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Common provisions

Subsequent taxation of unpaid obligations

Under a new provision, legal entities and individuals in receipt of income from a business or lease will have to increase their tax base by the sum of unpaid obligations due for payment but outstanding for more than 36 months, and barred obligations which have become statute-barred if such obligations were claimed as a tax deductible expense on the date on which they arose (although the tax base will not need to be increased by obligations arising from securities, payments into equity, loans, etc.). This provision will not apply to obligations forming the subject matter of administrative, court or arbitration proceedings pending issue of a legally enforceable ruling. If the obligation is subsequently fulfilled, only then can it be applied to reduce the tax base.

Usual price for interest and loans

The provision whereunder usual interest on specific loans (“pujcka”) is defined as 140% CNB discount rate has been repealed. From 2008 on usual interest on specific loans (“pujcka”) is required to be calculated in a way similar to the calculation of interest on loans under generally applicable rules. Hitherto the rules under ITA permitted the parties to agree a rate of interest lower than the usual rate only on loans from tax non-residents or from participants in the company. Under the new rules, interest lower than the usual inters rate can also be agreed on specific loans (“pujcka”) granted by such lenders.

Corporate transformations

A new provision incorporated into ITA is the tax regime governing division of business companies by split off.

The Amendment extends the scope of the special transformation regime provisions which is not applicable unless the taxpayer proves that tax optimisation has not been a major reason for the transaction. The time test for transfer of an interest in a company acquired following the exchange of interests has been tightened. Also, the new rules introduce an obligation to base allocations of various items in connection with transformations on economically justified criteria.

Tax deductible costs

Under specified conditions, the costs of liquidation of inventory will be tax deductible.

The Amendment repeals express provisions confirming that the costs incurred by an employer to transport employees to work, contributions by the employer to additional old-age pension insurance, contributions to private life assurance and the costs of provisional accommodation for employees. From 2008 these items will be tax deductible if they are rendered under a collective agreement, internal guideline, an employment contract or other agreement.

In past issues of Tax News we reported on government draft amendments incorporating the provision restricting tax deductibility of costs incurred in connection with provision of meals. This draft provision has been deleted from the government proposal and the terms whereunder costs incurred in the provision of company meals are tax deductible remain unchanged.

Financial leasing

The Amendment makes significant changes to the financial leasing (financial rental with subsequent sale of the rented property) tax regime. The rental payments under a financial leasing arrangement relating to tangible property, depreciable under ITA, will henceforth be tax deductible, provided that the rental period is identical to or longer than the minimum period of tax depreciation (for movable assets) or a minimum period of 30 years (for real property). The special provisions for depreciation relating to financial leasing have been repealed. From now on, financial expenditure (costs) relating to financial leasing of 1% of the total rental are no longer tax deductible if, during the tax period, they total more than 1,000,000 CZK. This provision will first apply to financial expenditure (costs) under agreements executed after 31 December 2007 and pursuant to amendments executed after 31 December 2007 amending agreements made before this date.

Property depreciation

The restrictions on the entry price (1,500,000 CZK) for tax depreciation of personal cars has been repealed, although they continue to apply to personal cars recorded as tangible property until the end of the period commencing in 2007. The Amendment has repealed depreciation group 1A. Tangible property falling into this group has been re-classified into group 2, with the practical effect of extending the depreciation period for personal cars from 4 to 5 years. This provision will first apply to property recorded after the date on which the statutory provision takes effect.

Henceforth, tangible property acquired free of charge and subject to gift tax will not be subject to depreciation if, at the date of acquisition, the property was in fact exempt from payment of gift tax.

A new provision is that the acquisition price of buildings and constructions may include "additional costs" i.e. expenditure not incurred in the acquisition of property but necessarily incurred by the investor to secure the operation or use of such property (roads, distribution networks passed to operators, remedy of damage arising during construction on third party property).

The Amendment provides that in the event of technical improvements to intangibles with a definite licence period, depreciation shall be applied to the increased acquisition price to ensure the intangible is fully depreciated by the end of the licence period.

Henceforth non-residential premises defined under separate provisions of law as units in buildings within depreciation group 6 will now fall within depreciation group 6 (formerly group 5).

Binding statement

Under a new provision in ITA, a party can now apply for a binding statement on:

  • how to divide expenditure relating to taxable income and tax-exempt income;
  • the proportion of tax deductible costs incurred in connection with the operation of real property partly used for business activities or lease and partly for private purposes;
  • whether a building alteration constitutes a technical improvement;
  • whether or not the expenditure in question has been incurred as part of research and development projects.

Costs not deductible for tax purposes

Under the Amendment various cultural, sporting, social and similar non-cash performance provided by the employer to employees will no longer (save with a few exceptions) constitute a tax-deductible expense for the employer.

Low capitalisation

A new rule is that the thin capitalization rules will apply not just to interest costs but also to "financial costs" (including other related costs such as fees for guarantees, administrative charges for processing credit and the like, as well as interest on credit and loans). The thin capitalisation rules will apply also for  credit and loans provided by a lender that is not a related entity.

The only financial costs that will continue to be tax deductible will be sums up to a threshold calculated as the average state of credit and loans for the tax period multiplied by a unified interest rate calculated according to specified rules, plus 4 percentual points. If the credit or loan is in a foreign currency, each currency will be tested separately according to the applicable reference rate for the currency concerned.

Financial costs will not be tax deductible if they have been incurred in connection with subordinated credit and loans or in circumstances where the interest rate or the due date of interest is based on the debtor's operating result (profit/loss).

Other financial costs that will not be tax deductible are those where the total credit and loans during the tax period (or the period in respect of which the taxpayer is filing a tax return) exceeds six times (in 2008) or four times (in 2009) its own equity. If the loan or credit is made or secured by a connected person, the threshold is twice the debtor's equity (or three times if the debtor is a bank). The total sum for these purposes does not include loans and credit or part thereof if the financial expenditure (costs) thereof form part of the entry price of the property, or interest-free credit and loans.

The limit on tax deductibility on financial expenditure will not apply if the costs are less than 1,000,000 CZK for the tax period and the creditor or guarantor of the credit or loan is not a connected person.

Under transitional provisions, the new rules on low capitalisation will apply to agreements made after the date on which the Amendment becomes effective i.e. 1 January 2008 and to amendments to existing agreements made after this date. The new low capitalisation rules will be applied for the first time to agreements concluded before the end of 2007 in the tax period commencing in 2010.

Tax loss

The Amendment makes slight changes to the conditions whereunder tax losses cannot be deducted from the tax base in the event of a significant change in the composition of persons directly participating in the capital or control of a company, and widens the range of matters on which a taxpayer may apply for a binding statement. The rules governing procedure in connection with the binding statement have also been amended.

The Amendment provides that Section 38r ITA, which extends the time for assessment of tax in the event of application of a tax loss, will apply to all taxpayers, not only to those who have received the investment incentive.

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