Planned Income Tax Changes for 2020
The Chamber of Deputies of the Czech Republic is currently debating two amendments to the Income Taxes Act (Act No. 586/1992 Coll., the Income Taxes Act, as amended), which may come into force in 2020. These amendments, parliamentary press nos. 572 and 509, bring the following proposals for changes.
Change in taxation of interest income arising from bonds issued before 1 January 2013
- The tax base for interest income arising from bonds issued before 1 January 2013 was rounded down to a whole Czech crown (so-called one-crown bonds). Subsequently, this treatment was changed when the tax on total income from one issuer started to be rounded. However, according to the transitional provisions, this adjustment did not affect interest income on bonds issued before 1 January 2013 (so-called one-crown bonds).
- Currently, a special transitional provision is proposed, removing this exemption for bonds issued before 1 January 2013 so that all interest income is rounded down on the level of the tax on total income from one issuer, regardless of the issue date of the bond. In practice, it means that if the amendment is approved, the new rounding procedure will be applied to all bonds.
Change in the method of creation and tax deductibility of technical provisions in insurance
- According to the proposed amendment, insurance and reinsurance companies will newly take into account as tax-deductible expenses the creation of provisions pursuant to the Insurance Act, which is based on the Solvency II Directive and not technical provisions created according to the accounting legal regulations. Thus, technical provisions created according to the accounting legal regulations will no longer be considered as tax-deductible expenses. Another change in approach is that, as technical provisions created pursuant to the Insurance Act are not accounted for, the provisions in insurance will be reflected in the tax base in the form of non-accounting adjustments to profit or loss.
- The transition to the new system is expected to lead to a relatively large impact on the tax liability of insurance and reinsurance companies; therefore, transitional provisions are proposed to split this one-off tax liability into two taxation periods.
Restrictions on the exemption of gambling winnings for natural persons
- Newly, gambling winnings should be exempted from income tax only up to CZK 100,000 (for example Sazka, Sportka, including receipt lottery). Thus, a domestic operator that pays out a prize greater than CZK 100,000 will be obliged to withhold or collect tax on this income. In case of a prize from a similar foreign competition, this income is not reduced by tax-deductible expenses and the natural person has to state it in the tax return.
Modifications following ATAD implementation
- Avoid duplicating the inclusion of so-called capitalised interest in the calculation of the limit for the eligibility of borrowing costs (according to the proposal, it will be possible to apply it for taxation periods from 1 April 2019).
- Addressing the restriction on the deductibility of borrowing costs for partners in partnership companies – e.g. k.s. and v.o.s. (according to the proposal, it will be possible to apply it for the taxation periods from 1 April 2019).
- Setting the taxation treatment for the transfer of assets without change of ownership from another EU Member State to the Czech Republic for securities valued at fair value.
- New rules for taxation of a foreign controlled company in case such a company is held indirectly through a basic investment fund (according to the proposal, it will be possible to apply it for taxation periods from 1 April 2019).
- In addition to municipalities and voluntary unions of municipalities, other public corporations such as regions and the state, or better the Czech Republic, are proposed to be considered as parent companies.
- Definition and unification of terminology relating to international treaties (including double taxation law in relation to Taiwan).
- Clarification of the legislation when a taxable entity can claim the tax paid abroad as a tax-deductible expense.
The article is part of dReport – September 2019, Tax news; Grants and investment Incentives.