On this topic, you can also read our previous articles in which we have discussed the concept of minimum tax and the developments at OECD and EU level.

The material is very complex. In view of this fact and for time reasons (we would like to remind you that the transposition of the European Directive must take place by the end of this year, with the rules to be applied starting as early as in 2024 or 2025), the Ministry of Finance has decided to go the route of “pure” transposition into a new separate act. As stated in the explanatory memorandum, in addition to transposing the rules laid down in the Directive, it contains only the necessary provisions regulating the relationship of the top-up taxes to other parts of the Czech legal system. The rules laid down in the Directive are transposed in the proposed act in the form of two new direct taxes, namely the allocated top-up tax and the domestic top-up tax. These taxes are not income taxes, therefore the proposed act explicitly regulates in particular the relationship between the top-up tax and income taxes in cases where the systems of these two types of taxes would come into conflict. For this reason, it also contains a separate special regulation of the administration of the top-up tax, with the Tax Code being applied in the alternative (note: references to specific acts are omitted).

As for the structure of the new act, it has 138 sections and 13 parts. The first part defines the terms, in particular the definition of the top-up tax and the two types of the top-up tax – the allocated top-up tax (the top-up tax based on the GloBE rules) or the qualified domestic top-up tax (QDMTT), the rules for the top-up tax (IIR, UTPR), the definition of entities, groups and specific situations, etc. The second part defines the taxpayer and the taxation period of the top-up tax to be allocated. The third part deals with the qualified domestic top-up tax. The fourth part again concerns (the application of) the rules for the allocated top-up tax. The fifth part contains the definition and procedure for determining the qualifying income or loss (GloBE income or loss) and the covered taxes that are necessary to determine the effective tax rate (ETR – this is further addressed in part six together with the allocated top-up tax). Part 6 also provides for exceptions to the obligation to calculate the top-up tax (safe-harbour rules), with some provisions to be added after the adoption of a substantive solution at OECD level (see Sections 84-87 of the draft). Part 7 deals with the special regime for transformations and holding structures, while Part 8 deals with the tax neutrality (transparency) regime and taxes on distributed profits (note the specificity of the taxation of companies in some countries, in particular the Baltic States, linked to the distribution of profits). Finally, Parts 9 and 10 contain provisions for the administration of the top-up tax (including the transition periods). The sections on general provisions, transitional provisions and proposed effect follow.

We are analysing the draft in detail and will comment on it. We see the main challenges for the groups that will be affected by the new obligation (according to the Ministry of Finance, they will include 5 to 6 Czech parent entities and over 3,000 constituent entities) in the need to provide the necessary data and information for the calculation for individual entities and countries – and also to determine the structure and regime of the groups and the implementation of the rules in individual countries where the group operates.

From the perspective of the transposition proposal itself, the challenge will be just to get to grips with the logic of the comprehensive act and the Czech terminology used (especially for those who already work with English terminology based on OECD and EU materials).

Comments can be submitted until 12 June 2023.