Category: Czech Republic

With the world becoming increasingly globalized, it is easier for taxpayers to make, hold, and manage investments outside their countries of residence. Vast amounts of money are kept offshore and untaxed, to the extent that taxpayers fail to comply with the tax duties of their home jurisdictions. Co-operation among tax authorities is critical in the fight against tax evasion.

In this article, we summarize the basic principles of exchange of information in the field of taxation. We do not list all of the kinds of information exchanged nor do we comment on individual legal sources such as EU Directives, Tax Information Exchange Agreements (TIEA), double tax treaties, multilateral conventions, and local law. 

Automatic Exchange of Information (AEOI) is a term used to describe a range of agreements tax authorities across the world have entered into to exchange data automatically. AEOI allows for the exchange of data regarding non-resident taxpayers with the tax authorities in the taxpayers’ countries of residence. Participating jurisdictions send and receive information automatically, mostly on an annual basis.

Although the original EU Directive on Administrative Cooperation in the Field of Taxation (DAC1) and several bilateral agreements allowed for the automatic exchange of information declared in tax returns, the number of participating countries is limited. The amended DAC2, together with global OECD standards (GATCA), were inspired by the US Foreign Account Tax Compliance Act (FATCA). The framework of the OECD’s Multilateral Competent Authority Agreement (MCAA) on the Automatic Exchange of Financial Account Information allows for exchange of information in a standard electronic format – the Common Reporting Standard (CRS). As with the FATCA, the CRS model imposes duties on financial institutions to identify reportable accounts and to obtain the information on the account holder required to be reported for such accounts to their local tax authorities. This avoids the need to conclude multiple bilateral agreements. The information on the account holder, capital gains, account balances, and income from the sale of financial instruments is reported. Data was exchanged for the first time in 2017 for 2016, with 54 countries participating. In 2018, 104 jurisdictions, including many “tax havens,” participate. 

It works simply. For example, in the British Virgin Islands, if a bank account is owned by a Czech tax resident, the BVI bank reports to the BVI tax authorities and they share the data with the Czech tax authorities. The Czech authorities are informed of the Czech tax resident´s accounts and income, and can easily verify his/her Czech income tax returns. The same applies, in reverse, in cases where Czech accounts or passive entities are owned by foreign tax residents.

Based on the DAC3, information about cross-border tax rulings and advance pricing arrangements are exchanged.

Based on the DAC4, MCAA, and other treaties, 57 countries participate in Country by Country Reporting (CbC) according to BEPS Action 13. Multinational groups with an annual consolidated turnover exceeding EUR 750 million are required to prepare a CbC report. On an annual basis, the CbC report provides the tax authorities with information on revenues generated with related parties, profits, income tax paid, retained earnings (accumulated losses), number of employees, and net book value of tangible assets in all of the jurisdictions in which the MNE Group operates.

Based on the DAC5, selected information on beneficial owners is collected pursuant to the AML Directive and accessed by tax authorities.

The DAC6 focuses on intermediaries such as tax advisors, accountants, and lawyers who propose or recommend tax planning arrangements. These intermediaries will have to report arrangements that may be aggressive.

The DAC7 … well … is expected to come soon.  

The spontaneous exchange of information (i.e., the passing on of information obtained during examination of a taxpayer’s affairs or otherwise, which might be of interest to the receiving state) or exchange of information on demand (the oldest type of information exchange among tax authorities) were slow, ineffective, and did not keep pace with the world of the 21st century. Computerized data processing is the key to effective cooperation. The automatic exchange of information on financial accounts with 104 participating jurisdictions is revolutionary. Reporting financial institutions, taxpayers, and tax lawyers face a significant challenge. The automatic exchange of information about various kinds of taxpayers provides tax authorities with a huge amount of data and additional effective tools for reviewing tax compliance. 

By Rostislav Frelich, Leader of Tax Desk, Peterka & Partners

This Article was originally published in Issue 5.12 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

On 1 December 2018 the new Insurance Distribution Act (the “Act”) became effective in the Czech Republic. It replaces the still effective Act No. 38/2004 Coll., on Insurance Intermediaries and Loss Adjusters, as amended (“IILA”), and implements the plan envisaged by the European Parliament and the Council (EU) Directive 2016/97 on insurance distribution (revised version) (“IDD”), even if a little later than anticipated.

In this article we will briefly try to highlight selected questions in the Act (inevitably making certain simplifications).

Fewer categories of intermediaries

An important change introduced by the Act is a reduction in the number of categories of persons authorised to mediate insurance or reinsurance from the IILA’s original six to four.

Insurance agents and brokers fall into one category of individual insurance intermediaries. The new categories of tied representatives and supplementary insurance intermediaries are referred to only in a single case, while the terms subordinated insurance intermediary, tied insurance intermediary or exclusive insurance agent, which we know from the IILA, will no longer be found in the Act at all. Insurance intermediaries under the IILA can operate even after the Act is in force. Existing insurance agents and brokers immediately become agents and brokers under the Act on 1 February 2019, unless they have announced to the Czech National Bank by the end of 2018 that they are unwilling to be independent intermediaries under the Act. Other insurance intermediaries have until the end of March 2019 to obtain authorisation under the Act or to be enrolled into the relevant registry, provided that if they have applied for registration in the register according to the IILA and were not enrolled by 30 November 2018, they will no longer be registered.

