Annual Tax Reconciliation: Resident versus Non-Resident
In order for you to perform the annual tax reconciliation properly and to maintain the payroll agenda correctly, you must answer one crucial question: is the employee a tax resident or a non-resident? How to decide who is a resident and who is not? The Czech tax regulations state two basic criteria that help payroll accountants decide the tax residency of their employees. What are these two criteria?
Tax residency is determined based on permanent stay in the Czech Republic or based on the fact that in the calendar year, the given individual spent at least 183 days in the Czech Republic. However, the issue is not fully addressed even if one of the prerequisites is met. It may happen that the second state considers your employee its tax resident – in such a case it is necessary to determine the employee’s residency based on the double tax treaty concluded with the given country.
Remember that non-residents are taxed only for the days that they demonstrably spent in the Czech Republic. If a person spent only 60 work days in the Czech Republic and he/she spent the remaining 200 days travelling, such person will state in his/her tax return only his/her income for the 60 days.
So, before you start preparing annual tax reconciliation, it is necessary to know the answers to the following questions. Bear in mind that if tax residency cannot be determined based on the first question, the second question must be answered, possibly the third, the fourth etc:
- Does the taxpayer have a place of residence in both countries?
- The centre of vital interests – where does the taxpayer have closer personal and economic relations?
- Where did the taxpayer spend most of his time in the given year? How many days did the resident spend in the Czech Republic?
- Mutual agreement – between the countries that claim the residency?
I would be very strict in determining residency. If in doubt, I would require that the foreigner bring a certificate of tax residency issued by the tax authority. Until then, I would consider the foreigner to be a non-resident, since you, as an accountant, bear a huge responsibility. In such cases, we advise that only personal tax relief or student tax relief be utilised.
The issue of double taxation is also interesting. I have already mentioned the double tax treaty which determines tax residency and at the same time, prevents double taxation of income. However, there are certain countries with which the Czech Republic has not concluded such a treaty yet. In such cases, there is a danger of double taxation.