Prepared changes to acts01/10/08 / cata_tax-news

Amendment to the Income Tax Act

INDIVIDUALS

The tax exemption of incomes of individuals from sale of securities pursuant to Action 4, subsection 1 , letter w) (after a 6-month holding period) shall be applied to all securities and not, as determined originally, only to investment securities. The test of 5% interest was also waived. Only direct interest (which originally also included indirect interest) of the registered capital or voting rights will be newly included in the said 5% (exceeding only one of these criteria shall be sufficient to lose the tax exemption). These provisions shall already be applied to the 2008 taxation period.

The amendment introduces a special method for constructing the tax base of employees to whom Czech regulations on public-law insurance do not apply – i.e., they work for an employer from a country outside the EU with whom the Czech Republic has not concluded any agreement on social security or the employee is insured in another EU country, etc. In case of these employees, the tax base is calculated by adding the amount that the employer would contribute on behalf of the employee into the system of domestic insurance to the gross salary. It is proposed to proceed similarly in case of incomes of non-residents from employment activities taxed by withholding.

The amendment cancelled the reduction of the tax rate on income of individuals to 12.5% as well as the tax reliefs that should have become effective from 2009. A 15% tax and tax reliefs in the same amount as in 2008 should be newly valid for 2009.

LEGAL ENTITIES

It is proposed that the conditions for tax exemption of sale of an interest in a subsidiary should be made more strict so that the exemption cannot be used for sale of real estate. Exemption of sale of an interest in a Czech subsidiary shall not be applied if 50% of all assets of the subsidiary in a market valuation as on the date preceding the date of transfer consists of real estate located in the Czech Republic. At the same time, this type of income shall be added to the statement of incomes that are considered as incomes from sources in the Czech Republic.

Incomes from sale of an interest in a commercial company or cooperative with its registered office in the Czech Republic have so far been considered as income from a source in the Czech Republic if the purchaser was a Czech tax resident or a permanent establishment of a tax non-resident. The amendment proposes that such income be considered as income from a source in the Czech Republic without further conditions (i.e. also in the event that both the seller and the purchaser are Czech tax non-residents).

Contractual sanctions from obligatory relations shall newly be considered as income from sources in the Czech Republic.

Whether the aforementioned last two types of incomes will actually be taxed in the Czech Republic depends on the wording of the relevant double taxation treaty.

Exemption of dividends, interests and license fees paid by subsidiaries having their registered offices in the Czech Republic shall also be newly applied to subsidiaries having their registered offices in Norway and Iceland, subject to fulfillment of the same conditions as applicable to parent companies with registered offices in the EU.

The amendment alleviates the thin capitalization rules, which set forth when interests on loans are non-tax deductible. Thin capitalization rules shall only be applied if the creditor or the person securing the credit or loan is a person connected with the debtor (in the existing wording of the law, thin capitalization rules are also applied to loans between unconnected persons). A pro-rata portion of financial costs corresponding to the amount by which the aggregate amount of credits and loans from connected persons and credits and loans secured by connected persons in the course of the taxation period exceeds triple (for banks) or double (for other entities) the amount of equity shall be non-tax deductible. The thin capitalization regime in 2008 tries to resolve the temporary provisions of the amendment, which are not entirely unambiguous.

Regardless of whether or not the creditor is a person connected with the debtor, interests from subordinated credits and loans and those where the interest or payment thereof depends entirely or predominantly on the debtor’s profit shall be non-tax deductible.

JOINT PROVISIONS

It will be newly possible to deduct the value of gifts provided to legal entities or individuals having the registered office/domicile in another EU member country, Norway or Iceland from the tax base; in such events, the fulfillment of the conditions concerning the purpose of the gift or the recipient of the gift shall be assessed pursuant to the legal regulations of the state in question, and if no such regulations exist, the conditions set forth by Czech laws must be fulfilled.

The tax payer that collects or withholds income tax or income tax advance from employment income and emoluments for a tax non-resident shall be obliged to file the relevant tax return, including annexes, only electronically through a data report for the first time for 2010.

Amendment to the Act on Reserves

The greatest change is that the conditions for tax-deductibility of costs of creation of reserves for repairs of tangible assets were made stricter. Newly, these costs shall only be tax deductible if the funds in the full amount of the reserve falling to one taxation period are transferred to a separate account of a bank residing in an EU member country by no later than the deadline for filing of the tax return. These provisions shall be applied for the first time as early as for 2008.