Negotiated amendments29/12/08 / cata_tax-news

• Amendment to the Income Tax Act (“ITA”)

On 10 December 2008, the Chamber of Deputies of the Parliament of the Czech Republic approved a proposed amendment to the Income Tax Act, including certain proposed changes. The amendment was approved in the Senate on 18 December 2008 and signed by the president on 19 December 2008. After the amendment to ITA becomes effective, we will inform you in detail of the main amended provisions of ITA. Below please find certain important proposed changes that have been adopted:

1. Effectiveness of the amendment to ITA

On legislative and technical grounds, a change to the effectiveness of the amendment to ITA was approved, so that the date of effect shall be the date of announcement in the Collection of Laws. This means that this amendment may become effective on another date than 1 January 2009 and this fact could cause certain problems of interpretation. If the amendment is declared in the Collection of Laws by 31 December 2008, problems in interpretation cannot be excluded in terms of whether certain provisions should also apply to tax duties for taxation periods commenced in 2008.

2. Tax exemption of income from transfer of an interest in a subsidiary

The deputies approved a proposed change to the amendment to the ITA, which canceled the exception from tax exemption for incomes of parent companies from transfer of an interest in a subsidiary as originally proposed by the amendment. Pursuant to point 24 of the amendment to the ITA, the originally proposed exception referred to income from transfer of an interest in a company 50 % of whose assets in the market valuation as of the date preceding the date of interest transfer consisted of intangible assets located in the Czech Republic. However, the deputies’ approval of the proposed change cancelled this point.

The tax exemption of income was so far applied to parent companies that are tax residents or tax residents of the EU or a contractual state (and fulfill other conditions set forth by law) only in the case of income from transfer of an interest in a subsidiary generated by its permanent establishment located in the Czech Republic. The amendment to the act deleted the condition concerning the permanent establishment in the Czech Republic.

3. Rules of low capitalization

The amendment to the ITA approved by the deputies contains, inter alia, a new wording of Section 25, subsection 1, letter w), which restricts tax deductibility of financial costs from loans and credits for the purposes of determination of corporate income tax base (with several exceptions) if the creditor or the person that secures the loan or credit is a related person in relation to the debtor within the meaning of the relevant provisions of the ITA; the tax deductibility applies to the amount by which such loans and credits exceed double the equity.

Tax costs further do not include financial costs in cases where the interest or revenue or payability thereof depend entirely or partly on the debtor’s profit and also in cases where a liability under a loan or credit is subordinated to another liability.

4. Personal income tax rate and tax reliefs

The amendment cancels the existing reduction in the personal income tax rate. The flat income tax rate of 15% will also be valid in 2009.

In relation to the above, the existing tax reliefs for a tax payer in the amount of CZK 24,280 and for a spouse living under joint household in the amount of CZK 24,840 shall remain valid. However, the amount of maximum annual personal income of the spouse for application of the relief has been changed to CZK 68,000.

5. Mandatory contributions for determination of the employment income tax base

A new method of determination of the tax base for employment income tax payers (employees) has been set forth so that the employment income is now increased by the amount of the so-called mandatory contributions. The amount equaling the social welfare and unemployment benefit contributions that employers are obliged to pay on such income pursuant to Czech legal regulations is now considered to constitute the mandatory contributions for the purpose of the ITA.

In case of employment income tax payers with regard to whom the employer is not obliged to pay the mandatory contributions, the tax base is calculated by adding the amount equaling the mandatory contributions from the employment income to the employment income.

• Chamber of Deputies postpones approval of partial harmonization amendment to the VAT Act and Excise Tax Act

The Chamber of Deputies did not meet the governmental proposal and postponed approval of the amendment to the VAT Act pursuant to which goods were to be exempt from VAT and excise tax in the value of up to EUR 430 if brought by a traveler from third countries. The Czech Republic thus does not fulfill its obligations arising from its EU membership. Persons who wish to utilize the exemption from VAT and excise tax in case of import of goods therefore cannot rely on Czech law but must seek the direct effect of Council Directive (EC) No. 2007/74/EC dated 20 December 2007 on exemption of goods brought by persons travelling from third countries from VAT and excise tax. Pursuant to the cited directive, the tax exemption should become effective from 1 December 2008 and the Czech Republic should adopt a change to the VAT Act and Excise Tax Act as of the same date.

• Amendment to the Foreign Currency Act

A proposed amendment to the Foreign Currency Act was presented to the Chamber of Deputies pursuant to which foreigners can acquire real estate in the Czech Republic effective 1 May 2009. Pursuant to Article 56 of the Agreement on Establishment of European Community, all restrictions of free movement of capital and payments are prohibited between member countries and vis-à-vis third countries outside the EU. When joining the EU, the Czech Republic negotiated two transitory periods to preserve certain restrictions in the field of acquisition of domestic real estate by foreign persons for a period of five years in case of secondary residential property and for a period of seven years in case of agricultural land and forests from the date of accession to the EU. On 1 May 2009, the Czech Republic’s agreed period determined for preservation of the transitory period for acquisition of secondary residential property will expire. The restriction in the field of acquisition of agricultural land and forests should be preserved pursuant to the proposed amendment.