We have already informed you in our previous posts that the accompanying act has been submitted to the external comment procedure. The accompanying act is a large text that includes amendments to more than a hundred acts, with some of the most significant changes reflected in the Income Taxes Act. In the current article, we will outline the proposed changes to the Income Taxes Act specifically for corporations that maintain accrual accounting.
The Act introduces entirely new terms such as asset, whereby an asset is defined as a recognised asset under the new draft Accounting Act. Thus, for the purposes of the Income Taxes Act, an asset does not only include fixed assets but also inventories, receivables, etc. However, only the newly defined tax-depreciable asset will be depreciated for tax purposes. The Act also introduces the term “immediate expense”, which for taxpayers with the so-called accrual tax base (i.e. accounting legal entities) corresponds more or less to a situation where the relevant item is charged to expenses in the income statement. We also see the term “deferred expense”, which is similar to today’s ”residual value”, or the term “ongoing expense”, which corresponds essentially to today’s term depreciation”. It is therefore necessary to become familiar with these new terms before we start working with the draft Income Taxes Act.
In addition to the completely new definitions, the Income Taxes Act also newly stipulates existing concepts such as the term “debt”. For the purposes of the Income Taxes Act, for example, accounting reserves, estimated payables and other accrual accounts should not be considered as debt. The new definition of the basic terms will thus affect the interpretation of all provisions containing these terms, even though they have not changed at first sight.
Another change that affects a large number of provisions is the definition of the taxation period. The taxable period of a corporate taxpayer that is an accounting entity should now be the accounting period without further addition. Thus, the term “tax return period” is cancelled throughout the Act. It is also interesting that a change in the taxation period should newly be addressed in the Income Taxes Act via a notification to the tax administrator within 3 months of the last day of the original taxation period.
In addition to the introduction of new terminology, a number of existing provisions and special tax regimes are also abolished. For example, contractual penalties that are charged to revenues will constitute taxable income regardless of whether they are paid by the debtor. On the other hand, cost penalties will have tax deductibility linked to payment, as before. The Act also cancels the special arrangements for social security contributions and public health insurance premiums, regardless the amount is attributable to the employee or the employer. The current arrangement, which was linked to payment no later than the end of the month following the end of the taxation period, is cancelled.
The tax treatment of technical improvements made by the lessee to the leased property will also disappear completely from the current draft of the Income Taxes Act. Similarly, the special regime for financial leasing is cancelled. The tax treatment of lessees and lessors will therefore be based on accounting treatment, including, for example, the assessment of gratuitous income at the time of termination of the lease if the technical improvement made by the lessee has been carried out.
The Act on Reserves newly allows the creation of statutory provisions and reserves to be applied as an non-accounting adjustment to the tax base without the need for related accounting. In terms of the Income Taxes Act, the proposed procedure will therefore be similar to the current reserves for the management of electrical waste from solar panels.
The Act defines the procedure for the so-called foreign taxpayer. According to the proposal, this should be a corporate taxpayer who is a non-resident taxpayer and, at the same time, is not an accounting unitunder the Accounting Act, i.e. it will typically apply to permanent establishments of foreign entities. However, a foreign taxpayer may also be a tax resident who is not established under the Czech law, etc. Therefore, although foreign taxpayers are not in principle an accounting entity, they will proceed in calculating the tax base as if they were a taxpayer with the current tax base, i.e. they will compile the tax base as if they were keeping accounts. However, a foreign taxpayer does not have to actually keep accounting records; according to the draft of the act, the so-called foreign taxpayer’s records, i.e. records of its assets and debts and income and expenses, should be sufficient for the calculation of tax.
The fundamental change is certainly that taxpayers who keep their accounts under the Accounting Act in accordance with international accounting standards (in the current proposal, it includes only those who are required to do so) will calculate the tax base using the profit/loss prepared in accordance with international accounting standards. However, the act prescribes a number of adjustments for this procedure.
These taxpayers will not include the amounts of the so-called permanent differences in the tax base. These are items which, according to the Czech accounting regulations, would enter the profit/loss (tax base), whereas according to international accounting standards they are not reflected in the profit/loss. The explanatory report gives as a typical example of such a permanent difference the revaluation of securities into equity under IFRS 9 Financial Instruments. Similarly, if a taxpayer under international accounting standards chooses to follow IAS 16 Property, Plant and Equipment or IAS 38 Intangible Assets, where assets are revalued at fair value, it will be necessary to exclude these valuation differences from the tax base and calculate notional depreciation based on historical cost.
Taxpayers using international accounting standards, on the other hand, will not exclude the following from the tax base: the impact of fair value remeasurements for investments in real estate, biological assets or non-current assets held for sale, i.e. the treatment under IAS 40 Investment Property, IAS 41 Agriculture and IFRS 5 Non-current Assets Held for Sale and Discontinued Operations.
Special rules are also laid down for these taxpayers on the issue of depreciation. In general, taxpayers using international accounting standards should not calculate tax depreciation. In other words, their accounting depreciation will be treated as a tax-deductible expense. However, this will only be the case up to so called “tax value”, which is regulated by law in the same way for all taxpayers. Another difference is that taxpayers using international accounting standards will adjust the tax value of assets for any impairments or reversals of impairments.
