The tax package, or, more precisely, Act No. 609/2020 Coll., was published in the Collection of Laws of the Czech Republic on 31 December 2020, coming into effect on 1 January 2021. In December 2020, its effectiveness was affected by a dispute whether or not President actually vetoed the Act by refusing to sign it, and, as a result, the opposition is considering lodging a constitutional complaint with the Constitutional Court. Whatever the result of this political debate, if we proceed from the effective date of 1 January 2021, the tax news of 2021 already have to be taken into consideration because it is a very current topic, especially in the area of tax depreciation / amortisation charges, which can be utilised retrospectively from 1 January 2020 under specific conditions in line with the transitional provisions. As part of the fight against the coronavirus crisis, the tax package brought three changes in the area of tax depreciation / amortisation, which we will cover in this article.
Increase in the limit amount for recognising tangible assets
The Income Taxes Act newly defines a tangible asset (i.e. separate tangible movable assets, animals and their groups etc.) as an item with a cost exceeding CZK 80 thousand, i.e. the current limit has been doubled. Technical improvements of tangible assets also increased to CZK 80 thousand. According to the transitional provisions, the new, higher limits apply to tangible assets acquired by the entity from 1 January 2021. In other words, the new legislation applies to assets acquired from the effective date of the Act, regardless of the taxation periods of individual entities. A company that has a taxation period set as a financial year, e.g. from September 2020 to August 2021, may find itself in the following situation: identical tangible assets with the cost of CZK 70 thousand acquired in November will be depreciated as tangible assets under the Income Taxes Act, on the basis of the respective depreciation group, and the same assets acquired in July 2021 (also with the cost of CZK 70 thousand) will be depreciated for tax purposes as low-value tangible fixed assets, i.e. depreciated for accounting purposes.
In this context, it is worth noting that according to the transitional provisions, the increased cost limit can also be applied to tangible assets acquired from 1 January 2020, as well as for technical improvements of tangible assets completed from 1 January 2020. The amendment therefore enables utilising the benefit retrospectively as well. However, caution should be exercised when applying the higher limit, mainly because the input price limit for the recognition of tangible assets is purely a tax matter. When deciding on utilising the increased limit retrospectively, the accounting treatment of the assets in question still plays a major role. If the assets are recognised and depreciated in the books, from a tax point of view, such assets within the limit of CZK 80 thousand cannot be recognised as one-off expenses in the respective period; only depreciation for accounting purposes will be reflected in the tax base as low-value tangible fixed assets depreciation.
The first reaction of a tax payer would be reclassifying the respective assets in the system from asset accounts to the profit and loss account, i.e. simply posting the assets acquired from 1 January 2020 within the limit of CZK 80 thousand into expenses and applying the same approach to the tax base. However, such approach can be precarious and contrary to the Accounting Act. It is important to emphasise the basic accounting principles, especially the fact that at the beginning of the accounting period, the entity itself sets the accounting methods for the period, which cannot be changed in the course of it. Setting a limit amount for the recognition of tangible fixed assets definitely is an accounting method. While it is true that the accounting rules allow for certain changes in the selected accounting method, it is important to note that a change in tax legislation cannot be a reason for this. Therefore, if an entity is considering a change in the accounting method, they should consult with an auditor.
Cancellation of special tax amortisation charges for intangible assets
Another change that the tax package brings is the cancellation of all special provisions of the Income Taxes Act relating to the recognition and amortisation of intangible assets. As a result, an accounting assessment will be crucial for the recognition and amortisation of intangible assets acquired from 1 January 2021. An accounting unit keeps records of intangible fixed assets in accordance with an internal guideline, starting from an amount that corresponds with the true and fair view of accounting. Therefore, the following amortisation for accounting purposes will newly be reflected in the tax base. In other words, if an intangible asset is treated as a one-off expense, it has to be treated the same way in the tax base. If an intangible asset is treated as an intangible fixed asset and amortised according to the entity’s internal guideline, this amortisation for accounting purposes will be considered tax deductible. We would like to point out that it is again possible to apply this new type of amortisation to intangible assets acquired from 1 January 2020.
In general, retrospective utilisation of amortisation of intangible assets at the accounting level should not be a problem. However, even in this case, it is necessary to consider the accounting guideline that the accounting unit is using for the amortisation of intangible fixed assets. That is because the new manner of tax assessment of intangible assets will lead to some entities considering firstly the limit for the recognition of intangible fixed assets (change in method) and secondly the amortisation period set for the assets (change in estimates). It applies to both the change in the accounting method and the change in estimates as well that a new tax legislation itself is not a legitimate reason for these changes. Therefore, if you are considering such changes, we recommend contacting your auditor to discuss these matters together.
Introduction of extraordinary depreciation charges for the 1st and 2nd depreciation groups
The amendment also reintroduces “extraordinary depreciation charges” under Section 30a of the Income Taxes Act. The option of extraordinary depreciation applies to tangible assets included in the 1st and 2nd depreciation groups and acquired between 1 January 2020 and 31 December 2021. Assets included in the 1st depreciation group will be continuously depreciated over a period of 12 months, evenly up to 100% of the input price. Assets included in the 2nd depreciation group will be depreciated over 24 months; in the first 12 months, the assets will be depreciated evenly up to 60% of the input price, and in the following 12 months, they will be depreciated evenly up to 40% of the input price.
This represents a considerable reduction of the depreciation period; from 3 years to 12 calendar months for the 1st group and from 5 years to 24 calendar months for the 2nd group. When considering the utilisation of extraordinary depreciation charges, entities often forget that such extraordinary depreciation can only be utilised by the first owner of the asset and that special records and depreciation of its technical improvements are required.
According to the transitional provisions, extraordinary depreciation charges can be applied retrospectively to assets acquired from 1 January 2020. However, we would like to point out that it is currently being debated in professional circles whether the retrospective utilisation of extraordinary depreciation changes the depreciation method applied to the respective assets, which the Income Taxes Act generally prohibits. However, the intention of the legislator is clear from the wording of the transitional provision, and therefore we assume that the Ministry of Finance of the Czech Republic currently considers the retrospective utilisation of extraordinary depreciation charges to be in compliance with the Income Taxes Act.
In this article, we wanted to emphasise that the application of the amendment in the area of tax depreciation / amortisation, especially retrospectively from 1 January 2020, will not be straightforward and that various factors need to be considered, taking into account not only the tax and accounting aspects, but also how complicated the selected solution will be.