Amendments under Discussion24/03/09 / cata_tax-news

• Amendment to the Taxes and Fees Administration Act

The long-discussed amendment to the Taxes and Fees Administration Act (Lower House’s Printout No. 387), which is to change the rules for imposing penalties to breaches of confidentiality duties and introduce suspensory effect for additional payment assessments issued after tax inspections, has been returned for a second reading. The amendment should now be discussed together with the new Code of Tax Procedure, which contains similar provisions but is proposed to take effect from 1 January 2010. Subject to approval, the amendment should take effect on the date of its announcement.

• Amendment to the Value Added Tax Act

Originally a mere implementation amendment to the VAT Act (Lower House’s Printout No. 605) that was supposed to only adjust the terms and conditions for VAT and excise duty exemption on goods imported from third countries by travelling individuals, this amendment was extended by additional proposals for amendments during the repeated second reading. On 3 March 2009, the amendment was passed in the third reading to make it possible to claim VAT deduction for passenger cars. The only category of passenger cars subject to VAT deduction is the N1 category – i.e. cars with a partition wall. Please keep in mind that personal use of passenger cars for which an input tax deduction has been claimed are subject to output VAT. Other proposals during second reading were not approved to reduce lower and standard VAT rates.

The amendment must be passed by the Senate and signed by the President before taking effect. The proposed effective date of the changes is the date of announcement in the Collection of Acts. We expect the date of publication to be on 1 April 2009.

• Amendment to Income Tax Act

The draft government amendment to the Value Added Tax Act (Lower House’s Printout No. 605) included an amendment to the Income Tax Act presented in the second reading. The amendment was passed in the third reading and contains, without limitation, new thin-capitalization rules (i.e. tax deductibility of interest on loans and credits). The amendment changes thin-capitalization rules again and shall be retroactively effective for 2008, to be applied to new agreements and amendments entered into after 31 December 2007. The amendment has been submitted to delete provisions on unconditional tax non-deductibility of interest on subordinate (junior) loans and credits and loans and credits arranged by a related party and to increase the thin capitalization limit. Financial costs should not be tax deductible on amounts in which the aggregate of loans and credits from, or arranged by, related parties exceeds the equity by six times (applicable to banks) or by four times (applicable to other parties) in a taxation period.

The amendment proposal contains fairly detailed transitory provisions in relation to the periods in which the relevant agreements are entered into and therefore we recommend monitoring them carefully.

• New Act on Auditors

The Lower House of the Parliament approved the draft new Act on Auditors (Lower House’s Printout No. 517), which responds to the requirements of European Directive No. 2006/43/EC on statutory audits of annual accounts and consolidated accounts and introduces a number of substantial changes and novelties compared to the current situation. These apply not only to the position and conduct of auditors but also to audited companies, especially with regard to the provisions on powers of corporate bodies to select an auditor and, thanks to the newly introduced concept of public-interest entities, their duties to establish an audit committee.

The Upper House has not yet approved the new Act on Auditors but after signing by the President, it should take effect on the date of announcement in the Collection of Acts. There are no plans to delay the date of effect, but some deadlines for compliance with certain duties are imposed in the transitory provisions. Below please find our comments on the most significant changes.

The Act on Auditors, if applicable, will require the statutes or articles of association of companies to be amended. This especially applies to statutes or articles of association of public-interest corporations and companies that determine which body shall decide on the auditor appointment. These companies should consider during preparation for general meetings whether to amend their statutes now with delayed effect in order to comply with the upcoming new legislation. Otherwise they will be required to convene another general meeting once the Act on Auditors becomes effective.

Compared to currently applicable legislation, financial penalties will be more severe for cases where audits are not carried out duly. Penalties up to CZK 2 and 5 million have been proposed for statutory and corporate auditors, respectively. On the other hand, imposing penalties on assistant auditors will be abandoned, leaving the responsibility of resolving any misconduct on the assistants’ supervising auditors.

Another major novelty introduced by the new legislation is the two-tier regulation system for the profession of auditors, which is standard in a number of European countries. The new supervisory authority will be superior to the Chamber, a self-governing organization, and shall supervise both the exercise of auditing activities and activities of the Chamber. The supervisory authority shall also have the powers of a recalling authority.

The draft Act on Auditors also has impact on the powers of the management bodies of accounting units by setting forth which accounting unit body shall be authorized to decide with which auditor to enter into a statutory audit agreement and by setting forth restrictions for unilateral termination of the audit contract by the accounting unit. The body authorized to appoint an auditor for legal entities shall be the legal entity’s supreme body, i.e. the general meeting of a commercial company. The statutory body shall have the right to enter into the statutory audit agreement only with the auditor so appointed. Accounting units may terminate such agreement unilaterally only if the auditor fails to carry out the statutory audit in accordance with law, internal rules or code of ethics.

A mandatory audit based on contracts established prior to the effective date of the Act on Auditors can be made with decisive date no later than 31 December 2010.

The draft Act on Auditors (see Section 2(m)) further defines the following parties, without limitation, as public-interest entities: pension funds, investment funds and investment companies, security brokers, health insurers and, in particular, all commercial companies or cooperatives with over 4,000 employees based on the previous accounting period.

Public-interest entities have a special duty to establish an audit committee as another mandatory body of public-interest entities. The members of the audit committee shall be elected by the general meeting or, if applicable, another supreme body of the public-interest entity. At least one member of the audit committee must be independent of the audited party. A minimum of at least 3 years of practical accounting or statutory audit experience is required. The audit committee is especially in charge of evaluating the efficiency of internal inspection systems, internal audit or risk management system. The draft Act on Auditors will require public-interest entities to comply with the duties imposed by the Act on Auditors by 31 December 2009.