The Constitutional Court rejected the abolition of taxation of technical reserves in the insurance sector
In its decision of 18 May 2021, the Constitutional Court rejected a motion to repeal Act No. 364/2019 Coll., which amended the method of creation and tax-deductibility of technical reserves with regard to insurance and reinsurance companies.
Following the above-mentioned amendment, with effect from 1 January 2020, the creation of the technical reserves in the insurance sector is governed by the Solvency II directive; as of that date, technical reserves created under the accounting regulations are no longer considered a tax-deductible expense as it was the case under the previous legislation. According to the transitional provisions of the Act, the difference between the amount of reserves recognised in the accounting books and the amount assessed in accordance with the Solvency II directive is subject to single taxation through an off-the-books adjustment of the tax base with the possibility of spreading the tax burden over two taxation periods.
The additional tax burden is expected to exceed the annual profit of almost half of the insurance companies in the Czech market, in certain cases even many times over, which prompted a group of deputies to submit a motion to repeal the amendment. In their motion, the deputies dispute the constitutionality of the amendment in the legislative process, as the opposition deputies did not have sufficient time to properly debate it. The deputies also point to the so-called “suffocating effect” that an excessive and disproportionate tax burden may have on certain entities. Furthermore, in their view the amendment also contradicts the principle of equality, since it affects only a certain group of taxpayers.
The Constitutional Court issued a statement on the motion to repeal the amendment and states that based on the record of the Chamber of Deputies’ debate, the opposition had enough time to become sufficiently familiar with the amendment and to comment on it. Furthermore, the Constitutional Court did not find any signs of the “suffocating effect” of taxation or any violation of the principle of equality. According to the Constitutional Court, the amendment does not cause any across-the-board increase in the tax liability with regard to all insurance companies, but only those that have created higher tax-deductible reserves in the past and therefore postponed taxation to the future. On the contrary, the insurance companies that have not created such high tax-deductible reserves in the past, and therefore paid higher taxes in the past, should not witness any noticeable increase in their tax liability. The Constitutional Court also takes into account the possibility of postponing the payment of the tax, which is offered by the current legal system and which allows the taxpayer to mitigate a one-off tax jump. Therefore, the Constitutional Court disagreed with the deputies’ arguments and rejected their motion.
Further information on this issue can be found on the website of the Constitutional Court of the Czech Republic.