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Amendment of the Value-Added Tax Act

On 1 July 2017 the long awaited amendment of the Value-Added Tax Act came into force. It is a part of the Tax Packet published in the Czech Collection of Laws (“Sbírka zákonů”) under no. 170/2017 Sb. In the following text we summarize briefly several changes the amendment has introduced.

CHANGES IN SHORTAGES AND DAMAGE

The amendment of law has introduced changes in returns of VAT in the case of undocumented cases of destruction, loss and theft of business assets. The originally claimed deduction of VAT will be returned on the date when the VAT-payer learned about the insufficiently documented destruction, loss and theft of goods and business assets. In the case of fixed assets, the relevant part of a VAT deduction will be returned if the undocumented destruction, loss or theft occurred within the time-limit of five years (in the case of real estates, the timelimit is 10 years). In the case of goods, VAT must be returned if the undocumented destruction, loss or theft occurs within the time-limit of three years after the acquisition of such goods.

The General Financial Directorate (GFD) has published information concerning the issue (see the following link; Czech version only).

Wider scope of the domestic reverse charge regime

The following new domestic reverse charge regimes have been introduced:

  • Intermediary services under sec. 92 (5) of the VAT Act, that is, supplies of investment gold, if tax is claimed on supplies of such services,
  • Supplies of real-estates sold by debtors based on a court ruling in proceedings of forced sale to a VAT-payer,
  • Supplies of workers for construction and installation works to a VAT-payer; for the purposes of the reverse charge regime, the supply of workers (manpower) for construction and installation works may be interpreted as the employment of individuals for the purposes of their work performance for the user who is another legal entity or an individual and who assigns work and supervises its completion (agency work). In general, the reverse charge regime under sec. 92a et seq. of the VAT Act does not apply to cross-border supplies of manpower.
  • Supplies of goods provided as a guarantee in execution of such guarantee; supplies of goods provided as a guarantee are not subject to VAT (the transaction does not meet the essential requirements, such as the transfer of the right of ownership to dispose of such goods as their owner, and the existence of a consideration). The domestic reverse charge regime will only apply upon the “execution of a guarantee” if legal requirements are met.
  • Supplies of goods after cessation of reservation of the right of ownership to a transferee and performance of such right by a transferee.

The GFD has published information concerning the issue (see the following link; Czech version only).

Payments of VAT on received advance payments

The amendment of law has introduced more detailed rules for establishing the date when the duty to pay VAT on advance payments arises. VAT must be paid on an advance payment as at the date the payment was received only if the details of the taxable supply are known with sufficient certainty on the date the payment was received. After the amendment of law, section 20a of the VAT Act stipulates that VAT may only be paid on an advance payment if the goods and services which will be supplied are known, and if the VAT rate and the place of taxable supply are known. The interpretation (see below) states that sufficient certainty of a taxable supply is decisive, namely, its tax regime; for example, if goods in the basic VAT rate are to be supplied and the Czech Republic is the place of supply, then the details of the taxable supply are deemed to be known with sufficient certainty regardless of which specific goods are to be supplied (i.e. no matter whether, for instance, women’s or men’s fashion will be supplied) and regardless of the specific place of supply (no matter whether it is a store in Prague or Brno).

The GFD has published information concerning the issue (see the following link; Czech version only).

Supplies provided on long-term basis

If goods and services are supplied over the period exceeding 12 months, then taxable supplies are deemed to take place at the latest on the last day of each calendar year following the year in which the taxable supply commenced. The new rules will not apply if an advance payment was provided, and in the cases of supplies of heat, cold, electricity, gas, water, etc.

A new unreliable person concept

A new unreliable person concept has been introduced, after the previously introduced “unreliable VAT-payer” concept. An unreliable person is a person who is not a VAT-payer and who
has violated seriously its duties in the field of VAT administration. If an unreliable person becomes a VAT-payer, then such person will also become an unreliable VAT-payer automatically.
If the registration of an unreliable VAT-payer ceases to exist, then the person will automatically become an unreliable person at the moment the person ceases to be a VAT-payer.

The recipients’ of taxable supplies guarantee of VAT

The duty of recipients of taxable supplies to guarantee VAT not paid by suppliers has been extended. Under the new rules, recipients of taxable supplies will guarantee payments provided (even partially) in virtual currency (for example, bitcoins). If the supplier fails to pay the relevant amount of VAT on output, then the recipient of the supply will automatically become the guarantor of the VAT amount.

