5 minute read 29 Sep 2021
Tax and Legal News - September 2021

Tax and Legal News - September 2021

Libor Frýzek
By Libor Frýzek

EY Česká republika, vedoucí partner týmu daňového poradenství

Libor Frýzek je vedoucím partnerem týmu daňového poradenství a odpovídá za vedení daňového oddělení v České republice. Je také členem Komory daňových poradců České republiky.

5 minute read 29 Sep 2021
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Editorial: Tax creativity until the elections

In June, we first wrote here about the vague ambitions and desires of some political parties and groups in the area of taxation ahead of the autumn elections. Today, the picture is much clearer and we provide a detailed description of the various proposals and election programs in a ten-page supplement. So in this short article, I’ll just take a quick look at some of the proposals.

Let’s recall a few parameters of the current situation. The state budget deficit for 2021 presently sits at some 300 billion – reportedly, the worst result since the Czech Republic was founded. Total state debt is roughly 2.4 trillion (2.4 thousand billion), i.e. some 43% of GDP. By comparison, the 2012-2019 period was consistently around 1.6 trillion, so an 800 billion increase. In contrast, we’ll collect 290 billion in VAT for the whole year and only 84 billion in corporate income tax.

Taxing the rich resonates nicely – numerically and politically – with this situation, and does so in several forms. A millionaire’s tax of 1% on assets over 100 million, inheritance tax on assets over 50 million, estate tax on a fourth (or possibly second) and additional real estate properties, abolition of the capital gains exemption. Basically, a race to see who can tax wealthy individuals more creatively. There’s also the creative idea of taxing large corporations at a higher rate, the unique concept of a progressive corporate tax rate. My feeling is that this doesn’t work anywhere in the world because large corporations simply split into several smaller corporations and don’t pay the higher tax. But we’ll see. Maybe we can make it work it here.

Taxing multinational corporations and digital giants, a digital tax, a bank tax, a sectoral tax... . Taxing the distribution of profits to prevent the outflow of funds also sounds great. Revising double tax treaties to limit the benefits. This may sound a bit like “promising the moon”. I don't know how we’ll unilaterally abolish the dividend exemption provided for in the EU directive, or how easy it’ll be to renegotiate double tax treaties, which requires both parties. Taxing the giants will also be interesting – last time we said ‘boo’ to US corporations and communicated intention to tax them in Europe, they ‘booed’ back by stopping the import of European cars and wines.

Resonating nicely with the elections – less so with numerical reality – is another group of proposals, again across the political spectrum. Reduce VAT on food, green products, recyclables, culture, housing, etc. Praiseworthy, tempting, a net cash-out for the state budget. And many others – lower labour taxation, equalise capital gains taxation, reduce social security contributions, retire after 25 years, lower contributions for the elderly, support for families with children... .

A spirit of simplifying the law, removing exemptions and user-friendliness runs through most of the election programs. Some specific and seemingly elaborate proposals are all the more interesting. I won't get into what tax theory would say about them. The transfer of R&D tax losses and deduction from employee contributions. But only for small companies and start-ups. Tax breaks to support the clever. A non-repayable loan for home furnishings upon the birth of a child. Repeal of the exemption from taxation of land on which a church has a building for economic activity. Exempting pubs from tax if the operator lives in the community and uses local resources. Increased tax deductions for trade union members. Public procurement for entities that use sorted raw materials. A discount for a non-working wife; yes, but only if she’s caring for children – if she’s not, no discount.

I'm having a hard time finding anyone who wouldn’t find at least one of the proposals exactly to their taste. I just hope that voters will evaluate not only the imaginative and appealing nature of the proposals, but also their actual functionality and chance of success.

A millionaire’s tax of 1% on assets over 100 million, inheritance tax on assets over 50 million, estate tax on a fourth (or perhaps second) and additional real estate properties, abolition of the capital gains exemption. Basically, a race to see who can tax wealthy individuals more creatively.
Libor Frýzek
EY Česká republika, vedoucí partner týmu daňového poradenství

  • Chip and raw material shortages – will kurzarbeit help employers?

    Ondřej Havránek, Barbora Suchá, Kateřina Suchanová

    On 1 July 2021, an amendment to Act No. 435/2004 Coll. on employment (“Employment Act”) came into force, introducing into the Czech legal system a long-discussed instrument of active employment policy, the so-called kurzarbeit, or contribution to employers during part-time work.

