Czech Republic: Approved Amendment To The Income Taxes Act

The personal income tax progression rate was slightly broadened, i.e. the tax base for the highest level of the personal income tax (tax rate 32 %) begins at CZK 331,200 (before CZK 312,000).

This modification of tax rates has also been applied to the calculation of tax advances on income from dependent activities. The highest personal income tax advances rate of 40 % was also abolished. Thus, the discrepancies made by the ITA amendment which are valid as of January 01, 2000 and did not reduce the monthly tax advances from 40 % to 32 % were resolved.

There is no longer a requirement that a seller have owned an apartment or single-family house for at least two years directly prior to the sale of the apartment or single-family house in order to exempt the income from the sale from the seller’s personal income tax. This requirement is broadened; it is sufficient that the seller have resided there.

Starting in the 2001 tax year, small businessmen will be allowed to pay a so-called "lump-sum" personal income tax instead of the actual tax on their profits calculated according to the income tax rules. Such taxation would be allowed only to those persons who are not VAT payers, who run the business alone (without employees) and whose total yearly income did not exceed the amount of CZK 1,000,000 during the three tax years immediately preceding.

Employee income not exceeding CZK 2,000 per calendar month was subject to 15 % withholding tax subject to the condition of signing a tax statement ("prohlášení k dani"). As of January 01, 2001, the amount of such income is increased to CZK 3,000.

Income earned by a taxpayer from dependent activities in a country, which has not concluded a double taxation treaty with the Czech Republic, was previously not taxed in the Czech Republic. Starting in the 2001 tax year this income, reduced by the foreign income tax paid will be taxed in the Czech Republic. Therefore, there is no avoidance of double taxation of income resulting from dependent activities in non-treaty countries.

In the past the companies had unlimited tax liability in the Czech Republic and their world-wide income was subject to tax thereto if their registered headquarters were located there according to Czech commercial law.

The ITA amendment designated the adoption of the "place of actual management" as a further criteria for the definition of unlimited tax liability starting in the 2001 tax year.

In the tax year 2000, the tax-deductible expense for legal entities with respect to gifts was up to 2 % of the tax base. The ITA included the ability to deduct up to 4 % from the tax base in case of gifts donated in connection with a natural disaster; for social and health care; for environmental, humanitarian and charitable purposes.

The value of the gifts that can be deducted from the tax base has been increased to 5 % starting with the 2001 tax year.

The corporate income tax rate for equity interest funds, pension funds and unit trusts was reduced from 25 % to 15%. The decreased tax rate is already applicable to tax year 2000.

The tax base of the unit trust can be further reduced by the losses carried forward in seven successive tax years, instead of three. This provision is also already applicable to tax year 2000.

The amendment to the Commercial Code in Section 190a regulates entering into a profit transfer contract. In connection with the unification of the Commercial Code’s amendment with the ITA, dividends as well as distributions of profits are taxed at a withholding tax rate of 15 % according to the ITA amendment.

Interest yields from deposit certificates were subject to a final withholding tax of 15 %. The ITA amendment unifies the taxation of interest yields from deposit certificates with the taxation of yields from other securities (corporate income tax rate of 31%). The deposit certificates are still subject to a 15 % withholding tax, but the tax withheld is now not final. The withholding tax can be credited against the total tax liability or is refundable in case of a loss situation.

The arm’s length principle has to be applied between related companies; otherwise, the tax administrators are allowed to adjust the tax base by the appropriate difference. The ITA states that loans, which are concluded according to Civil Law, have an arm’s length interest rate which is 140 % of the Czech National Bank discount rate. According to the past wording of the ITA, such a restriction did not apply to loans where the creditor was a foreign entity and loan interest was lower than 140 % of the Czech National Bank discount rate.

Starting on January 01, 2001,with respect to the arm’s length interest rate provision, the ITA amendment broadened the specification of creditors for whom the restriction does not apply to include the domestic shareholder of the company.

