The Recovery Package in the context of tax changes
Following the Government announcement on the Recovery Package, the related amendment to the tax regulations was published. Below we summarise a selection of the most important changes in this area.
As we have informed you in our previous articles, during the approval process of the Tax Package for 2021 (amendment of the Income Taxes Act as of 1. 1. 2021), doubts arose as to whether the legislative process took place in a constitutionally prescribed manner. Now, a group of senators asked the Constitutional Court of the Czech Republic to review the constitutionality of the Act’s approval process and proposed it be abolished. According to the Constitution of the Czech Republic, the Constitutional Court can decide on the abolishment of an act should it be contrary to the constitutional order.
It is important to note that the approval process of the 2021 Tax Package really was a turbulent one. Until the very last minute, taxpayers did not know when – and whether at all – such crucial changes to the tax system would become effective. Needless to say that it subsequently had to implement the approved changes practically overnight.
Since the Tax Package was supposed to become effective on 1 January 2021, the Parliament was a busy place in December. Right before Christmas, specifically on 22 December, the Parliament approved the Tax Package. All that remained to complete the legislative process was the President’s signature and publishing the Act in the Collection of Laws. And it was Miloš Zeman’s signature that became the weakness that the group of senators is now contesting at the Constitutional Court. The President announced in advance that he would not sign the Act, because in his opinion it contributed to the unfavourable development of the public finances. In accordance with this, he sent the Act back to the Parliament on 28 December together with an explanatory letter, in which he stated he would not sign the Act and that he was returning it for further actions. Subsequently, the Act was published in the Collection of Laws on 31 December 2020 and became effective on 1 January 2021. Only then did Miloš Zeman explain his letter to the President of the Chamber of Deputies, confirming that he had not vetoed the Act, only passed it on for its publishing in the Collection of Laws.
This subsequently sparked an intensive expert debate on whether the Act was approved in accordance with the Constitution or not. According to the Constitution, the President has basically two options: signing the act, by which it is definitively approved, or returning it including justification to the Chamber of Deputies within 15 days, after which the Chamber of Deputies can vote on the act again and outvote the President. However, another option “broke into” the Czech constitutional practice, even though the Constitution does not mention it. This is the option when the President neither signs nor returns the act, and the act is subsequently published without the President’s signature. In other words, the President lets the period for the act approval expire without any actions taken, which is what Miloš Zeman probably intended to do in this case. However, to achieve the required effective date of 1 January 2021, the President returned the Act to the Chamber of Deputies before the 15-day period expired, by which he raised concerns about a presidential veto of the Act.
Therefore, Miloš Zeman’s explanatory letter for the President of the Chamber of Deputies became the subject matter of the Constitutional Court’s review. Because if the President vetoed the Act by his letter, though probably unintentionally, the Chamber of Deputies should have voted on the Act again; that did not happen, which poses a risk that the approval process of the Act was not in accordance with the Constitution and, as such, could be abolished.
The Constitutional Court can abolish the acts approved as part of the Tax Package as of the date of publishing its judgment (i.e. when it decides about the matter), or with a deferred effective date (i.e. the abolishment would take place on an effective date stipulated by the Court). In both cases, however, the Parliament and President could approve a new act with the same content, this time in a formally correct approval process. Nevertheless, in such a case, uncertainties would arise as to the effectiveness of the individual versions of the act. This would constitute a considerable formalism from the Constitutional Court, especially in a situation when the President clearly confirmed that he had not vetoed the Act.
It is, however, important to monitor this case, because it can have an impact on all Czech taxpayers. And we can only hope that in the future, tax regulations will be approved after a proper debate with the professional public and in time so that there are no doubts about their meaning, let alone constitutionality, and taxpayers have time to prepare for the changes before they are applied.
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