2019 Tax Package
People tend to be more relaxed than busy in these sultry summer days and it’s the silly season in the media. However, tax specialists can’t complain about having nothing to do. In June, the Government adopted a set of tax amendments traditionally referred to as the ‘tax package’. This tax package, containing, in particular, amendments to the Income Tax Act, the Value Added Tax Act and the Tax Code, should go through the standard legislative process by the end of 2018.
Amendment to the Income Tax Act ATAD
The Income Tax Act has undergone the most significant changes. Several measures are proposed to prevent tax avoidance in connection with the transposition of the EU Anti-Tax Avoidance Directive (ATAD).
The amendments – mainly aimed at major corporations – include the following:
- Limitation on the deductibility of borrowing costs (interest, etc.) from the tax base to a maximum of CZK 80 million or 30 % of an entity’s EBITDA, applying both to related and unrelated parties. The traditional thin capitalization rules shall continue to apply.
- Taxation on the relocation of property abroad without change of ownership (“exit tax”) where the relocation of property connected with a change of tax residency is taxed as if the property were sold.
- Taxation of foreign companies controlled by a Czech entity (“CFC rules”)
- Anti-abuse rules (rules to prevent abuse of mismatches in Member States’ tax systems).
As the above changes should be implemented into Czech law by the end of 2018, the Chamber of Deputies is expected to make efforts to meet the proposed effective dates.
Additional reporting of exempt income
The changes will also affect corporations paying dividends, royalties, interest or other income that is subject to withholding tax under Czech law but are exempt from tax, for example, under a bilateral double tax treaty.
Henceforth, these exempt payments shall be reported to the tax administration on a monthly basis if such income paid to one non-resident exceeds CZK 100,000 per month. In certain cases, applications for exemption from this notification obligation may be filed.
To put you completely in the picture, it should be noted that the originally proposed changes to the taxation of natural persons have not been adopted. Thus, the super-gross salary concept, the uniform tax rate of 15 % and the solidarity tax increase continue to apply.
Amendment to the VAT Act
The tax package also affects the VAT Act by which the EU directive governing electronic commerce and vouchers and the determination of the tax base for virtual currency payments (such as Bitcoin payments) is being implemented. Moreover, the amendment should lay down more detailed rules for the calculation of the right to partial tax deduction, increase the possibilities for claiming tax deduction upon registration for VAT and govern penalties related to control statements.
Amendment to the Tax Code
As part of the tax package, the Ministry of Finance proposes that the prohibition of ‘abuse of law’ is explicitly included in the Tax Code. This principle has so far been applied only on the basis of the Czech courts’ case law since there has been no explicit reference to it in tax legislation.
An abuse of law occurs where there are no proper financial reasons for a transaction since its main purpose or one of its main purposes is to gain a tax or other advantage contrary to the spirit and purpose of the tax legislation. The burden of proof regarding the non-existence of financial reasons for a transaction shall lie with the tax administration.