The proposal is largely based on a rejected draft of an EU “Digital Services Tax” directive and imposes tax liability in relation to three specific activities of digital service providers. The tax rate is currently set at 7 percent, although this is expected to be a highly contentious topic during an upcoming second reading in the Chamber of Deputies.
Any proceeds acquired from the following services will constitute a “taxable revenue”:
(i) the placing on a digital interface of personalised advertising targeted at users of that interface based on collected user data and directly-related ancillary services (e.g. consulting), excluding the creation of advertised content;
(ii) the utilisation of a multi-sided digital interface (e.g. a social network or online marketplace) consisting in either (i) facilitating a transaction between users of that interface; or (ii) making an interface available to users – the tax will not be applicable to regulated financial services, gambling sites, or where the main purpose of the interface is to provide:
- digital content;
- computer gaming, or the use of other interactive entertainment software;
- communication services;
- payment services;
- electronic identification services;
(iii) the transmission of user data collected in relation to user activity on a digital interface.
A service is deemed to be provided (i.e. taxable) in the Czech Republic where the user:
- accesses an interface from the Czech Republic according to a reliable method of IP address geolocation, or where this cannot be ascertained;
- is resident or has a registered office in the Czech Republic – the user is presumed to be residing in the Czech Republic where the digital interface is at least partially targeted at Czech users.
The subject of the digital service tax can either be an independent entity or an entity within a group. An entity is liable if it attains, either independently or as part of a group:
(i) global annual revenues exceeding EUR 750,000,000 (affecting only large businesses);
(ii) a digital services tax base for services provided in the Czech Republic exceeding CZK 100 million (affecting businesses with a significant presence in the Czech Republic);
(iii) proceeds from digital services provided in EU/EEA member states and Switzerland exceeding 10 percent of the aggregate annual revenue from all activities in the respective states (excluding businesses with only a marginal engagement in digital services in comparison to their main activity, e.g. the automotive sector).
Taxation for individual taxable services is levied where the entity exceeds:
(i) CZK 5 million in annual proceeds from the placement of a targeted advertising campaign in the Czech Republic;
(ii) CZK 5 million in annual proceeds from the transmission of data generated in the Czech Republic; or
(iii) 200,000 user accounts on a multi-sided digital interface.
Significantly, the proposed tax represents only a temporary measure in lieu of OECD countries agreeing upon a joint solution. As a result, if passed, the law will only be effective up to the 2024 tax year.
For more information, please contact Zdeněk Kučera, Managing Associate, Head of TMT and Dispute Resolution, Kinstellar Prague.