Personal income tax allowances on life insurance have been approved and are valid as of January 01, 2001. This allowance is subject to the insurance benefit payment being made at least 60 months after entering into the contract and simultaneously that the beneficiary is at least 60 years old at the time the payment is made. The maximum deductible expense for the employee is CZK 12,000 per annum; the same allowance amount applies if the taxpayer pays for the life insurance himself. The maximum deductible expense for the employer is CZK 8,000 per annum.

The ITA previously maintained that membership fees to legal entities, e.g. professional chambers, were in general considered a non tax-deductible expense unless membership was compulsory.

The new amendment allows such contributions to be treated as tax-deductible if the membership is necessary for business. In addition, membership fees paid by an employer on behalf of employees are tax-deductible for the employer under the same conditions as stated above.

The ITA considers a tax-deductible expense the input price of land acquired or received as an in-kind contribution up to the amount of income from the sale of this land. In case of an in-kind contribution for the input price of the contributor was granted a tax free step up in the tax base to the fair market value (i.e. the value of land as a in-kind contribution was higher than the original acquisition price paid by the contributor). Thus, the receiving company could sell the land upon the in-kind contribution without triggering taxable income.

The new amendment abolished the opportunity of granting a tax free step up in the tax base of the contributed land. Thus as of January 01, 2001, only the acquisition price of the land prior to contribution (evidenced by the contributor) is considered a tax-deductible expense up to the amount of income from the sale.

The tax deductibility of the total losses on the sale of an enterprise was disputable. The Ministry of Finance and professional experts were not in agreement. As losses on sale of several assets (e.g. receivables and land) are not tax deductible, in practise it was problematic when sellers had to justify the sale price for separate items, which were part of the sold enterprise.

The ITA amendment clarified the approach to losses on sale of an enterprise. An overall loss on the sale of an enterprise or a part of an enterprise is not tax deductible.

Starting on January 01, 2001, Czech tax residents are not allowed to use the exemption or credit method for elimination of double taxation on income from non-treaty countries. The income from non-treaty countries is also taxed in the Czech Republic. However, the paid tax is considered a tax-deductible expense.

Only the corresponding amount of the prepaid rent (it is accounted for on deferred accounts or advance payments) that is paid by the assignee to the assignor is considered a tax-deductible expense for new lessees (assignees). The additional amounts are not tax-deductible for assignees. Note: the above refers to financial leasing agreements.

Lease payments in respect of financial or operational leasing shall be recognised as tax-deductible expenses subject to the condition that the purchase price of the leased asset does not exceed the residual value which the leased asset would have had, if depreciated by the straight-line method or as of January 01, 2001, also by the accelerated method of depreciation. If this condition is not met, the lease payments should be reversed and recognised as a non tax-deductible expense for the whole leasing period.

The amendment permits an increase of the input price of the acquired asset by the amount of the non tax-deductible lease payments, and applies the depreciation as tax-deductible expense starting on January 01, 2001.

All interest on loans and credits was tax-deductible irrespective of the actual payment. In the new wording of the ITA, only paid interest on loans are tax-deductible. However, this regulation only applies, if the creditor practices single-entry bookkeeping or if the creditor is not considered an accounting unit.

Starting on January 01, 2001, the ITA no longer provides for depreciation of intangible assets. Therefore, accounting depreciation of intangible assets is tax-deductible. In the past, the intangible assets were depreciated from 4 to 12 years.

The depreciation period for newly acquired intangible assets as of January 01, 2001 is determined based on generally adopted accounting principles; i.e. the useful life of the assets.

According to the ITA, taxpayers depreciate assets using the straight-line or accelerated method and the rates as defined by law. They are allowed to interrupt depreciation, but they are not allowed to apply part of depreciation as a tax-deductible cost.

Starting in tax year 2001, the ITA amendment stipulates the depreciation coefficient for the straight-line method as a maximum. Therefore, it permits taxpayers to prolong the depreciation period.

