In this article, we would like to present a few terms from the world of investment incentives that are useful to know if you are already using an incentive or just thinking about it.
In which cases can an investment incentive be applied for?
Investment incentives can be applied for by companies that operate or plan to operate in the area of the manufacturing industry as well as by technology centres and strategic service centres. Primary production such as crop or agricultural production, mining, etc. is not supported by incentives on a long-term basis.
The most frequent recipients of investment incentives are manufacturers from the area of the manufacturing industry, i.e. companies or plants that are either newly established or that expand existing production. Production implementation in a newly established company – that is a rather obvious term, but which conditions have to be met so that an investment incentive can be applied for by an already existing company?
According to the methodological manual on Commission Regulation (EU) No. 651/2014, when expanding an existing plant, the company has to meet one of the following requirements by carrying out the investment:
a) Increase in production capacity – the investment will be intended for existing production that enables the company to produce more products, i.e. the production capacity of at least one existing kind of product that is already being produced by the company will increase without expanding the existing production range or changing the manufacturing process of existing kinds of products.
b) Production launch of a new product (the so-called production diversification by new products) – it is an investment aid that enables the company to expand the production by products that have not yet been produced by the company and have significantly different functional characteristics than the existing production range (the new product does not have to belong to another CZ-NACE classification group). On the other hand, a moderate (slight) modification of products by usual (routine) innovation (e.g. using minor changes in the product design) is not considered production expansion.
c) Significant change of the production process – concerns significant process modernisation, i.e. implementation of a substantially different technology solution, transition from manual production to machine production, etc. The changes have to relate to the production process of at least one of the existing products; the production range remains unmodified or is modified only insignificantly.
The defined requirements imply that it cannot be automatically assumed that any new investment can qualify for an investment incentive. It is often forgotten that e.g. a mere replacement of an existing investment by a new investment (e.g. during the modernisation of a production line or its replacement with a new one) that fails to qualify for one of the above-mentioned categories cannot be supported by an investment incentive.
Let us not forget that all investment incentive applications are subject to approval by the Czech Government that has the right of veto in the final decision.
Important conditions and deadlines
If everything goes well and the Ministry of Industry and Trade issues a positive decision and the investment inceptive is allocated to the company, there are certain conditions and deadlines you should not forget about. The most important ones are:
- Deadline for meeting the general conditions
The basic condition for the company to use an investment incentive (mostly a corporate income tax relief) is meeting the so-called general terms defined by the Act on Investment Incentives within 3 years after the issue of the decision to provide an investment incentive. It should be noted that within the investment project, the investment can be carried out even after these three years. After meeting both the general and special conditions set by the Income Taxes Act, the investor can start to use the tax relief for up to ten consecutive taxation periods.
- Investment project completion
The so-called investment project completion is another important term. The holder of the investment incentive decision is obliged to send a notification to the Ministry of Finance and the Ministry of Industry and Trade of when and to what extent was the investment action completed, i.e. no more aided assets will be acquired within the investment project. The investment is regarded as completed as of the date stated in the notification. If no notification is sent, the investment project is automatically considered completed within 5 years from the issue of the decision on the investment incentive. The completion date of the investment project determines the beginning of the period during which the investment project recipient is obliged to keep assets in possession in the amount corresponding to the amount of the aid drawn. The period for keeping the aided assets lasts for the duration of the investment incentive; however, it has to be at least 5 years after the completion of the investment project. In certain situations, especially with regard to recipients who use up the income tax relief earlier than within the ten-year term, it is important to announce the end of the project as it may reduce the overall obligatory period to keep the invested assets.
- Cancellation of the decision on the investment incentive versus termination of the use of tax relief
Cancellation of the decision on the investment incentive can be applied for by the holder of the decision if the investment incentive has not been used and is not expected to be used. In such cases, the investment is regarded as an investment that has never been supported. The cancellation of the decision on the investment incentive denotes, among other things, the termination of obligations for the recipient of investment incentives set by the Income Taxes Act including the specific deadlines for an inspection by the tax administrator.
We recommend the holders of the investment incentive decision who have already used up the tax relief before the end of the ten-year term to notify the tax administrator (as well as the Ministry of Finance and the Ministry of Industry and Trade) that the tax relief will no longer be used. The notification does not affect the obligation to meet the conditions set by the Act on Investment Incentives, e.g. the condition to keep the aided assets. However, it affects the termination of obligations for the recipients of investment incentives set by the Income Taxes Act including the specific deadlines for an inspection by the tax administrator.
We consider these milestones in the life cycle of investment incentives essential as they can and do have an effect on the possibility to use the tax relief, the following compliance with the conditions as well as on the deadlines for an inspection of the tax administrator.