Answer ... While investment in capital assets does not represent a tax-deductible expense, tax depreciation of capital assets is tax effective. Although the tax depreciation set by the Income Tax Act usually does not correspond precisely with the accounting depreciation defined according to the economic life of the asset, the tax and accounting deprecation correlate quite well in many corporations. Accounting depreciation is used as a tax-deductible expense only for low-value fixed assets (ie, assets whose value is lower than CZK 40,000 in the case of tangible assets or CZK 60,000 in the case of intangible assets).
Tax depreciation is set forth in the Income Tax Act. Tangible assets are divided into six tax depreciation categories, with different depreciation periods. A taxpayer can depreciate tangible assets using either a straight-line or accelerated method of depreciation. Intangible assets are depreciated evenly on a monthly basis over periods stipulated by the Income Tax Act. There are certain exceptions which have their own depreciation rules (eg, assets used for photovoltaic electricity generation or the technical improvement of immovable historic monuments). The Income Tax Act also explicitly defines assets that are not depreciated (eg, land and artwork). The assets are depreciated by legal owner and tax depreciation is primarily calculated based on the acquisition price of the respective asset.
Answer ... The Czech Republic supports research and development (R&D) activities performed by taxpayers with an R&D tax allowance. The Income Tax Act allows a taxpayer to deduct from its tax base up to 110% of the costs incurred on the implementation of R&D projects during a given tax period. This means that the costs incurred by the taxpayer represent tax-deductible costs and, in addition, may be used again as a tax allowance to decrease the taxpayer’s tax base. The R&D projects must be in writing and must contain certain information required by law.
If the amount of the tax base does not allow the taxpayer to utilise the R&D allowance, it can be utilised during the three subsequent tax periods. Taxpayers may apply for a binding tax ruling from the tax authorities to confirm the eligibility of costs for R&D allowance purposes.
The Czech Republic also allows taxpayers to apply for investment incentives, which may be granted to both newly established and existing investors. The investment incentive may take different forms, one of which is an income tax discount.
Answer ... There is no special tax regime with respect to inventories. Inventories are valued at cost. This means that inventories acquired by purchase are valued based on their purchase price and other costs incurred in connection with their acquisition. Internally produced inventories are valued based on own costs, which include:
- direct costs incurred in their manufacture or other activities resulting in their creation, such as work in progress concerning services, construction and development projects, including the costs of material and other consumed products or other expenses that arise in direct relation to the manufacturing or other activities; and
- allocable indirect costs that relate to manufacturing or other activities.
If the actual value of the inventories is lower than the value shown in the taxpayer’s accounting books, the accounting value may be decreased by respective provisions in accordance with the prudence principle. However, this is not tax effective.
Answer ... Fair value of derivatives and changes thereto continue to be treated as tax costs or taxable revenue, as appropriate, upon realisation; while the corresponding accounting entries are recorded in accordance with International Financial Reporting Standard 9 as equity items.