We have already informed you in our previous articles about the forthcoming changes, which include so-called implementation package amending several legal regulations due to the implementation of EU tax laws. In terms of taxes, the implementation package of the Ministry of Finance of the Czech Republic slightly amends the Income Taxes Act, brings about a major change in cross-border transactions in the VAT Act and also introduces the long-announced obligation to report cross-border arrangements in the Act on International Cooperation in Tax Administration.
The implementation package, more precisely Document of the Chamber of Deputies No. 572, was finally approved, after almost a year of debates in the Parliament of the Czech Republic. On 14 August 2020, it was published in the Collection of Laws and became effective from 1 September 2020. It is therefore time to analyse it in greater detail.
Income Taxes Act
In the Income Taxes Act, the amendment defines and unifies selected terms concerning international taxation, such as “international treaty”, throughout the act. Nevertheless, it does not substantially modify the interpretation of individual provisions but purely aims to unify terminology. Furthermore, the amendment specifies some rules which were included in the Income Taxes Act as part of transposing Council Directive (EU) 2016/1164 (“ATAD”). In this respect, the amendment removes deficiencies in calculating the threshold of excess borrowing costs that is based on earnings before interest, tax, depreciation and amortisation and clearly defines the procedure for limiting the deductibility of excess borrowing costs for partners in partnership or general partners in a limited partnership. Furthermore, the amendment also defines the tax treatment of transferring assets, specifically securities measured at fair value, without a change in ownership if the assets are transferred from another EU Member State to the Czech Republic. Finally, the amendment sets forth a special taxation treatment of a controlled foreign entity if the controlling entity is a basic investment fund.
The aforementioned changes will apply to taxation periods commenced from the effective day of the act, with the measures related to the ATAD implementation being subject to special transitional provisions.
Value Added Tax Act
Principally, changes in the VAT Act will only affect cross-border trading in goods. They have been initiated primarily by the need to reduce the room for possible tax evasion but simultaneously, they also aim to align the rules for applying VAT in chain supplies of goods or in supplies involving consignment warehouses.
First, the amendment will change the work with the VAT number of a customer purchasing goods in one EU Member State (e.g. Czech Republic) and subsequently transporting the goods to another EU Member State as part of the transaction. Aside from other qualification criteria for VAT exemption, it will be necessary to obtain a valid VAT number from the customer, otherwise the supply will be subject to VAT. With regard to the evidence demonstrating that transport to another EU Member State has been realised, the VAT Act will also refer to the relevant Council Regulation addressing this matter in detail.
The VAT Act will define an unambiguous rule for allocating the realised transportation to a specific part of the supply chain, depending on which VAT number is used by the transporting party. The parties to the transaction will thus be certain that they proceed in line with VAT legislation.
The most significant changes in the existing rules relate to the application of the call-off stock simplification. The amendment has introduced a number of additional requirements, with some rules becoming, contrarily, less stringent. However, using the call-off stock simplification in practice might be more difficult in the future than at present.
Act on International Cooperation in Tax Administration
Following the implementation package, an obligation to report cross-border arrangements pursuant to the Directive on Tax Administrative Cooperation (“DAC VI”) has newly become part of the Act on International Cooperation in Tax Administration. The Act newly requires economic entities to report some cross-border transactions and other arrangements to taxation authorities so that the tax administrator can keep proper track of misusing tax legislation and aggressive tax planning. More information about this matter has already been provided in the article DAC 6: New Obligation to Report Certain Transactions to Taxation Authorities in Advance.
In response to passing the amendment to DAC VI at the EU level, the Czech Republic extended the reporting deadlines based on a government decree. This decree takes effect from 25 September 2020 and extends the deadlines as follows:
- For cross-border arrangements under which the first step was already realised from 25 June 2018 to 30 June 2020 (inclusive), on 28 February 2021 at the latest;
- For cross-border arrangements which were made available or prepared for launch, or under which the first step was already realised from 1 July 2020 to 31 December 2020 (inclusive), on 30 January 2021 at the latest; and
- For cross-border arrangements which were made available or prepared for launch, or under which the first step was already realised after 1 January 2021, no later than within 30 days from the relevant fact.