Tax and Legal News - April 2022

Editorial: Czech aid to Ukraine     

After more than two years of COVID, many people (myself included) were looking forward to the arrival of this spring as the time when life would finally return to its old, quiet ways. It didn’t. The events in Ukraine could not leave untouched even those who’ve been fighting the virus in their own way by pretending it didn’t affect them. The current situation painfully and deeply affects every one of us.   

From a tax perspective, the topic of solidarity and aid to Ukraine is currently at the top of the list of issues being discussed (even when the time of financial statements, audits and tax calculations is at its height).

The most frequent question remains the possibility of deducting monetary gifts to various Czech and foreign organisations or directly to individuals and the related question of taxation for the gift recipient (including situations where the recipient is an employee or his/her family member). And because the Czech nation is generally very resourceful, it doesn't just stick to these classic forms of aid. We are also dealing with the tax implications of free accommodation, various forms of in-kind donations, organising employee fundraisers or paying wage compensation for volunteer work. What do you think – can the free-of-charge provision of alcoholic beverages (obviously in the context of a martial conflict) be considered a donation fulfilling a humanitarian and charitable purpose, or will this purpose only be fulfilled in the case of drinking water? What about fizzy drinks?  

When it comes to creativity, it seems even the legislator didn’t want to be left behind. The first draft of the related Income Tax Act amendment has thus seen the light of day in a very unconventional way in the form of transitional provisions. In the end, however, the Finance Minister abandoned this innovative concept and a brand new Bill on tax measures in connection with the armed conflict on the territory of Ukraine caused by the invasion of the Russian Federation (Parliamentary Document No. 173) was circulated to MPs on 9 March 2022. In addition, Questions and Answers regarding this bill were published in a lightning-fast manner on the Financial Administration website (even before discussion of the bill in the Chamber of Deputies began).  

The Government’s efforts should result in a temporary increase in the limit on the deductibility of donations up to 30% of the tax base and an expansion of the qualified purpose of the donation to support Ukraine’s defence efforts. The scope of entities to which donations can be made in 2022 has also been expanded, specifically to the Ukraine State and to natural and legal persons residing or having their registered office in Ukraine. Similarly to the time of COVID, the bill allows the possibility of claiming the relevant expenses for in-kind donations made in 2022 directly in tax deductible expenses (of course, in such a case said expense cannot be claimed again as a tax-deductible item).

However, it is important to note that even after the adoption of the proposed amendment, it will not be possible to deduct from the tax base gifts made across the board to any natural persons, but only to those who meet the conditions regarding their status already defined by law. This includes a relatively narrow range of persons, e.g. those on a disability pension, minor children, persons running medical or school facilities or animal welfare facilities. In the case of gifts to individuals, it may therefore be preferable to use the method of claiming the related expense directly as a tax deductible expense (again, however, only for gifts in kind).

In any case, we acknowledge – with appreciation – that the draft legislation came very quickly. It’s just a pity that the government hasn’t taken the same constructive approach regarding VAT. Here, the existing legislation applies in full, which means, among other things, that in many cases a taxpayer making an in-kind donation may not be entitled to deduct the related input VAT (more on VAT implications in our next article).  

However, many more tax issues exist in relation to the situation in Ukraine. Examples include questions about the accounting and taxation of exchange rate differences or allowances for bad debts, the never-ending area of transfer pricing (which group company should bear incurred losses?) or the VAT implications of exporting goods or services to Ukraine. A number of non-tax issues also need to be addressed – increasing pressure to comply with AML obligations, interpretation of the concept of force majeure (again?), the possibility of sanctions in the event of early termination of contractual relations or failure to comply with a contract, immigration regulations and so on.   

Hopefully, by the time you read this editorial, the current conflict will be heading towards some kind of peaceful resolution or the semblance of one. Fingers crossed.