Major amendments to the Income Tax Act since 2015
The Chamber of Deputies approved the government’s proposal for an amendment to the Income Tax Act (the “ITA”), which came into effect on 1 January 2015. From a total of about 300 changes, I have prepared a guide to the most important ones for you:
Payment of equity, payment of reserve fund
- The payment of the equity components not made up of profit (return of share premium, surcharges other than share capital and similar benefits) is subject to withholding tax similarly to the settlement share or share in the liquidation balance.
- For such income, which is not a profit-sharing payment, it is possible to apply the acquisition price of the given capital asset in the tax base for the withholding tax (Section 36 (1) (b) (1)).
- The payment of the reserve fund created from profits is subject to the same tax regime as the decrease in share capital. In the context of Section 36 (2) (i), a withholding tax will be applied if it cannot be exempted under Section 19.
- First, the profit reduction rule is applied, only then, for example, from establishment when founding a company.
- Profits from trade corporations may also be newly acquired by persons who do not own a stake in the corporation.
- In the case of employees, the profit-sharing payment is considered income from dependent activity; other natural persons are subject to withholding tax. Legal entities that do not own a stake in this corporation tax the share of profit within the general tax base.
Non-monetary benefit from an interest-free loan
- Transfer from Section 18 (was outside the subject of tax) to Section 19b (1) (d) – a similar concept to that of natural persons where subsequently there is an obligation to report exempt income.
- In addition, the non-monetary benefit from borrowing, promissory note and loan for CZK 100,000 is capped. The boundary is tested for each individual income. The taxpayer may have more such benefits, but only those that flow from the same person are added together for the threshold. The decisive period is the calendar year.
Prices between related parties and new annex to corporate income tax
- The taxpayer will be obliged to increase the profit or difference between income and expenditure by an amount equal to the difference between the price agreed between the related parties and the “usual” price in those cases where the profit or loss of the taxpayer will be reduced in accordance with the provisions of Section 23 (7).
- The taxpayer does not have to do this when the amount between related parties has been settled.
- If the company records a loss or holds a promise of investment incentives, it will complete the attachment for all related parties with whom it has executed a transaction in the period. In other cases, it will only disclose transactions with related entities resident abroad. The annex will already be mandatory for the taxation periods started in 2014.
- In contrast to the original proposal, there is no question whether there is any form of transfer pricing documentation processed.
Specification of leasing and income definitions
- Criteria defining this institute more precisely were added.
- Transfers of leasing under Section 24 (4) (only the classification as a commercial asset with FO remained) to Section 21d.
- The minimum depreciation period is the period according to the ITA, with group 2-6 reduced by six months (for example, immovable assets were 30 years).
Tax write-off of receivables
- The adjustment reflects the fact that, under the new accounting policies, corrections of prior periods are recognised at significant amounts in equity.
Retrospective tax assessment on commitments
- Following the new regulation of the NCC, which introduces a general rule that the limitation period is three years (Section 629), it is proposed to amend Section 8a of the Act on Reserves, which shortens the period after which expiry provisions for non-statute-barred receivables of 100% for 30 months (from the original 36) can be created.
- Following this adjustment and to eliminate the time shift in the impact on the collection of income tax, it is proposed to similarly shorten the period after which the borrower must increase the tax base by the outstanding debts that were recorded in the accounts and included in the previous tax periods.
Re-invoicing non-tax costs
- However, if a taxpayer incurs an expense that is not an expense to secure or maintain income (e.g. representation expenses), but it is instead reimbursed by another taxpayer, then it is an expense to earn, secure and maintain revenue. Due to recent case law, such a provision is rendered to make this provision applicable in principle only to net re-invoicing.
- It is proposed to extend the provisions of Section 23 (4) (e) to expenditure not recognised as tax expenditure in a given tax period. The meaning of this provision is the same as in Section 24 (2) (zc). This provision can also be applied, for example, to property that is not entirely used to achieve taxable income (natural persons), where in the absence of such a regulation this income would be unintentionally taxed.
- The taxpayer is also allowed to apply the tax loss in the re-examination procedure (both in the framework of the procedure to remove doubts and in the framework of the tax audit).
- For the purposes of a penalty payment, the application of a tax loss within the scope of the recovery procedure has no effect.
Tax deduction interest
- The tax deduction interest is a compensation for the excessively long retention of the tax deduction (especially value added tax deduction) by the tax administrator because of a long-standing procedure to remove doubts.
- Interest arises if the procedure to eliminate doubts lasts longer than five months from its commencement, i.e. from the announcement of the call that initiates the procedure, at the CNB’s repo rate increased by one percentage point.
Applying tax losses to transformations
- If the conditions are met, such a taxpayer will be able to deduct the tax loss from the tax base of the taxpayer who assumed it from a taxpayer who assumed it from another taxpayer to whom the tax loss was levied.
Compulsory electronic communication
- If a taxpayer or their representative has a data box or the statutory obligation to have audited financial statements, they are required to submit the application for registration, all notifications of a change of registration data, proper tax returns and additional tax returns, and reporting and billing only electronically by data message.
- The tax administrator will impose a fine of CZK 2,000 for non-compliance with the compulsory electronic form for submissions, a list of which is published on the Financial Administration’s website.
- If by failing to submit electronically the taxpayer severely complicates the administration of tax, the tax administrator can impose a fine of up to CZK 50,000.
Limitation of cash payments and cancellation of old FA accounts
- The limit for cash payments has been reduced from CZK 350,000 to CZK 270,000. This change will affect the liability of payers for VAT not paid by the supplier. If the payer pays the price of the goods or services to the Czech bank account of the supplier, which is not published in the register of payers, the limit for the establishment of a guarantee will be reduced from CZK 700,000 to CZK 540,000.
- The tax office’s s original bank accounts are cancelled and only new account numbers (which have been in force for two years) will apply. The CNB will no longer automatically transfer payments to the correct accounts; therefore, when paying to a cancelled account, there may be sanctions due to delay in payment.
Important changes for individuals
- Taxation of executives of non-residents in 2014 and 2015 – The remuneration of a Czech tax non-resident who acts as a statutory representative will be subject to 15% withholding tax, similarly to the remuneration of a member of the statutory body, or a 35% tax in the case of tax residents from non-Contracting States. The super-gross wage will be the basis for the withholding tax.
- Restrictions on flat rates for sole traders – limitations for 60% and 80% flat rates, whereas these can now be applied only up to CZK 2 million.
- Stricter life insurance allowances – To be able to continue to deduct up to CZK 12,000 per year from the tax base, continuous withdrawals of saved money will no longer be possible (a new contract condition, which will have to be accepted for the tax benefit).
If you are interested in what is changing in the field of VAT, read the guide by Petr Vondraš.