Tax Package 2019
Last week a set of tax amendments, referred to as the “tax package”, was published in the Collection of Laws.
Most of the provisions will come into effect on 1 April 2019; however, there will be some significant exceptions.
Please note some major changes brought about by the tax package which are detailed below.
Amendment to the VAT Act
Deduction adjustments in connection with repair of real estate
Adjustments to VAT deductions should be made not only for technical improvements but also for real estate repairs. Taxpayers who carry out real estate repairs to a value exceeding CZK 200,000 excluding VAT shall be obliged to monitor whether the real estate is sold applying the tax exemption within a period of 10 years after the repair was carried out. If so, the taxpayer shall repay a part of the originally-claimed VAT deduction.
Obligation to make a reasonable effort to deliver tax documents
Taxpayers will be obliged to make every reasonable effort to deliver a tax document to the recipient of the supply within the time limit for issuing the tax document.
Delivering credit notes
This obligation is a positive development for credit note issuers. According to the amendment, credit notes may be included in VAT returns in the period in which the taxpayer sends it to the customer if they make the necessary effort to deliver the credit notes. Currently, taxpayers may reduce output VAT only after the customers have received the credit notes.
Date of taxable supply for credit and debit notes
Henceforth, both credit and debit notes shall include the date of taxable supply. This is the day on which the events relevant to the correction of the tax base occurred.
Until now, creditors could make a correction to the tax base only in the case of uncollectible receivables against a debtor in insolvency proceedings. The tax package introduces further opportunities for making such corrections, such as, for example, the following situations:
- A receivable has been made-over in enforcement proceedings for at least 2 years and has not yet been recovered.
- The enforcement proceedings have been suspended due to a lack of means on the part of the debtor.
- The debtor has died and it is obvious from the inheritance procedure that the receivable will not be collected.
Ban on the application of VAT to the lease of residential premises
Currently, VAT payers may decide whether or not they will tax the rent for real estate leased to another VAT payer. Henceforth, the taxation of rents will not be possible in the case of buildings intended to serve as a principal residence. As a result, the landlord shall not have the right to claim related VAT deductions. If the right to deduct VAT was exercised in the past, this will have to be adjusted by repaying its proportional share. This change should take effect as late as 2021.
Single-purpose and multi-purpose vouchers are distinguished. Single-purpose vouchers are vouchers for supplies for which there is sufficient advance information (tax rate and place of delivery or performance). The other vouchers are multi-purpose vouchers. The transfer of a single-purpose voucher shall be considered to be a supply of goods or provision of services which is no longer subject to tax at the time the voucher is used. The above provision does not apply if a third party accepts a voucher as a consideration. By contrast, not the transfer but the redemption of a multi-purpose voucher is considered to be a delivery of goods / provision of a service.
No changes for managing directors
According to the original government bill, managing directors’ service should be considered to be an economic activity which is subject to VAT. However, according to the approved amendment, the activity of a person that is taxed as income from employment is not economic activity, which applies not only to employees but also to managing directors and other members of statutory bodies.
The tax package introduces many other VAT changes. We would like to briefly list the following:
- Extension of the possibility of claiming tax deduction before registration for VAT.
- Simplified taxation of small-scale cross-border electronic services.
- Duty to state the acceptance of an advance payment before the provision of a service in the recapitulative statement.
- Change in the taxation on the supply of goods with assembly by a Czech tax non-resident.
Income Tax and the Tax Code
In particular, the tax package shall implement EU Directive 2016/1165 (“ATAD“) laying down the following five rules against tax avoidance practices:
Limitation on the deductibility of excessive borrowing costs
Borrowing costs exceeding the associated income of a tax period shall be tax deductible only up to CZK 80 million or up to an amount corresponding to 30 % of earnings before interest, taxes, depreciation and amortization (EBITDA), whichever is the greater. Borrowing costs exceeding the above thresholds shall be considered tax non-deductible; however, they may be deducted in the following years.