    This new benefit is intended to replace the dysfunctional partial unemployment benefit, which was too low and required government approval for each claim. It was therefore not used in practice, and the Employment Act amendment has thus removed it completely. At the same time, the aim of the amendment was to introduce a conceptual tool in place of the Antivirus program, which temporarily helped employers during the COVID crisis. For the time being, the Antivirus program is running in a very limited form until the end of October 2021, where employers are only compensated for the cost of wage replacement paid to employees in quarantine or isolation.

    The basic principle of all the described instruments is the same: If an employer temporarily has no work for (some of) its employees, it must continue to provide them with wage compensation. The State will cover a certain portion of the wage costs of these employees for the time they are not working. The employer can thus bridge a difficult period without layoffs. Employees do not lose their jobs and ideally use the time off to, for example, improve their qualifications or retrain.

    Who could kurzarbeit help?

    A large proportion of employers in the manufacturing sector came through the COVID-19 pandemic relatively unscathed. The situation was more critical for the service sector, where most activities were outright banned or restricted by government measures and the Antivirus program was widely used. However, this year the tables have turned and many manufacturing companies are affected by global shortages of chips, plastics, metals and other raw materials and products. Some companies are being forced to stop production for these reasons. Logically, then, they’re asking whether the Antivirus or kurzarbeit program, which was approved in the summer, could help them cope with these indirect consequences of the COVID situation on the world markets.

    As we mentioned, Antivirus is only perfunctorily in place anymore. And while the law regulating kurzarbeit is in effect, it’s not yet possible to draw any funds from it. In order to activate the provision of the allowance during part-time work, the government would have to issue a regulation after a tripartite discussion. It can issue a regulation if the economy of the Czech Republic or a sector thereof is seriously threatened:

    • for economic reasons characterised by relevant economic indicators and their past and expected development,
    • due to a natural disaster under directly applicable EU law,
    • due to an epidemic,
    • due to a cyber-attack, or
    • due to another emergency situation constituting force majeure.

    It is therefore not enough if the problem of work allocation exists at the level of a single employer, as was the case with the (abolitshed) partial unemployment allowance. There must be a serious threat to an entire sector of the Czech economy or to the national economy for one of the following reasons. If the shortage of a number of raw materials and products were to continue to worsen and affect, for example, the entire car manufacturing sector, economic reasons could possibly be fulfilled. It could also be another exceptional situation, though whether such a situation could be interpreted as force majeure is open to question. It seems the Government has not yet addressed the situation and would have to be pressured to adopt the relevant regulation.

    What might a government regulation look like?

    A government regulation activating kurzarbeit must always specify the period for which the allowance will be granted. This period may be set at a maximum of six months for the first time and may be extended a maximum of two times thereafter for a maximum of three months each time. The total duration of the allowance may therefore be up to one year. In the event of the need to further extend the allowance, the government would be forced to adopt a new regulation, again after tripartite discussion.

    The regulation may limit the provision of the allowance to only part of the territory of the Czech Republic, to specific sectors of the economy or to a certain group of employers.

    Under what conditions will the allowance be available?

    In the case of kurzarbeit activation, affected employers can send a notification to the Labour Office, in which they provide the prescribed information and thereby apply for the benefit.

    In the notification, the employer will be required to declare that it will not terminate the employment of the employee for organisational reasons for the duration of the allowance and for half that period after the end of the allowance. It will also be required to confirm that it will allow the employees concerned to participate in retraining or other activities facilitated or recommended by the Labour Office. Another important condition is that the employer may not draw on other public funds for the same purpose and that in the month before the government regulation takes effect, the employer has not paid out extraordinary profit shares, otherwise distributed its own resources or provided other extraordinary benefits, and will not do so during the period of the allowance and for 12 months thereafter.

    Employers will only be able to claim the allowance in respect of employees whose employment relationship with the employer has lasted at least three months at the date of notification. In addition, the allowance cannot be claimed for employees working on a working time account.

    After the notification is sent, the Labour Office will grant the allowance if the employee is unable to perform the work because of obstacles to work on the part of the employer that are directly related to the reasons listed in the government regulation. The extent of such impediments must, in the aggregate for all employees of the employer, be between 20% and 80% of the total weekly working time of all employees in an employment relationship. Another condition for granting the allowance is that the employees have been informed in writing of the obstacle to work and the employer has paid them wage compensation of at least 80% of their average earnings prior to the notification.