Validity of the authorisation, remuneration rules and other changes

The Act newly introduces a time limit on the validity intermediary authorisation. Authorisation to act as an intermediary now lasts up to two years (valid until the end of the year following the year when the distributor was entered into the registry) and can be extended by 12 months by submitting an application to the Czech National Bank and paying the relevant administrative fee, which is CZK 5,000 (approx. EUR 200) for individual intermediaries, i.e. an agent or broker, and CZK 1,000 (approx. CZK 40) for tied representatives or supplementary insurance intermediaries).

Increasing consumer protection is linked to more detailed rules relating to the remuneration of persons involved in the distribution of insurance. The Act maintains the rule of distribution or reimbursement of life insurance remuneration. These rules, which according to the explanatory memorandum are inspired by the Austrian legislation, were originally transposed into the IILA through a 2016 amendment. In our experience, in terms of insurance companies and intermediaries, including banks, they represent a major challenge when negotiating contracts on insurance intermediation or partnership in the field of bancassurance. The Act also newly prohibits remuneration similar to pyramid schemes or remuneration to the intermediary conditional upon the payment of an entry fee or similar payments. These rules were framed during the effectiveness of the IILA in the opinions of the Czech National Bank regulating remuneration of intermediaries.

The legislator has taken the opportunity stated in the IDD and more strictly regulated, among others, professional liability insurance (versus the IILA it has raised minimum indemnity limits and deductibles for intermediaries were introduced) or the scope of life insurance information which the intermediary has to provide to the consumer.

Beyond the requirements of the IDD, the Act contains a modified system of accredited tests for insurance intermediaries or the rules of group distribution insurance negotiated in a business manner (fleet).

We could continue to enumerate the many areas that the Act modifies or implements from the IDD, and the questions that will need to be answered. All we can do for now is wait with an open mind to see how these questions will be resolved in practice, which is something we are glad to be a part of.

By Jitka Kadlcikova, Attorney at Law Schoenherr

In this age of intricate transnational ties, the international business community is placing an ever-increasing emphasis on the swift and economic settlement of disputes. Major arbitral institutions are adopting rules on expedited proceedings, promoting mediation, and/or embracing summary disposition procedures. All these initiatives are focused on managing the process and the taking of evidence: the focal points of procedural efficiency.

In addition, the arbitration community has developed several best practices and rules on various aspects of arbitration proceedings. An example of this phenomenon is the IBA Rules on the Taking of Evidence in International Arbitration (the “IBA Rules”) which were developed by experts from various jurisdictions and cultures to bridge the gap between common and civil law procedure. 

The IBA Rules may not be suitable for all parties and all disputes, however, and the arbitration community is now developing an alternative set of rules on proceedings entitled “Rules on the Efficient Conduct of Proceedings in International Arbitration” (the “Prague Rules”) which will be launched in Prague in December 2018. 

The Prague Rules provide more investigative and managerial powers to arbitrators to allow them to conduct the process effectively. These rules are built on the notion that early determinations of procedure and transparence in the conduct of the arbitration are beneficial to all participants. In this sense, arbitrators are endowed with powers to enhance the process if it struggles, to hold case management conferences, to limit the number and length of party submissions, and to direct witness examinations at hearings. 

Arbitrators also retain discretion regarding expert submissions, as they may select joint expert commissions from candidates appointed by the parties. And with regards to document production, a party may be ordered to produce only those specific documents which are material to the outcome of the case rather than conducting far-reaching discovery, which is costly and burdensome. The Prague Rules also give arbitrators the opportunity to communicate their preliminary views to the parties regarding the relief sought at any stage of the process without the risk of prejudgment. In short, the Prague Rules are designed to overcome some of the obstacles of prolonged proceedings by promoting the proactive role of arbitrators. 

Nonetheless, even the best efforts of arbitrators may be fruitless if a party resorts to dilatory practices. Interestingly, according to a major empirical investigation of arbitration practices worldwide conducted under the auspices of the Queen Mary University of London in 2018, “lack of effective sanctions during the arbitral process” was identified as the second worst characteristic of arbitration (following only “cost”). Accordingly, the Prague Rules grant sanction powers to arbitrators as well. In particular, arbitrators may reflect upon a party’s conduct and draw adverse inferences regarding that party’s case if the party does not follow arbitrators’ instructions without a valid reason. Similarly, arbitrators may consider the conduct of the parties when deciding on the allocation of costs.

In principle, these features of the Prague Rules should ensure that the proceedings will not be indeterminably delayed by unsolicited briefs. At the same time, however, the principles of fair trial are both fundamental and mandatory under the Prague Rules. Yet, it is also important that arbitrators view parties’ procedural rights in their full context. The fact is that in the vast majority of cases the initial agreement of the parties was to have their prospective dispute decided expeditiously. In this sense, the Prague Rules are in line with this early covenant.  

The Prague Rules as an Alternative

The Prague Rules provide a new perspective on the proceedings by allowing arbitrators, with parties’ consent, to use their powers more extensively and have greater control over the process.

Accordingly, the Prague Rules provide an alternative to the IBA Rules and other sets of procedural rules. The one-size-fits-all concept does not reflect the nature of arbitration, which touches upon diverse legal cultures. Therefore, once adopted, parties and their legal counsels may consider the Prague Rules as a valuable instrument when drafting arbitration clauses, potentially providing a method for handling potential disputes more efficiently. 

The Prague Rules are currently in draft form and open to comments by any interested party.   

By Miroslav Dubovsky, Country Managing Partner, DLA Piper Czech Republic 

This Article was originally published in Issue 5.11 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.