Act on transformation of commercial companies and cooperatives (“Transformation Act”) takes effect from 1 July 2008. This new, comprehensive legislation applicable to commercial companies and cooperatives shall replace and supersede current provisions of the Commercial Code.

The Chamber of Deputies of the Parliament of the Czech Republic is currently discussing amendments to the Value Added Tax Act and Income Tax Act.  We will inform you of these amendments in the next issue of Tax News.

Pursuant to our information in the previous issue of Tax News, the Government presented a draft VAT Act to the Parliament of the Czech Republic. This long-prepared amendment primarily harmonizes the provisions of the Czech VAT Act with the provisions of Directive 2006/112/EC (the so-called Sixth Directive Recast) and provides suggestions for simplification and improvement of certain other provisions.

In February 2008, two new directives of the Council on VAT were approved. Council Directive 2008/8/EC fundamentally changes existing rules for determining the place of performance for services, i.e. determining EU member states for application of VAT. Most new rules shall be introduced from January 2010, and the remaining ones shall be introduced gradually up to 2015.

The House of Representatives (Lower House) approved an amendment to the Road Tax Act. The amended provisions should result in reduction of road tax rates for vehicles over 12 tons used as new for businesses that are more environmentally friendly. The lower rate should apply for 36 months following the first registration.

On 17 July 2008, the Senate approved a bill to amend the VAT Act. The Amendment, subject to the President’s approval which is expected to be granted, will not take effect before 1 January 2009, but we would like to inform you well in advance of the major changes to be introduced due to the fact some of them will require adjustment of accounting systems and redrafting of commercial agreements. 

In February 2008, Directive 2008/7/EC on indirect taxes on capital contributions took force. Effective January 209, this directive cancels the original Council Directive 69/335/EEC on indirect taxes on capital contributions. This tax is applied in certain EU member states, but not in the Czech Republic.

Since the VAT Act introduces many changes effective 1 January 2009 and preparation well in advance is highly desirable, KSB will hold a workshop specializing on VAT.

The Ministry of Finance of the Czech Republic published Guideline No. D – 317 on average prices of fuel for calculating the amount of compensation for expenses in consumed fuel to determine income tax bases for the 2007 taxation period. Taxpayers can use these prices to determine tax expenses for consumed fuel, unless they apply expenses in documented amounts.

For the taxation period commencing 1 January 2008,  a newly concluded double-tax treaty between the Czech Republic and the Hashemite Kingdom of Jordan, which also prevents tax evasion in the area of income taxes, became effective.

Vlastimil Pihera, attorney, and Helena Navrátilová, tax advisor at the law firm Kocián Šolc Balaštík, published an article in Euro concerning the current legal interpretation of ownership relations in respect of mutual funds and its impacts on application of the corporate income tax. To download the article click here

The Commission has presented for consultations new draft rules to exempt more subsidies from the notification obligation laid down in EC Treaty state aid rules.

At the end of March the ECJ issued its decision in Case C-111/05 Aktiebolaget NN on several preliminary matters relating to application of VAT on the laying of seabed optic cables. Although the issues arising particularly concern the criteria according to which supplies of goods may be distinguished from the provision of services, and how to determine the place of supply when providing line constructions, the ECJ decision also has general application.

The Commission adopted on 29 March an amended proposal of the modernised "Television without Frontiers" Directive. After a first reading in the Parliament and the Council, there is now broad agreement with the Commission about the future legal framework for the EU's audiovisual sector.

The Court of Justice (“ECJ”) ruled that the Italian criminal penalties for the collecting of bets by intermediaries acting on behalf of foreign companies are contrary to community law (Joined Cases C-338/04, C-359/04, C-360/04 Placanica of 6 March 2007).

The ECJ ruled that the Third Motor Insurance Directive (Third Council Directive 90/232/EEC of 14 May 1990 on the approximation of the laws of the Member States relating to insurance against civil liability in respect of the use of motor vehicles) requires all passengers to be covered by motor insurance and therefore Irish national legislation, which precludes those not travelling in a part of a vehicle designed to carry passengers, is incompatible with Community law.

In March European Parliament (“Parliament”) gave a first reading of a directive to change European rules on how mergers of banks and other financial institutions are approved. Since the text adopted has already been agreed in informal negotiations with the Council, the proposals should enter force without further changes.

The effectiveness of the Act on Stabilization of Public Budgets will provide VAT payers with the alternative of group VAT registration. The group registration makes it possible for affiliated parties (companies) to act as a single VAT payer with a single registration number for VAT purposes. This means that an entire corporate group will only file a single VAT tax return. Supplies delivered between individual group members are not deemed to constitute taxable supplies. The first groups of VAT payers shall be registered effective 1 January 2009, provided that they apply by 31 October 2008 at the latest.

The Ministry of Finance issued Instruction No. D-312 regarding application of reduced tax rates to license fees under the Double Taxation Treaty between the Czech Republic and Belgium. The Instruction sets forth, for the purposes of the aforementioned Treaty, that the listed license fees may be taxed in the country of origin by not more than 5 percent of the gross amount thereof. The Instruction shall take effect on 1 January 2008.

