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Amendments to the income taxes act (ITA)

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.

The existing version of the Government Draft sets out stricter conditions on which income of individuals  from sale of securities is tax exempt. Income from the sale of investment securities and securities for collective investments will be tax exempt if the transfer occurs 6 months after the acquisition of the securities. The exemption applies only to persons whose total share in the registered capital and voting rights of the company has not exceeded 5% over a 24 month period prior to the sale. The requirement that the securities cannot form part of such person's business assets and did not do so 6 months prior to the sale of securities remains unchanged.

These new rules on tax exempt sales of securities will not apply to income from securities acquired by a tax payer before the end of 2007, and until such time, the applicable procedure will continue to be the provisions under ITA in its current wording.

The rules governing exemption from tax upon sale of an interest in a business company and income from the transfer of membership rights in a co-operative remain unchanged. Such income will be exempt provided that, in particular, a period of 5 years or more passes between acquisition and transfer of such income and also provided that this income has not been acquired from the business assets of the tax payer. These rules will also apply to exemption of income from sale of securities not qualifying as investment securities and securities from collective investment under the Government Draft.

Interest at 140% CNB discount rate will no longer constitute the usual price for loans under civil code. Hence if the lender is a connected person, tax payers will at all times need to prove that the agreed interest rate is the usual rate. The only exception will be circumstances where the creditor is a Czech tax non-resident or partner (participant) or member of a co-operative. In such case the parties can agree a lower rate of interest than would have been agreed between non-connected parties. To date, parties have been able to agree a lower rate of interest in selected cases of loans (but not credit).

The list of tax deductible expenses will be extended to include (but not be necessarily limited to) expenditure (costs) incurred during a documented removal (inventory) of materials, goods, work in progress, semi-finished products and completed products. This will apply to pharmaceuticals, medicinal products or food only if the "use by" period has expired, in consequence of which these products cannot be put on the market (under special provisions of law).

Under a new provision, tax payers will be able to apply to the competent tax authority for a binding standpoint on

  • the attribution (division) of expenditure (costs) which cannot be allocated to taxable income in full
  • the ratio of expenditure (costs) incurred in the operation of real property used party for business or for other gainful (self-employed) purposes and/or which is leased, and partly for private use, if such expenditure (costs) qualifies as tax deductible expenditure of attaining, securing and maintaining income.

The exhaustive (definitive) list of non tax-deductible costs will be extended to include the costs of non-alcoholic drinks provided by the employer as a non-cash benefit to employees for consumption on the premises; also, expenditure on financial leasing and subsequent acquisition of tangible property – for the purposes of ITA, this means 1% of total rental – only if the value of the financial expenditure (costs) exceeding 1 million CZK over the tax period.

Changes in the tax deductible status of interest on loans and credit are also expected (low capitalisation rules). Such expenditure will be tax deductible only upon compliance with very strict rules. We have set out only some of these rules below - please contact us should you require further information.

Financial expenditure will be tax deductible:

  • if it does not exceed the sum determined as the unified rate of interest + 4 percentage points multiplied by the average state of credit and loans - interest on credit and loans expressed in various currencies shall be determined for each currency separately;
  • at a proportional rate if the credit is granted by unconnected persons: the amount of such credit during the tax period (statute is silent on how this amount is to be assessed) must not to exceed 6x equity; or
  • at a proportional rate if creditor or credit guarantor is a connected person (under Section 23 subs. 7 ITA): the amount of such credit during the tax period must not exceed 2x equity (current ratio is 4:1) – for banks or insurance companies, the ratio is 3x equity (current ratio 6:1).

The intention is that the proposed amendments to the low capitalisation rules affect only loan and credit agreements, and contract amendments executed after the Government Draft becomes effective in 2008 and 2009 only. As from 1 January 2010 the new low capitalisation rules will apply to all agreements i.e. irrespective of their date of execution.

Section 38na ITA, governing the rules on application of tax losses to reduce the tax base, is also due for further amendment. The new provisions will mainly affect the conditions and requirements of an application for a binding standpoint by the tax authority on the question of whether the tax loss may be used to reduce the tax base.

In addition to the Government Draft, ITA will also be amended in conjunction with the amendment of the Insolvency Act. New Section 38gb will be incorporated into ITA to make provision for filings of tax returns in insolvency proceedings.

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