This brings us to the term “tax value”. It is not just the term itself, but a whole new concept proposed in the new Income Taxes Act. Tax value brings many new terms, definitions and procedures, which are already partially described in the previous paragraphs.
Tax value can be simply described as the current value of an asset or debt at a given point in time for tax purposes. The expenditure on obtaining, securing and retaining taxable income cannot then be an amount greater than the tax value. The tax value is increased by, among other things, additional appreciation, or, in the terminology of the current act, technical improvement.
The definition of “additional appreciation” itself is substantively derived from the definition of “subsequent acquisition expenditure on an asset” introduced by the new Accounting Act. In value terms, additional appreciation means that the amount of the expenditure exceeds CZK 100 thousand or 10% of the tax value of the appreciated asset (however, the limit calculated in this manner must not exceed CZK 10 million). The Income Taxes Act also introduces a safe harbour in the sense that repair and maintenance expenses may represent additional appreciation if the taxpayer chooses so. This new regulation is one of the reasons why the possibility for the taxpayer to ask the tax administrator to assess whether a particular changes to the property is a technical improvement or a repair has been cancelled.
The act newly defines a so-called asset depreciated for tax purposes, while listing exceptions that are not considered to be depreciated assets (such as an asset under construction). Even in the case of an asset depreciated for tax purposes, it is proposed to increase the amount of the tax value for its recognition to CZK 100 thousand. A fundamental change is that the principle of assets depreciated for tax purposes completely cancels the concept of classification into depreciation groups and tax depreciation is now determined on a monthly basis for all depreciated assets. The act now specifies the minimum number of months of tax depreciation, namely:
The procedure in the case of an increase in tax value, i.e. for example in the case of additional appreciation, is also completely new. If the tax value of an asset increases during depreciation, the amount of tax depreciation charge remains unchanged, but the tax depreciation period is extended. However, the extended period should not exceed the minimum depreciation period.
Example 1
A depreciated asset has a tax value of CZK 600 thousand. It is a movable asset and will therefore be depreciated over the period of 60 months at the rate of CZK 10 thousand per month, starting in the month following the month in which the conditions for depreciation are met. After 12 months of depreciation, there will be an additional appreciation of CZK 100 thousand. The remaining depreciation period is therefore 58 months, which does not exceed the minimum depreciation period. In effect, the appreciated asset will therefore be depreciated over 70 months (12 months plus 58 months).
Example 2
The depreciated asset is a real estate with a tax value of CZK 3,600 thousand, which is depreciated over 360 months. The monthly tax depreciation will be CZK 10 thousand. After 120 months of depreciation, there will be an additional appreciation of CZK 4,000 thousand. It follows that the remaining depreciation period would be 640 months, which would exceed the minimum depreciation period. Therefore, the current tax value is calculated, i.e. (3,600,000 – (120*10,000)+ 4,000,000) = CZK 6,400,000. The tax value is divided by the minimum number of months of tax depreciation, i.e. 360, and the new depreciation charge is calculated, i.e. CZK 6,400,000 / 360 = CZK 17,778.
We would also like to add that the taxpayer may choose a depreciation period longer than the statutory minimum, but the tax depreciation period chosen in this manner cannot generally be changed. It will now be impossible not to defer the start of tax depreciation or to interrupt it.
The concept of applying tax losses should also be changed; it will no longer be linked to the number of tax periods (i.e. generally 2 preceding and 5 following tax periods), but to all tax periods that started in the period of 2 years before the beginning of the tax period for which the loss arose or in the period of 5 years after the end of that period. Therefore, it will now not matter how many periods the tax loss is claimed in, but whether the period in question began within 2 years before or 5 years after the period in which the loss was incurred.
The proposed wording of the Income Taxes Act with effect from 1 January 2027 will allow a corporate taxpayer to calculate income tax liability in a foreign currency. Until now, the system was set up in such a way that the taxpayer worked with values in the currency of accounting, which was a foreign currency, but for the purposes of preparing the tax return and calculating the tax itself, the amounts were converted from the currency of accounting into Czech crowns. The new act will make it possible to calculate the tax in the accounting currency, with the functional currency no longer limited to the euro, the US dollar or the British pound. However, if the accounting currency is EUR, the tax administration (including the claiming and assessment of tax, the maintenance of the taxpayer’s personal tax account, etc.) will be carried in EUR. If the taxpayer has another foreign currency as the currency of accounting, then the taxpayer will calculate the tax in the foreign currency, but then convert the resulting tax in the foreign currency into Czech crowns in the return and the tax administration will continue to be carried out in Czech crowns.
Last but not least, certain administrative matters are also changing. For example, a corporate tax non-resident does not have to file a tax return in the Czech Republic if they only receive income that is not subject to tax, that is exempt from tax or income which is subject to withholding tax.
The above text contains only certain proposed areas and is only an introduction to the concept of the new Income Taxes Act. The draft contains a number of other changes and details, including transitional provisions. The accompanying act is currently under external comment procedure and will certainly change in many respects, not least because the Accounting Act itself is not yet finished. It is therefore a question of when and in what form the act will be introduced into the Chamber of Deputies and what its proposed effective date will be, as the date of the current wording is still 1 January 2025.
Seminars, webcasts, business breakfasts and other events organized by Deloitte.
