Global Tax Alert | 15 October 2013

EU incentive limit provisions effective 1 July 2014 require review of Czech Republic investments

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Executive summary

As of 1 July 2014, the European Commission (EC) is planning to set new incentive limits for all European Union (EU) member states. Based on the current Czech Republic incentives regime, companies should consider filing an application for additional investment incentives for projects likely to be implemented within the following five to six years. The application needs to be filed by the end of 2013 – early 2014 at the latest in order to ensure the investment incentives grant is issued by 30 June 2014 and, thus, the incentives are provided under the current rules.

If the investment is not implemented as expected, there should not be any sanctions imposed by the Czech authorities based on applicable law. It should also be possible to file a formal request for cancellation of the investment incentives grant.

New rules as of 1 July 2014

The Czech Republic currently provides for tax relief over 10 years for selected types of projects (manufacturing, shared service centers, technology centers). The total amount of incentives is equivalent to 40% of the investment value.

Starting 1 July 2014, new rules prepared by the EC should become effective across the EU. The new regime will limit incentives for large enterprises and reduce the current level of benefit in the Czech Republic from 40% to 25% (and potentially to 10% in some regions including Pilsen). Given the expected effective date of these new rules, there is still time to file an investment incentives application under the existing rules so that the Grant of investment incentives (Grant) is issued by 30 June 2014.

The investor then has three years starting from the date of issuance of the Grant to meet the respective conditions including the investment threshold (CZK 100 million1 for standard manufacturing projects). Machinery purchased over 60 months from the Grant issuance date could form part of the subsidized investment and increase the base for the tax relief. If the project is not realized as expected for whatever reason and the conditions are not met, there should not be any sanction based on the incentives law (primarily because the Company did not utilize any incentives yet). The only negative implication would be that the investment incentives with respect to the respective project cannot be claimed anymore.

Companies should review their investment plans and assess opportunities to apply for and receive incentive benefits prior to 1 July 2014.

Endnote

1. Approximately US$ 5 million.

For additional information with respect to this Alert, please contact the following:

Ernst & Young s.r.o., Prague
  • Ondrej Janecek
    +420 225 335 360
    ondrej.janecek@cz.ey.com
Ernst & Young LLP, Eastern European Business Group, New York
  • Vladimir Sopkuliak
    +1 212 773 4144
    vladimir.sopkuliak@ey.com
  • Miklos Santa
    +1 212 773 1395
    miklos.santa@ey.com

EYG no. CM3878