Tax 

Tax authorities issued new methodology for the interpretation of Income Taxes Act

Last December, the General Financial Directorate (“GFD”) issued the long-awaited instruction GFD-D-59 on a uniform procedure for the application of certain provisions of Act No. 586/1992 Coll., on Income Taxes, as amended (the “ITA”), which replaced the previous instruction GFD-D-22. Let us take a look at how the tax administrator’s methodology has changed or become more precise.

Personal income tax

The new instruction states that in the case of a plot of land with a building forming part of it under the Civil Code, it is the date of acquisition of the land, and not of the building on the land, that is decisive for the exemption of income from the sale of real estate. This, however, does not apply in cases where the building has not yet become part of the land on which it stands and continues to exist as a separate immovable property, i.e. in cases where the building historically existed as a separate immovable property before the Civil Code came into force and the income from its sale had already been exempt from income tax.

In the category of exemption of gratuitous income (Section 4a(m)(4) of the ITA), the law allows the taxpayer to exempt gratuitous income in the form of economic advantage of a borrower in the case of an interest-free loan for consumption, a borrower in the case of a loan for use or a borrower in the case of a precarium, if it is not income from employment and the total income from this economic advantage does not exceed CZK 100,000 in the taxable period. The new instruction GFD-D-59 stipulates that the economic advantage to be taxed or exempted, if any, generally arises at the time a contract is concluded.

Further clarifications concern the deductible items that can be deducted from the taxpayer’s tax base. If the tax return of the taxpayer states interest on a loan granted for maintenance and alteration of the construction of a family house, where the participant in the loan agreement is not the owner of the family house and is unable to prove their entitlement to deduct interest on the loan by means of an extract from the title deed pursuant to Section 38l(1)(e) of the ITA, then it is necessary for the taxpayer to prove at least some relationship to the housing need – i.e. that they use the family house for permanent residence.

From 1 January 2021, the maximum limit for the application of interest on loans was changed from CZK 300,000 to CZK 150,000, with the new limit applying to housing acquired after 1 January 2021. In this context, the instruction sets out the method for calculating the total amount of applicable interest when combining old and new loans.

With regard to Section 6(4) and Section 38h, the GFD adds that in the event of concurrence of the taxpayer’s income from employment or agreement to perform work and income from an agreement to complete a job with one taxable entity, if the taxpayer has filed a taxpayer’s declaration in accordance with Section 38k of the ITA, all income of the taxpayer will be included in one basis for calculating the advance payment of tax, regardless of the amount of income generated from the agreement to complete a job. This would not apply if the taxpayer did not file a taxpayer’s declaration in accordance with section 38k of the ITA. In this case, income arising from the agreement to complete a job that does not exceed CZK 10,000 is taxed at a special withholding tax rate and other income from the same employer would be taxed by the advance payment of tax.

The new instruction also removes any doubts regarding the provision of meal vouchers and monetary meal allowance, in particular:

  • in the case of the provision of meal vouchers or the possibility of meals in the canteen, there is no limit for exemption from personal income tax. However, in order to avoid abuse of the right, it is necessary for the employer to provide meals at a value equivalent to normal meals during the working shift,
  • in the case of monetary meal allowance and a shift of more than 11 hours, the monetary meal allowance can be exempted up to 70% of the upper limit of the meal allowance that can be granted to salaried employees on a business trip lasting between 5 and 12 hours, i.e. CZK 107.1 as of 1 January 2023,
  • monetary meal allowance may also be granted to an employee working under an agreement to complete a job or to a statutory executive, provided that they have shifts determined by the employer,
  • in the private sector, an employer may offer more than one form of meal allowance to employees; however, an employee may only use one of the tax-advantaged forms agreed in a collective agreement or laid down in an internal regulation of the employer per shift.

In connection with Section 6(9)(d)(1) of the ITA, the instruction emphasises the necessity of providing goods or services of a medical, therapeutic, hygienic, and similar nature only from healthcare institutions (i.e. institutions registered in the National Register of Health Care Providers (NRHCP), formerly the Institute of Health Information and Statistics). If this condition is not met, it constitutes an income of the employee that is subject to taxation and enters the assessment base for social security and health insurance contributions. This does not apply to the acquisition of medical devices on prescription.

Last but not least, the GFD assigned the income from Airbnb to Section 7 of the ITA, which only confirms the long-standing practice of the tax administration and the courts. The usual practice of the tax administration is also to value immovable property at the appraised price rather than the market price, as also confirmed by the new GFD-D-59 instruction.

Corporate income tax

For common practice of legal entities, the tax authorities remarked on the importance of contractual arrangements in the case of deductible gifts. In respect of the minimum required amount of CZK 2,000 for an individual deductible gift, it makes a difference whether the taxpayer provides one person with 12 gifts of CZK 200 each or with one gift of CZK 2,400, which they pay in instalments.

Furthermore, in accordance with the explanatory report concerning Act No. 299/2020 Coll., which introduced the possibility of tax loss carry-back, the approach for applying losses for the tax period, or the period for which the tax return is filed, has been extended to its carry-back as well. In the area of tax losses, the methodology for tax assessment periods was supplemented; in accordance with current case law, for the purposes of calculating the statute of limitations under Section 38r(2) of the ITA, it is decisive whether the tax loss assessed could be claimed, not whether it was actually claimed.

In addition to the above-described issue of meal allowance, we also add the opinion of the GFD, which states that in the case of providing meal vouchers to employees, the price of the meal is determined primarily by the employer’s internal guideline, which means that more meal vouchers can be provided by the employer for one meal (e.g. the value of the meal is CZK 90, therefore 3 pieces of meal vouchers worth CZK 30 can be provided). The Financial Administration has also interpreted that meal vouchers can be provided to employees retroactively according to the actual shifts worked.

Turning to more specific areas of the ITA, the instruction states that a user who is neither a lessee nor a user under a finance lease agreement to whom the provisions of Section 28(7) of the ITA apply is e.g. a sublessee, a borrower or a user under an unnamed agreement. These persons are attributed the status of the lessee and the person who has transferred the property is in the position of the owner. According to the GFD, the provisions of the ITA governing the relationship between the owner and the lessee apply mutatis mutandis to such defined relationships. A useful guideline may be also that a building that is allowed to operate under a trial operation may be put into a use, as opposed to a building that is allowed to be used prematurely by the building authority.

In the area of international taxation, generally in order to claim the exemption of royalties and interest pursuant to Section 19(1)(zj) and (zk) of the ITA, a decision to grant the exemption pursuant to Section 38nb of the ITA is necessary. In this respect, GFD instruction D-59 newly provides that this exemption or decision may also be applied for retrospectively, namely for periods for which the statute of limitation has not yet expired. Last but not least, the instruction contains the already issued methodology for the implementation of Council Directive (EU) 2016/1164 laying down rules against tax avoidance practices (ATAD Directive).

Finally, we would like to remind you that the instruction is an internal methodology of the GFD for individual tax administrators. Thus, it is generally binding for tax administrators. Therefore, if the taxpayer follows the instruction, the tax authority should not object to their practice.

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