The depreciation of technical appreciation of fixed assets excluded from depreciation is tax-deductible. Separately depreciated technical appreciation shall be classified in the depreciation category as the fixed assets on which the technical appreciation was carried out.

Based on past wording of the ITA, there was a tax relief of CZK 9,000 for a disabled employee and CZK 32,000 for a severely disabled employee. The amendment increased the tax relief amounts to CZK 18,000 and CZK 60,000 respectively.

The ITA had not indicated clearly, how a decrease of the registered capital should be taxed in the past. Starting on January 01, 2001, a decrease in the registered capital is subject to 15 % withholding tax provided that it was formally increased from the company’s own equity.

The amendment altered the rules for computing income tax advances. In the past, taxpayers whose last known tax liability exceeded CZK 20,000 were obliged to pay income tax advances. Those taxpayers whose last known tax liability exceeded CZK 20,000 but was not more than CZK 100,000, paid half-yearly tax advances amounting to 40 % of their last known tax liability. Taxpayers with a higher last known tax liability paid quarterly (tax liability from CZK 100,000 to CZK 10 million) or monthly (tax liability exceeding CZK 10 million) tax advances.

According to the amendment, taxpayers whose last known tax liability exceeds CZK 30,000 should pay half-yearly advances, and taxpayers whose last known tax liability exceeds CZK 150,000 should pay quarterly advances. Thus, monthly tax advances for individuals and legal entities are no longer valid.

The ITA amendment also altered the due date for the tax advance payments. Half-yearly advances are due by 15^th of June and December, while quarterly advances are due by 15^th of March, June, September and December. Based on the amendment, the new regulations on tax advance payments shall be applied after the 2000 tax returns are filed, i.e. April 01, 2001 and July 01, 2001 respectively. The later date applies for the taxpayers, who are represented vis-à-vis the financial authorities by a tax advisor.

Czech taxpayers are obliged to withhold tax security advances on payments or credits to foreign entities on taxable income accruing from sources in the Czech Republic. The amount of tax security was previously paid to the tax authorities responsible for the foreign entity. Starting on January 01, 2001, the tax security shall be transferred to the tax authorities that are competent for the Czech taxpayer.

Already for the tax year 2000, the additional pension insurance paid by employees (the amount of insurance premiums reduced by CZK 6,000, maximum CZK 12,000) shall be considered in the annual settlement of the tax advances on income from dependent activities. The employees are not obliged to file the income tax return themselves.

However, the employees are obliged to give to the employers a copy of the insurance agreement and confirmation of the paid insurance premiums for the tax year.

On July 2000, the Chamber of Deputies rejected the proposed amendment to the Accounting Act for the 2001 tax year. However, the proposed provision with respect to the possibility of determining a fiscal year separate from the calendar year was indirectly approved by the ITA amendment.

The fiscal year is determined as a period of twelve successive months, which can begin on the first day of any month other than January. The application of the fiscal year is only allowed with the approval of the competent financial authority. The ITA amendment permits the accounting period immediately preceding a change in fiscal year to be shorter or longer than twelve months.

Starting on January 01, 2001 it is not possible to create adjustments to receivables from debtors under bankruptcy or composition proceedings, which were due on December 31, 1994 or earlier.

Reserves and adjustments may be created and applied only for a tax year. All doubts about whether the adjustments to the receivables may be created during the tax year are removed.

According to past wording of the Act on Reserves, a company might have created adjustments to receivables from some related persons according the ITA wording. This provision was not repealed but became stricter. As of 2001 tax year, it is not possible to create adjustments to receivables, which were due after December 31, 1994 also from affiliated companies.

The amendment to the Road Tax Act became effective on September 07, 2000 when published in the Collection of Laws (Act No. 303/2000). However, the amendment applies to tax year 2000. Above all, it decreases the tax rate by 50 % and 25 % respectively, for vehicles that meet certain pollution level limits.

The proposed amendments to the Administration of Taxes Act and the Value Added Tax Act were rejected. It is expected that both amendments will be considered again by the Parliamentary Assembly of the Czech Republic.