    The allowance is linked to the part of the working week in which the employer does not assign work to employees. The amount of the allowance is 80% of the wage replacement and the social security contributions and state employment policy contributions paid on it.

    The maximum contribution is 1.5 times the average wage in the national economy for the year preceding the notification. This year, the maximum contribution would therefore be just under CZK 52,000 per employee per month.

    How will the allowance be paid?

    Payment of the allowance also falls under Labour Office competency, always on the basis of the receipt of a complete and duly completed monthly wage replacement cost statement delivered to the Labour Office by the 20th day of the following month. The billing will therefore be done on a monthly basis. The reporting requirements are very detailed, more so than for the Antivirus program. For each employee for whom an allowance is claimed, the employer will need to provide identifying information, the amount of wage replacement and allowance for the month, the date of employment, the length of the workweek, the length of the employment relationship, the number of hours worked, the number of hours of work interference, the record of hours worked, and the amount of average earnings.

    If the employer does not submit the report on time, the allowance will not be paid. The allowance will also not be paid to employers who have been fined for allowing illegal work for three years from the date the decision imposing the fine becomes final.

    If the allowance is paid incorrectly or in an incorrect amount on the basis of incorrect data in the monthly statement, or if the employer fails to fulfil the obligations arising from the employer’s declaration in the notification, the employer will be obliged to reimburse the allowance or a pro rata part of it at the request of the Labour Office.

    If you have any further questions, please contact the authors of the article or other members of EY Law or your usual EY advisory team.

    Although the law regulating kurzarbeit is effective, it is not yet possible to draw contributions from it. In order to activate kurzarbeit, the government would have to issue a decree, which it can do on the condition that the economy of the country or its sectors are seriously threatened for the enumerated reasons (epidemics, economic reasons, etc.). Antivirus is being phased out. Thus, employers cannot currently count on any financial support for employees who are subject to barriers to work on the employer’s side, for example, due to a lack of chips or raw materials.

  • New public aid amounts from 1 January 2022

    Martin Hladký, Veronika Kruttová

    In April, the European Commission adopted revised guidelines on regional state aid.1 The guidelines will enter into force on 1 January 2022. The level of regional support affects the level of subsidies in certain European subsidy programmes or the level of support for projects supported by investment incentives. Currently, regional aid of 25% of eligible costs is available for large enterprises in the Czech Republic (except Prague). For small enterprises, the amount of aid is increased by 20 percentage points, for medium-sized enterprises by 10 percentage points.

    Regional aid is intended for the economic development of disadvantaged areas in the European Union. These are areas with an extremely low standard of living or high unemployment (regions pursuant to Art. 107[3][a] of the Treaty on the Functioning of the European Union) or a specific economic area (regions pursuant to Art. 107[3][c] of the Treaty on the Functioning of the European Union). As stated by the Office for the protection of competition (“Office”) in its press release,2 as of 2022, the Czech Republic will now have not only regions under (a) as before, but also regions under (c). For this reason, the Office, in cooperation with the ministries, prepared the documents for the notification of the new regional aid map for the 2022-2027 period and submitted them to the European Commission for approval.

    The European Commission approved the new regional aid map at the end of July 2021.3 The approved map will be in effect from 1 January 2022 to 31 December 2027. The level of support may still be affected by the Just Transition Fund (JTF) that is currently awaiting approval. Once the JTF is approved, the Czech Republic will need to submit a new regional aid map to the European Commission for approval in order to increase aid in selected regions.

    The table below sets out the maximum amount of public aid applicable from 1 January 2022 to 31 December 2027 in each region of the Czech Republic:

    NUTS II NUTS III NUTS IV Aid amount for large enterprises Note
    Northwest

    Karlovy Vary

    		   40 % Possible increase of 10 percentage points after JTF approval.
      Ústí   40 % Possible increase of 10 percentage points after JTF approval.
    Northeast Liberec   30 %  
     

    Hradec Králové

    		   30 %  
      Pardubice   30 %  
    Central Moravia Olomouc   30 %  
      Zlín   30 %  

    Moravia-Silesia

    Moravia-Silesia

    		   30 % Possible increase of 10 percentage points after JTF approval.

    Central Bohemia

    Central Bohemia

    		   20 % Reduction to 15% from 2024, only new projects (new economic activity) for large enterprises from  2022.
       

