On 30 June, a bill amending certain laws in connection with the consolidation of public budgets (the “consolidation package”) was submitted by the government to the Chamber of Deputies as print 488/0. The consolidation package was discussed in the Chamber of Deputies and sent for a second reading on 19 July 2023.

During the summer, the government coalition agreed on proposals for amendments and supplements to the consolidation package that were submitted on 30 August 2023 as a joint amendment by MPs from the coalition parties (print 488/4).

As part of this amendment, changes to the Act on the Security of the President of the Republic after the Expiration of the Term of Office were deleted from the government’s original consolidation package bill. In its place, quite surprisingly, a new Part Thirty-Five was submitted, and it proposes Amendment to Act No. 563/1991 Coll., on Accounting, as amended (the “Accounting Act”).

The proposed Amendment to the Accounting Act contains the following three new major innovations, which have different effective dates:

• introduction of the concept of a functional currency, effective as early as 1 January 2024;
• implementation of the European Corporate Sustainability Reporting Directive (“CSRD”), effective as early as 1 January 2024; and
• implementation of the European Directive on the Disclosure of Income Tax Information by Certain Undertakings and Branches (“CbCR”), effective from the financial year beginning on 22 June 2024.

We will now look at the individual changes in more detail, knowing that the entire consolidation package is yet to go to a third reading in the Chamber of Deputies; therefore, further changes may still be made.

Introduction of the concept of the functional currency as early as 1 January 2024

The concept of the functional currency was originally proposed in the new Accounting Act, which was to become effective as early as 1 January 2024. However, given that the bill of the new Accounting Act has only gone through the external comment procedure and the lack of related accompanying act and decrees, it is clear that the new Accounting Act can be expected only as early as 1 January 2025.

According to the explanatory memorandum of the amendment to the consolidation package, the purpose of introducing the functional currency into the Czech legal system is to “enable reporting entities to use a currency for accounting purposes that coincides with the currency in which the entity actually carries out its activities and in which the majority of its transactions take place”.

Section 24a is included in the Accounting Act that introduces the concept of an “accounting currency”. The accounting currency may be not only the Czech currency but also the euro, the US dollar, or the British pound if they also meet the defining elements of the functional currency of the entity. The functional currency is defined as the currency of the primary economic environment in which the entity operates. The specific criteria for assessing whether a currency meets the definition of the functional currency will be set out in the implementing regulation. The explanatory memorandum of the amendment to the consolidation package presents the following indicators that may be relevant for the assessment:

• the proportion of the entity’s transactions denominated in the relevant currency exceeds 50%;
• the extent to which the relevant currency affects the prices of the entity’s goods and services;
• the currency of the country whose competitive environment and business conditions predominantly affect the prices of the entity’s goods and services; and
• the extent to which the currency affects payroll and other costs that the entity has to incur in producing and selling goods and providing services.

The explanatory memorandum states that the concept of the functional currency is based on IAS 21 “The Effects of Changes in Foreign Exchange Rates” but it is understood more narrowly. “Whereas under IAS 21 the entity is obliged to use for accounting purposes the currency that is its functional currency according to the criteria defined, pursuant to the Accounting Act, the use of functional currency will be solely the right of an entity, with the Czech currency remaining the default accounting currency for entities.” Compared to IAS 21, the range of currencies that can be used as the functional currency is also limited.

Sections have also been added to the Accounting Act to regulate when and at what rate to convert foreign currencies into the accounting currency. The entity will generally use a “general rate”, which is the rate of exchange for the foreign currency announced by a central bank responsible for the accounting currency on the data of conversion, to convert assets and liabilities denominated in a foreign currency. The central bank is the Czech National Bank (CZK), the European Central Bank (EUR), the Federal Reserve System (USD), and the Bank of England (GBP). As at present, a fixed rate may also be used.

The accounting currency may only be changed on the first day of the reporting period. If the accounting currency is other than the Czech currency, the accounting currency cannot be changed to the Czech currency unless the other currency ceases to be the functional currency.

The amendment also contains a related amendment to the Income Tax Act that allows corporate income tax (except for windfall tax, withholding tax as special rate, and reinsurance tax) to be calculated in euro, US dollar, or British pound if these currencies are the taxpayer’s accounting currency. However, the corporate income tax return will continue to be filed in Czech crowns. No changes are proposed in the Value Added Tax Act in relation to the functional currency.

Sustainability reporting as early as 1 January 2024

In December 2022, Directive (EU) 2022/2464 of the European Parliament and of the Council as regards corporate sustainability reporting (Corporate Sustainability Reporting Directive – “CSRD”) was adopted. The sustainability reporting obligation brought by the CSRD is spread over several phases. The amendment to the consolidation package only includes the first phase of the start of this obligation, which is to be effective from 1 January 2024. Further phases will be part of the new Accounting Act.

The existing Part Eight of the Accounting Act, which regulates the presentation of non-financial information, is proposed to be replaced in its entirety by new wording regulating the production of sustainability reporting.

The range of obliged entities is the same as the range of entities that currently report non-financial information, so only an entity that:

a) is a business corporation;

b) is a public-interest entity;

c) would be a large entity even if it were not a public-interest entity; and

d) has more than 500 employees for the reporting period as of the balance sheet data

has to prepare the sustainability reporting.

Similar rules apply to the obligation to prepare the consolidated sustainability reporting.

Sustainability is understood to include environmental matters, social matters, human rights and respect for them, governance, employee matters, fight against corruption and bribery.

The amendment to the Accounting Act also lists exemptions from the obligation to produce sustainability reporting, relief for small and medium-sized undertakings, and the statutory content of the sustainability reporting.

The sustainability reporting is to be the separate section of an annual report. The annual report of the entity producing the sustainability reporting is to be produced in the Extensible Hypertext Markup Language format (xhtml extension), with this requirement applying to all its parts (including annual accounts).

As the sustainability reporting is subject to audit as part of the annual report, an amendment to the Auditors Act is also proposed.

Report on income tax

The obligation for certain entities to publish and make accessible the report on income tax was also originally included in the bill of the new Accounting Act. As it concerns the implementation of the European Directive, which is due to apply from the financial year commencing on 22 June 2024, it has been included in the consolidated package.

The purpose of the report on income tax is to provide information on the country in which income taxes are paid and the amount of income taxes paid.

A new Part Nine is to be included in the Accounting Act that contains the definition of entities, which will be obliged to produce or make accessible the report or the consolidated report on income tax, as well as the statutory information that the report must contain.

In simple terms, the obligation to produce the report or the consolidate report on income tax applies to standalone or consolidated entities that are business companies and that have a foreign branch or a foreign permanent business and their annual net turnover or annual total net turnover on consolidated basis reaches CZK 19 billion in two consecutive financial years.

The report on income tax is made accessible by the standalone entity from a state other than an EU Member State that has a form comparable to a business company and has a branch in the Czech Republic in the financial year if, in two consecutive financial years, the annual aggregate net turnover of the branch reaches CZK 200 million and revenues of the entity reach the amount corresponding to the amount of EUR 750 million. Similar rules apply to making the consolidated report on income tax accessible.

We will inform you about the upcoming changes to the current Accounting Act as well as about the new Accounting Act under preparation in our upcoming articles. In November and December, we will also invite you to our Czech Accounting News: Introducing the New Accounting Act seminars. Information about other events, not only in the area of accounting, can be found at events.deloitte.cz.