2019 Tax Packet: Part 1
In March 2019, the so-called “tax packet” was adopted, amending ten (mainly) tax laws. A substantial part of the tax packet became effective 1 April 2019; however, some changes will become effective at a later date, while certain other amendments may be applied with retrospect to tax periods which have not finished yet. The tax packet was published in the Collection of Laws under no. 80/2019 Sb., and it introduces significant changes in the field of income taxes, value added tax, consumption tax and tax administration. For major changes in income taxes please see the brief summary below. In the next issue of our VGD News we will keep you updated about other changes introduced by the tax packet.
Increased ceiling of flat-rate expenditures of self-employed persons
In 2019, natural persons who calculate their expenditures by means of percentages of their income may claim their flat-rate expenditures in the total amount twice as high as the ceiling valid in 2018. In 2019, the ceiling is similar to that of 2016. However, in 2019 natural persons who calculate their expenditures by means of a flat-rate may also claim tax credits, and tax allowances for maintained persons (that is, tax allowances for a spouse and for maintained children).
Implementation of the Anti-Tax Avoidance Directive
Czech income tax legislation has implemented the “ATAD” (the Anti-Tax Avoidance Directive), that is, Council Directive (EU) 2016/1164 of 12 July 2016 laying down rules against tax avoidance practices. Namely, the Czech Income Taxes Act has implemented the following ATAD rules:
A. Limitation of tax deductibility of exceeding borrowing costs
A ceiling for tax deductibility of interest, and other borrowing costs, has been introduced in the Czech Income Taxes Act. The definition of borrowing costs is very broad: borrowing costs include not only interest on loans and on simple loans, but also interest on financial leasing, notional interest amounts under derivative instruments, exchange rate differences relating to financing, and the so-called capitalized interest (that is, interest which is not included in the valuation of fixed assets). Borrowing costs are tax deductible if they do not exceed CZK 80 million or 30 % EBITDA (earnings before interest, taxes, depreciation and amortization). The new rule restricts the amount of excessive borrowing costs, that is, borrowing costs (for example, interest expense) decreased by borrowing income (for example, interest income). The limitation applies both to interest paid to related parties, and to transactions (for example, simple loans) between unrelated parties.
The new rules do not apply to certain taxpayers (such as banks and insurance companies).
B. Exit taxation (tax on relocation of assets without a change of ownership) will come into effect on 1 January 2020
Assets will be subject to exit taxation if they are transferred within one legal entity from the Czech Republic to a foreign country (for example, a Czech tax resident transfers his assets to a permanent establishment abroad), and if the Czech Republic will not be able to levy tax on future sale of such assets. The Czech Income Taxes Act introduces a legal fiction, where relocation of assets is deemed to be a sale (a transfer for a fee) for a usual price; even though, in fact, no assets are being sold. As a result, fictitious profit from the sale of assets will be taxed in the Czech Republic, or fictitious loss will be claimed. Here, assets are deemed to be fixed assets, inventory, securities, etc.
C. CFC Rules (taxation of controlled foreign companies)
The new rule is to prevent Czech tax residents from establishing new (passive) companies in countries offering low taxation of income (profit), and from transferring their assets to the newly established companies which results in low tax on asset-related income. The rules apply to relations between a Czech controlling entity and a controlled foreign entity. The rule will apply if the controlled foreign entity performs no substantial business activity, and if income tax liability (or a similar tax liability) in the foreign country is lower than one half of tax liability which would have
been paid in the Czech Republic. Then, the controlled foreign company’s activities and its disposal of assets will be deemed to have been performed by the Czech controlling entity. As a result, the Czech controlling entity will pay tax, for example, on interest income, royalties and shares in profit (that is, income included in the tax base).
D. Hybrid mismatches (that is, a situation when countries treat a taxable event differently): effective from 1 January 2020
The new rule applies to associated enterprises. It targets situations when a transaction is treated differently for tax purposes by countries where associated enterprises are seated (for example, a payment transaction may be considered a payment of interest by one country, but treated as profit sharing by another country). The rule targets cases when an expense (or another item) decreases the tax base twice in the countries where associated enterprises are seated (“double deduction”), as well as cases when one expense decreases the tax base of one associated enterprise but is not included in the tax base of the other associated enterprise (“deduction without inclusion”). Under the new rule, the tax base of the associated enterprise will be adjusted in order to eliminate the mismatches.
The new rules transposed to Czech legislation from the ATAD only apply to legal entities and their permanent establishments, but not to individuals (natural persons).
Simplified rules for claiming R&D tax allowances
The amendment of law aims to alleviate the unnecessary burden and formalism upon claiming R&D tax allowances. Taxpayers who aim to claim research and development tax allowances will inform the tax authority about their intention for each project separately. Project documents will be submitted for all projects notified to the tax authority. Under the new rules, project documents need to be approved by the deadline for submitting tax returns for the relevant tax period. In addition, under the new rules, research may also take place before the project documents were
approved. The new rules may be applied in retrospect to open projects (that is, projects which started in the tax period which still ran on 1 April 2019).
Notifying tax authorities about income paid to foreign entities (and Czech tax nonresidents)
Under the new amendment of the Income Taxes Act, there is an extended notification duty concerning income paid to foreign entities (or Czech tax non-residents). Under the old rules, Czech taxpayers informed the tax authority about income paid to Czech tax non-residents which was subject to withholding tax. Under the new rules, Czech taxpayers will have to inform the tax authority also about income which is not subject to withholding tax (tax exempt income, and income not taxed in the Czech Republic under double tax treaties). The notification duty may concern,
for example, interest, royalties and shares in profit paid to foreign entities (or Czech tax non-residents). Notifications need to be submitted by the deadline for payment of withholding tax (even if no withholding tax is to be paid). Entities which have a mandatory data box and entities subject to statutory auditing must submit their notifications in electronic format.
The amendment of law has a wide scope and relates not only to income paid to legal entities, but also income paid to natural persons (with the exception of certain types of income from dependent activities). Notifications always need to be submitted if income subject to withholding tax is involved. Income not subject to withholding tax must be reported to the tax authority if the total amount of income paid to a Czech tax non-resident exceeded CZK 100 000 in a calendar month.