Unlike thin capitalisation rules, the new rules will also cover loans from unrelated parties. Moreover, the definition of borrowing costs shall be much broader than under the thin capitalisation rules. For example, capitalized interest or exchange differences related to funding shall also be subject to these rules.
The thin capitalisation rules shall continue to apply, which means that ATAD introduces yet another rule applying to borrowing costs.
Taxation of revenues from sales of movable assets abroad without change of ownership (“exit tax”)
With effect from 2020, transfers of assets without changing ownership shall be subject to tax as if they were sales of assets. This applies, for example, to situations in which a Czech company transfers its assets to its permanent establishment abroad or changes its tax residency.
The difference between the market value and the tax value of assets shall serve as the corporate tax base. In certain cases, payments of this tax may be split into several instalments over the following five years.
Taxation of controlled foreign companies (“CFC rules”)
Starting from 2019, a Czech company will be obliged to include the revenues of a foreign company in its tax base if the foreign company is considered to be a controlled entity.
A controlled entity shall mean an entity in the capital of which a Czech company has – whether directly or indirectly – a holding exceeding 50 % where, at the same time, the foreign entity does not carry out any significant economic activity, its tax liability abroad being less than half the tax liability this company would have had were it taxed under Czech tax law.
A Czech parent company will be allowed to set off any tax the controlled subsidiary has paid on its income abroad against the parent company’s own tax liability.
Dealing with the consequences of different legal qualification – hybrid mismatch arrangements
With effect from 2020, this rule should apply to cross-border transactions carried out in order to obtain tax advantages, mainly due to the fact that the tax systems of different EU Member States are not harmonised. Hybrid mismatch arrangements either have the character of a double deduction where one amount is used to reduce the tax base in more than one Member State, or the character of a deduction without including the income in the tax base where an amount is deducted from the tax base in one country, while not being included in the tax base in another country.
Anti-abuse rule (GAAR)
According to the tax package, the general anti-abuse rule will be incorporated into the Tax Code. However, in practice this provision is not expected to be ground-breaking since the Supreme Administrative Court has often ruled on the abuse of law.
Apart from the implementation of ATAD, the tax package brings about other significant changes described below.
Deduction on research and development (R&D)
According to the present wording of the Income Tax Act, taxpayers are obliged to prepare and approve R&D projects before initiating research and development activities. The tax package will make it possible for taxpayers to fulfil this obligation within the deadline for the submission of tax returns in which they intend to claim a deduction.
On the other hand, according to the tax package, a taxpayer must notify the tax administration, in writing, of its intent to make tax deductions within a new R&D project in order be allowed to make these deductions. The date of the notification is the key factor for determining the amount of the deduction since taxpayers may only claim the deductibility of the costs of research and development incurred after the date of notification.
Reporting of income exempt from withholding tax
From the date of entry into force of the tax package, a Czech taxpayer who pays income subject to withholding tax to a recipient resident in another country must include in its monthly reporting any income that is exempt from withholding tax or that is not subject to withholding tax according to the relevant bilateral double tax agreement. This may include, for example, interest, profit shares, dividends and royalties. Until now, taxpayers have been required to notify the tax authority only of income subject to withholding tax where they were actually obliged to withhold the tax.
The notification requirement will not apply to monthly income up to a total of CZK 100 000 paid to one recipient (non-resident).
Taxpayers may request that the tax authority release them from the obligation to send these reports. If you so wish, we will be pleased to assist you in preparing this application.
Flat-rate expenses for entrepreneurs
For 2019, the tax package re-introduces previously applicable limits up to which entrepreneurs and natural persons receiving income from a lease could claim flat-rate expenses. Flat-rate expenses shall again be calculated based on the maximum limit of CZK 2 million per calendar year (which applied last in 2017). Thus, the year 2018 is, for the present, the only tax period in which natural persons have to content themselves with flat-rate expenses limited to CZK 1 million.
The flat-rate expense percentage shall remain unchanged for each type of entrepreneur (40 %, 60 %, 80 %) and landlords (30 %).