Adjustments of VAT deductions of fixed assets

Under the new rules, one-time adjustments of VAT deductions of fixed assets under sec. 78d will also be carried out in the course of a calendar year (under the old rules, such adjustments were only performed in VAT returns covering the last tax period of the relevant tax year).

The main changes in the Income Taxes Act:

Increased tax credits for maintained children

The amendment of law increases tax credits under sec. 35c of the Income Taxes Act (ITA). The tax credit for a second maintained child will increase from CZK 17 004 to CZK 19 404, and the tax credit for a third child and subsequent children will increase from CZK 20 604 to CZK 24 204. Employers will first apply the new increased monthly tax credits in their administration of wages for July 2017. The remaining parts of the claim will be provided by means of annual reports, or tax returns.

Stricter rules for payments of tax bonuses for maintained children

Effective 2018, the conditions for payments of tax bonuses for maintained children will become stricter. The threshold of income which taxpayers need to exceed in order to obtain such tax bonuses (six times the minimum wage) will not include income from capital assets (sec. 8 ITA), and income from lease (sec. 9 ITA). Tax bonuses for maintained children will only be provided to taxpayers who have income from dependent activities (employment), and income from independent activities (self-employment).

Expenses of individuals established as percentages of income

Effective 2018, entrepreneurs and lessors will be allowed to claim lower amount of expenses calculated as percentages of their income. If taxpayers do not claim expenses in their actual (documented) amount, then they will be entitled to claim “lump-sum” expenses not exceeding the following amounts:

  • CZK 800 thousand in the case of income from agricultural production, forest and water management, and vocationa trades
  • CZK 600 thousand in the case of income from trades
  • CZK 300 thousand in the case of income from lease of business assets
  • CZK 400 thousand in the case of income from independent activities not specified above
  • CZK 300 thousand in the case of income from lease under sec. 9 ITA

2017 is a transitory period. Taxpayers may decide in their 2017 tax returns whether they claim lump-sum expenses in line with the 2016 rules (that is, without the possibility to claim tax credits for children and for a dependent spouse), or whether they apply the new stricter limits for claiming lump-sum expenses – which will come into effect in 2018 – and claim at the same time the tax credits for a child and a spouse.

Tax established as a lump-sum

Since the 2017 taxable period, tax may be established as a lump-sum to taxpayers who have not only income from independent activities (self-employment), but also income from dependent
activities (employment), and to taxpayers who carry out independent business activities and have employees.

Depreciation of technical enhancement

The amendment of law defines a wider group of taxpayers who may claim tax write-offs of technical enhancement effected on property of another person. Under the new rules, tax write-offs may also be claimed by taxpayers who use such property (for example, sublessees). They will need to comply with the following conditions similar to those of lessees:

  • Technical enhancement has been paid by the taxpayer who has the right to use the property on which such technical enhancement has been effected
  • The owners’ written consent that the technical enhancement may be implemented and their consent with tax write-offs of technical enhancement; technical enhancement will be allocated into the same depreciation category as the property
  • The owner did not increase the input price of the property by such technical enhancement

The new rules will apply to technical enhancement completed and put into a condition fit for regular use after the amendment of law has become effective.

Depreciation of intangible assets

The categories of intangible assets no longer have fixed depreciation periods, but instead there are minimum depreciation periods. Taxpayers will be allowed to depreciate intangible assets for longer periods of time, but the currently existing conditions will need to be fulfilled (in particular, tax write-offs will need to remain straight-line). The new rules will apply to assets the write-offs of which commence after the amendment of law has become effective.

Changes in financial leasing

Under the new rules, tangible assets depreciated under sec. 26 ITA are the object of financial leasing. The new rules exclude from financial leasing all contracts relating to assets which are not depreciated, and contracts relating to intangible assets. The new rules will apply to contracts where the object of financial leasing was given to the user in a condition fit for its regular use after the amendment of law has become effective.

Publicly beneficial taxpayers: tax savings

If publicly beneficial taxpayers generate financial means as a result of their tax savings, then they will have to use such finance for covering the expenses of their non-entrepreneurial activities in the subsequent tax period at the latest.

Tax depreciation of entrusted assets of budgetary organizations

Organizations fully funded from the State budget may claim tax write-offs of tangible assets handed over to them by their founders by means of deeds of foundation. If such assets were being written off by the founders as well, then the organizations must continue in such write offs. The new rules may be applied in the period commenced in 2017 already.

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