Briefly on Selected Amendments to the Income Taxes Act
The development of Czech legislation has recently been so rapid that it is starting to be rather difficult to keep track of all the proposed changes. We have therefore prepared a brief overview of some of the proposed changes in the area of income taxes that are either under preparation or already in the legislation process and will affect Act No. 586/1992 Coll., on Income Taxes, as amended (hereinafter the “Income Taxes Act”).
The implementation package (press of the Chamber of Deputies no. 572) was presented to the Chamber of Deputies already on 23 August 2019 but so far it has only gone through the second reading in this Chamber. As far as the Income Taxes Act is concerned, the proposed changes are mainly terminological adjustments in the area of international taxation and modifications and corrections concerning the implementation of the EU anti-tax avoidance directive (ATAD). Specifically, the adjustments concern exceeding borrowing costs (interest limitation rule), exit taxation and taxation of controlled foreign companies.
Aside from the Income Taxes Act, which will not be substantially changed by this amendment, the implementation package will significantly affect the area of VAT, where it introduces new rules together referred to as “quick fixes”. Finally yet importantly, this amendment contains the long-awaited implementation of another EU directive, DAC VI, in the area of cross-border arrangements reporting. As part of the implementation of DAC VI, we would like to draw your attention to the currently discussed possibility of postponing some notification obligations following the COVID pandemic, based on an initiative of the European Commission. More details are available in our current article Possible Postponement of the Reporting Obligation Deadlines in Relation to Cross-border Arrangements.
“Pre-coronavirus” amendments for 2021
In the “pre-coronavirus era”, two amendments were proposed for 2021. The first one, from January 2020, introduces the possibility of lump-sum personal income tax and public insurance for selected groups of taxpayers with business income. In specified cases, this amendment would mean the possibility to pay a lump-sum amount to the tax authority without the need to file a tax return or a report of income and expenses. The draft also includes follow-up changes of relevant insurance regulations. The external consultation procedure in respect of this amendment has already been concluded.
The second amendment for 2021 is, in the words of the Ministry of Finance, focused primarily on reduction of exceptions in the Income Taxes Act. It includes for example a proposal to abolish the exemption of interest income for non-residents (personal as well as corporate income tax payers) arising from bonds issued abroad by taxpayers based in the Czech Republic, or by the Czech Republic (so-called Eurobonds). The amendment also deals with the long-awaited modification and simplification of the notification duty with respect to income paid abroad and it newly introduces the exemption of monetary meal contributions for employees. The external consultation procedure regarding this amendment is nearing its end.
Retrospective utilization of tax losses
As part of the emergency government measures, the possibility of retrospective tax loss utilisation has been proposed. This institute should give taxpayers the possibility to obtain refundable overpayments based on tax liabilities that have been settled for the preceding two years. The amendment was presented at the meeting of the Government’s National Economic Council (NERV) and after the meeting; the amended draft has still not left the Ministry of Finance. The adjustment of the original proposal should consist primarily in ensuring that the refundable overpayments would be paid out to taxpayers as soon as possible and the aid would thus be sufficiently effective. For this reason, the amendment should contain a special one-off transitional measure aiming at speeding up the receipt of funds (refundable overpayments) by taxpayers during the coronavirus crisis.
The proposed transitional measure should offer the opportunity for the taxpayers to determine or estimate the tax loss expected to be reported for the first taxation period ending on or after 30 June 2020, i.e. the period likely to be the most affected by the coronavirus crisis. The estimated tax loss will be utilised in an additional tax return (or even in the regular tax return, if it has not been filed yet) for the immediately preceding taxation period as an item deductible form the tax base. In other words, to obtain the refundable overpayment based on the utilisation of a tax loss for the preceding period, taxpayers will not have to wait for the tax loss to be assessed, but can obtain the overpayment sooner based on their own estimate.
Abolition of Real Estate Transfer Tax
After a long hesitation, the Ministry of Finance presented to the government a draft bill that abolishes legal measure of the Senate no. 340/2013 Coll., on real estate transfer tax, as amended. The abolition of the real estate transfer tax should be proposed retrospectively, even for real estates whose ownership right was recorded in the Cadastre of Real Estate in December 2019. However, this amendment also changes certain provisions of the Income Taxes Act, namely in the area of taxation of individuals. The abolition of the real estate transfer tax should entail an extension of the time test for the exemption of income from the sale of immovable assets not intended as the taxpayer’s own residence from 5 to 10 years, with respect to properties acquired since 2021. In addition, the draft proposes abolishing the possibility of applying deductions of interest on mortgages from the tax base. This shall apply to newly concluded agreements on housing loans probably from 2022.
Amendment related to changes on the capital market
A draft bill changing certain acts in relation to the development of the capital market is currently in the external consultation procedure. With respect to the Income Taxes Act, adjustments are made to the possibility to deduct additional pension and life insurance contributions (now jointly called “retirement savings products”) from the tax base. With respect to corporate income tax, the term “investment fund sub-fund” is expanded in line with the proposed changes to Act No. 240/2013 Coll., on Investment Companies and Investment Funds, as amended.
We have summarised above some amendments that should change the Income Taxes Act, however, other amendments proposed by groups of deputies or other initiatives are also under discussion. The coming months will therefore show when and in what form the amendments to the Income Taxes Act will take effect. In any case, we will continue to monitor the development and keep you informed about the current situation.