In connection with the tax entity’s authorization to draw attention to the tax administrator’s inactivity on the grounds of processing filings by tax entities by reasonable deadlines, the Ministry of Finance issued Instruction No. D-308 imposing deadlines on tax administrators for processing filings by tax entities and other parties involved in tax proceedings.

On 29 November 2007, law firm Kocián Šolc Balaštík (KSB) organized for its clients - major pharmaceutical companies - a seminar focused on important legislative changes in the pharmaceutical industry taking effect in early 2008. The lecturers at the seminar were Hana Heroldová, an attorney specializing in the area of pharmaceutical law, and Václav Pátek, tax expert at KSB.

The Ministers of Finance of the Czech Republic and Bosnia and Herzegovina signed a Double Taxation Treaty between both countries on 20 November 2007. The Treaty shall result in termination of the provisions of the Double Taxation Treaty between the Czechoslovak Socialistic Republic and the Socialistic Federative Republic of Yugoslavia (applicable to Income and property taxes) signed in Prague on 2 November 1981. The termination shall take effect on the effective date of the new Treaty. This may occur on 1 January 2009 if the following legislative procedure in both countries proceeds in the standard manner.

The Ministry of Finance issued Decree No. 338/2007 – on calculation of base rates of food allowances in foreign currency for 2008. Decree No. 549/2007 Coll., on base rates of food allowances in foreign currency for 2007 shall terminate on the new Decree’s effective date, i.e. 1 January 2008.  

The banking council of the Czech National Bank decided to raise the 2T repo rate to 3.50%, the discount rate to 2.50% and the Lombard rate to 4.50% at its meeting held on 29 November 2007. The new rates shall apply beginning 30 November 2007.

Parliament is currently debating several proposed amendments to ITA. The most important of these are the proposals set out in the "Government draft of the Act on stabilisation of public budget" ("Government Draft"). Amended several times, the Government Draft is now on its second reading and is likely to experience further amendment.

At the end of October 2007, the Constitutional Court denied a constitutional complaint against a decision by the Supreme Administrative Court and admitted that “malice in law” may be applied to tax issues.

The Chamber of Deputies of the Parliament of the Czech Republic recently adopted the Act on Stabilization of Public Budgets, which the Senate of the Parliament of the Czech Republic is expected to approve in September 2007. The Act applies to sickness, pension and health insurance in the Czech Republic as well.

On 16 October 2007, the Act No. 261/2007 Coll,  the Public Budget Stabilisation Act (the "Amendment") was published. This Act also amends the Income Tax Act ("ITA"). The most important changes, effective from 1 January 2008, are summarised below.

As set out in earlier issues of Tax News, the Act on stabilisation of public budgets has amended many provisions of law hitherto in force. Some of these changes are detailed below.

Clear provision will be made for the creation of reserves by successor companies following a corporate transformation. The successor company will continue to create reserves and make provisions/ adjustments as commenced by the company being split up on the conditions that would have applied to such company had the transformation not taken place, but only insofar as such creation of reserves pertains to the portion of business assets passing to the successor company.

The most significant change to be introduced by the amended VAT Act is the increase of the reduced 5% VAT rate to 9%. No transitory provisions have been proposed to restrict pre-supplying or payment of advances prior to the increase.

Kocián Šolc Balaštík advised Finnish company Cramo Plc on its acquisition of a 100% holding in Techniline spol. s r.o., the largest equipment rental services company in the Czech Republic, also operating in Slovakia.

On 1 January 2007 new EU Directive [1] ("Recast") governing the common system of value added tax in all Member States came into force. The Recast supersedes the Sixth Directive [2]. The Recast was issued to simplify the Sixth Directive which, owing to numerous amendments, had become difficult to follow, unsystematic and often incomprehensible.

Pursuant to amendments to Commission Regulation no. 2454/93 on implementation of the customs codex, as from 1 February 2007 the Czech Republic commenced operation of the Export Control System (ECS) (e-Export), intended to facilitate rapid electronic exchange of information between customs authorities in Member States on exports to third countries.

Kocián Šolc Balaštík assisted Hungarian gas company MOL Plc. with acquiring a 100% stake in I & C Energo from ČEZ. I&C Energo is engaged in providing system control and industrial IT control services.

European Commission Regulation no. 1998/2006 has increased the de minimis state aid threshold (a sum which, if exceeded, gives rise to the presumption that state aid can distort economic competition and is therefore incompatible with the common market).

The largest producer of mineral and spring water in the Czech Republic, Karlovarské minerální vody, a.s., has received after a long “fight” with the Antimonopoly Office of the Czech Republic (ÚOHS) a decision on approval of the merger with Poděbradka, a.s., the second largest producer operating in the same industry.

The amendments repeal the obligation to publish final accounts in electronic form in the Commercial Bulletin, since final statements are available in digital format in the documents registries of the Commercial Register.