    Rakovník district

    		 35 %  
       

    Kladno district

    (Kladno, Slaný)

    		 35 %  
       

    Mělník district

    (Mělník, Kralupy n. V., Neratovice)

    		 35 %  
    Southwest Plzeň   20 % Reduction to 15% from 2024, only new projects (new economic activity) for large enterprises from 2022.
        Plzeň – Sever district (Kralovice, Nýřany) 35 %  
       

    Tachov district

    (Tachov, Stříbro)

    		 35 %  
      South Bohemia   20 % Reduction to 15% from 2024, only new projects (new economic activity) for large enterprises from 2022.
    Southeast Vysočina   20 % Reduction to 15% from 2024, only new projects (new economic activity) for large enterprises from 2022.
     

    South Moravia

    		   20 % Reduction to 15% from 2024, only new projects (new economic activity) for large enterprises from 2022.

    Source: CzechInvest

    The good news is an increase in support above the current 25% in selected regions. The bad news is the inability to support production expansion projects (under the investment incentive scheme) for large enterprises from 1 January 2022 in the Central Bohemia region, in the south-west and south-east of the country (with a few exceptions, see the districts listed in the overview above). Due to the time needed to approve investment incentive applications (based on experience, 8 to 12 months), it is practically impossible to get them approved before 1 January 2022, unless they’ve been submitted by about the middle of this year. The question of how to test a new economic activity is currently being intensively addressed by the State Administration and, according to available information, activities with the same four-digit economic activity classification code (CZ-NACE4) will be considered the same or similar activity. On the further question of whether the new activity will be tested at the legal entity or group level, we have not yet received a clear answer.

    For small enterprises, the aid amount will normally be increased by 20 percentage points, and for medium-sized enterprises by 10 percentage points. In addition, the restrictions on expansion projects described above for large enterprises (requirement for new economic activity) will not apply to small or medium-sized enterprises.

    If you would like to receive more support than the current 25%, you will need to wait until January 2022 to submit your application. Given the time required to complete the application (in our experience, at least 6 weeks, but more realistically 8 to 12 weeks), we would recommend not delaying its preparation. We have extensive practical experience in preparing applications and are happy to help you. We will also be happy to discuss with you the possibilities of optimising the investment incentive, not only with regard to the location of the project, but also the methodology for calculating the tax rebate (including the timing of the investment when taking into account the amount of tax liability in the so-called reference tax periods) or the possible combination with other types of support (subsidies, deductible item for research and development).

    If you have any questions, please contact either the authors of the article or your usual EY advisory team.

    The good news is an increase in support above the current 25% in selected regions. If you would like to receive this higher support, you will need to wait until January 2022 to apply. Given the time it will take to complete your application, we recommend not delaying its preparation.

  • Information on Czech Financial Administration activities in 2020 – what caught our attention

    Radek Matuštík, Tomáš Stacho

    Every year, the Financial Administration (“FA”) publishes a report on its activities5. The report comments not only on tax collection, but also on control activities, international cooperation in the field of taxation and the exercise of other competencies. Below, we summarise what caught our attention.

    Tax collection

    • Total tax collections fell from CZK 906 billion to CZK 850 billion. According to the tax administrator, the decline is mainly due to the COVID-19 pandemic.
    • VAT revenues fell the most for Specialized Tax Offices and the City of Prague. Surprisingly, VAT collections increased in the Olomouc, Zlín and Vysočina regions. One factor contributing to the decline in VAT collections was the introduction of reduced rates, especially for heating and cooling and catering services.
    • The total collection of corporate income tax is at the level of 2016. At the same time, increased collections were recorded in the IT, construction and automotive sectors. On the other hand, financial institutions and companies specialising in the production of chemicals and preparations recorded a decrease.

