Windfall tax
Windfall tax, i.e. tax on unexpected profits, is introduced into the Czech tax system as a subcategory of corporate income tax. It is intended to be an additional taxation of corporations that generate unexpected profits as a result of energy prices and interest rates increase. Exceptional profits of banks and companies in the energy and fossil fuel sectors will be subject to the new tax between 2023 and 2025.
Who will be subject to the tax
An entity falling into one of the following categories of taxpayers shall be subject to windfall profits tax:
- The first group is represented by taxpayers who are banks. Banks will be subject to the tax for the given tax period, in which they achieve a net interest income of at least CZK 50 million and at the same time, in 2021 they achieved the same income of at least CZK 6 billion.
- The next group is non-bank taxpayers. These taxpayers are subject to the tax for the given tax period in which the total annual net turnover from the activities listed below amounts to at least CZK 50 million and at the same time, in 2021 they achieved a turnover of at least CZK 2 billion from these activities.The aforementioned turnover of CZK 2 billion can be achieved by the company individually or as a group (the income of all group members is added together). If the turnover is exceeded, all members of the group who also meet the CZK 50 million turnover criterion for the given tax period are taxpayers.
Activities counting towards turnover:
- mining of hard coal, oil and natural gas;
- production of coke oven products and refined petroleum products;
- generation, transmission and distribution of electricity (with certain exceptions) and gas production and distribution;
- wholesale of liquid fuels, gaseous fuels and related products;
- pipeline transport by oil and gas pipeline.
- The last category is taxpayers who are subject to the tax for the given tax period in which the total annual net turnover from the activities listed below amounts to at least CZK 50 million and at the same time, in 2021 the income from these activities accounted for at least 25% of their turnover.
Activities counting towards turnover:
- mining and treatment of hard coal, oil and natural gas;
- production of coke oven products and refined petroleum products.
Calculation of tax
The tax base for windfall profits is based on the amount by which the tax base (calculated for corporate income tax purposes) for the given tax period exceeds the comparative tax base plus 20% of its value. The comparative tax base is the arithmetic average of the tax bases for the years 2018 to 2021. A tax rate of 60% will be applied to the tax base thus calculated.
Illustrative example of windfall profits tax calculation:
A company whose tax period is a calendar year is subject to windfall profits tax in 2023 and has reached a tax base of CZK 250 million. The average tax base for 2018 – 2021 is CZK 200 million. The basis for calculating the windfall profits tax will thus be CZK 10 million [250 – (200 * 1,2) = 10]. On a tax base of CZK 10 mil. the rate of 60% will be applied.
Tax collection
Windfall tax will be paid during the tax period similarly to income tax through the payment of advances calculated from the last known tax.
The amount of advances paid in 2023 shall be calculated on the basis the notional windfall profits tax amount. This notional tax will be determined from the data provided by the company in its 2022 notional tax notice. The notice shall state the details for calculating the windfall profits tax and shall be filed with the Specialized Tax Office no later than July 3, 2023. Advances paid during 2023 will then be offset against the actual amount of tax for 2023.
If you are affected by the aforementioned changes, please do not hesitate to contact us.
Your WTS Alfery team