The instruction sets out the Czech Finance Ministry's interpretation of some provisions of ITA. Although not binding on tax payers, the instruction is likely to be followed by tax authorities. The wording of instruction D-300 has been more closely specified and now reflects the comments of the Czech Chamber of Tax Advisors and other conclusions approved by the Co-ordination Committee of Czech Finance Ministry and Czech Chamber of Tax Advisors.

Heineken Group with KSB as its legal counsel completed the acquisition of Drinks Union in the Czech Republic on 1 July 2008. The transaction involved transfer of a majority stake in Drinks Union, and, indirectly, a stake in Pivovar Louny, to Královský pivovar Krušovice a.s., a Heineken Group’s flagship in the Czech Republic.

Kocián Šolc Balaštík, as long-term legal counsel to the Heineken Group, assisted the global brewery group with a squeeze-out in STAROBRNO, a.s., a member of the Heineken Group. It was the first squeeze-out to be carried out under the newly applicable legislation effective since 1 April 2008, which no longer requires consent from the Czech National Bank to squeeze-outs carried out by companies that do not issue listed participation securities.

Kocián Šolc Balaštík, as long term legal counsel to New World Resources, assisted NWR Group member OKD, a.s. with restructuring that involved spin-off via combining a merger and foundation of new companies.

Petr Kasík and Vlastimil Pihera contributed a chapter dealing with the transposition of the Prospectus Directive into Czech law to Prospectus for the Public Offering of Securities in Europe, Volume I. The title was published by Cambridge University Press as a part of the “Law Practitioner Series” and contains a summary of the provisions of Directive No. 2003/71/EC on the prospectus and on the transposition thereof in fifteen EU Member States. The title was authored by lawyers from major European law firms. More information

Kocián Šolc Balaštík (KSB) held a workshop on 24 June 2008 to provide its clients with a summary of personal data protection issues. The lecturers were KSB personal data protection specialists, Martin Kubík, Petra Mirovská and Drahomír Tomašuk.

Václav Pátek, a Kocián Šolc Balaštík tax specialist, writes an article in Euro on VAT deductions relating to fraudulent conduct. To download the article click here.

Kocián Šolc Balaštík assisted NWR Group member OKD, OKK, a.s. in another stage of restructuring in which OKD, OKK’s parent company ceased to exist by merging with its subsidiary OKD, OKK, a.s. KSB’s assistance was provided as part of its long-term legal assistance to the NWR Group (New World Resources).

Kocián Šolc Balaštík assisted Skanska CZ in the Skanska Group’s restructuring in the Czech and Slovak Republics. The restructuring resulted in a new holding structure under the umbrella of the newly incorporated Skanska CS and spin-off of part of Skanska CZ’s operations via spin-off by merger into three existing surviving companies.

Kocián Šolc Balaštík assisted Teplárny Brno during the transformation involving concentration of its business with the business of Tepelné zásobování Brno. The transformation took the form of a division by merger in which Tepelné zásobování Brno ceased to exist and its operations passed over to its indirectly controlled affiliate, Teplárny Brno.

On 11 March 2008, the Constitutional Court issued a long awaited decision on constitutional complaints challenging the new Labour Code shortly after having been adopted. Award File No. Pl. ÚS 83/06 applies even to the concept of the Code.

Amendment to Act No. 120/2001 Coll., on court-appointed distrainers and distraining activities (the Code of Distraint Procedure), as amended, effective from 1 January 2008, was published under Act No. 347/2007 Coll. The major goal of the amendment is to make supervision over distrainers more efficient and, as a result thereof, improve their activities; However, at the same time, the amendment again worsens the position of creditors in connection with the payment of distraint costs.

Act No. 36/2008 Coll. amended several laws applicable to consumer protection, advertising and competition, effective 12 February 2008, to increase protection of consumers against unfair business practice and, at the same time, improve competition culture; the amendment implements Directive 2005/29/EC concerning unfair business-to-consumer commercial practices in the internal market. The following legislation is primarily involved:

The long awaited legislative, technical and corrective amendment to Act No. 262/2006 Coll., the Labour Code, as amended (hereinafter the “Labour Code”), was disclosed under Act No. 362/2007 Coll. effective 1 January 2008.

Act No. 261/2007 Coll. on the Public Budget Stabilization (hereinafter the “APBS”), applies, among other things, to labour legislation. The changes took effect on 1 January 2008.

Act No. 104/2008 Coll., concerning takeover bids and amending some other Acts (the Takeover Bid Act) took effect on 1 April 2008. The Act applies to bids aimed at issues of gaining control over listed companies, which were originally regulated by the Commercial Code. Following this conceptual step, the Commercial Code shall apply to public bids for purchase of shares in primarily unlisted companies but also to listed companies if there is no intention of gaining control over the target company.

Kocián Šolc Balaštík (KSB) law office represented Královský pivovar Krušovice a.s., a member of the multinational Heineken Brewery Group, before the Czech Anti-trust Office in an application for acquisition of the major beverage group Drinks Union, a.s. The Office granted unconditional approval for the merger on 28 April 2008.