s.r.o. 38/43

  39. 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 flatsand 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 Mr. Havle, Schaffer & Partner s.r.o. 39/15

  40. 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 Mr. Havle, Schaffer & Partner s.r.o. 40/43

  41. 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 Mr. Havle, Schaffer & Partner s.r.o. 41/43

  42. 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 Mr. Havle, Schaffer & Partner s.r.o. 42/43

  43. 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. 43/43

  44. Welcome to EU Questions…? Mr. Havle, Schaffer & Partner s.r.o.

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