    Control activity

    • The tax administrator’s control activities were substantially curtailed in 2020 due mainly to the allocation of audit staff to dealing with compensatory bonuses and the use of sick pay, the sickness benefit and quarantine orders.
    • For control activity, the long-term trend of declining numbers of tax audits and Proceedings for the Removal of Doubt (“POP”) combined with an increase in supplementary tax assessments per tax audit/POP continued in 2020.
    • The drop in the number and intensity of inspections in 2020 was also due to recurring changes in the dates of oral hearings, interrogations or local investigations under the COVID-19 measures.
    • For example, the number of VAT Clearance of Doubt procedures fell from 12.6 thousand in 2019 to 9.6 thousand in 2020. The probability that a POP will result in a change in tax liability has increased by 5 percentage points compared to the previous period and now stands at 80%.
    • The downward trend also continued in the number of completed tax audits. For example, in 2019, about 10 thousand tax audits were completed, while in 2020 only about 6.7 thousand tax audits were completed. In 2020, 0.2% of entities were audited by the tax administration for corporate income tax.
    • The most frequent rulings were in the area of claiming deductions for fictitious transactions, transfer pricing, the application of deductible items and exemption of interest income from crown-denominated bonds.
    • Other competencies controlled by the tax administration include:
      • Failure to keep proper accounting records and failure to comply with the obligation to publish accounting statements in the Commercial Register – offences identified in 218 cases with total fines of approximately CZK 2.6 million.
      • The Financial Administration identified 71 cases of breach of the obligation to make payments over CZK 270 thousand in non-cash form, for which it imposed fines averaging CZK 11 thousand per violation.
      • The most frequent offence was again the late declaration of tax, specifically in 357,000 cases. However, a large number of penalties was simultaneously waived by order of the Minister of Finance in the context of mitigating the impact of the COVID-19 pandemic.

    Other

    • The Financial Administration actively cooperates with the tax administrations of other countries, including through requests for exchange of information. Within the EU, the most frequent requests for information go to Germany, Poland and the Netherlands. Outside the EU, the most frequently contacted countries are the USA, the British Virgin Islands, the Russian Federation, Norway, Switzerland and Belize.
    • In 2020, 36 requests for binding assessments on transfer pricing were submitted. A further 19 requests were made for bilateral assessments (i.e. in cooperation with a foreign tax authority).
    • In the context of the UK’s exit from the EU, the Financial Administration has seen an increased demand for information to assess related-party transactions and has responded by issuing related BREXIT information.
    • In the framework of international cooperation in the field of VAT in 2020, activity in parallel multilateral controls completely ceased, i.e. the Financial Administration did not initiate a new control or engage in one.
    •  In 2020, 5.5 thousand appeals against tax assessment decisions were filed. In the same year, the first-instance tax administrator upheld 1,055 appeals, dismissed 428 and rejected 131 for inadmissibility or late filing (also deciding on appeals from previous years).
    • The Appellate Tax Directorate itself decided 5,198 appeals. Of these, 881 were upheld, 725 were partially upheld, 128 were decided against the taxpayer (i.e. a deterioration in the taxpayer’s position compared to the first-instance tax administrator’s decision) and 3,448 were rejected.
    • In 2020, there was a significant increase in collections under the one-stop scheme from CZK 1.43 billion to CZK 1.94 billion.
    • The Financial Administration plans to extend the functionality of the My Taxes portal in the coming years to allow the pre-filling of tax returns.
    • In view of the economic situation, there has been an increase in the number of requests for tax postponement and authorisation of tax instalments, especially in the area of VAT. According to the Financial Administration, most of the requests were granted.
    • The Financial Administration points out that, in view of the fiscal effect, it will continue to control personal income tax in 2021 (in particular, verifying the accuracy of data on tax returns and proving the origin of assets).

    Cooperation with law enforcement authorities

    The Financial Administration published several cases arising from cooperation with law enforcement authorities. We present a selection of them below.

    • Compensatory bonuses – In the context of the payment of compensatory bonuses, cases have been documented where individuals have claimed compensatory bonuses on the basis of stolen identities. The most serious case is an offender who made approximately 400 claims (with a total potential loss of CZK 17 million).
    • Sale of luxury cars – The Tax Cobra uncovered a case of large-scale VAT evasion in the formal sale of luxury vehicles during 2020. Twenty-four individuals were charged with “evasion of tax, duty and compulsory payment” and “laundering of proceeds of crime”. The taxable entities caused damage of CZK 75 million. At the same time, the Tax Cobra seized assets amounting to CZK 18 million from the perpetrators.
    • Sale of mobile phones – A similar case was uncovered by the Tax Cobra in the formal sale of mobile phones, where taxpayers circumvented the obligation to apply the reverse charge regime to the supply by formally stating the value of the supply as less than CZK 100,000. The perpetrators undermined the tax obligation in a group of 13 individuals, and they have been carrying out this illegal activity since at least 2016.
    • Employment agencies – Criminal investigators have uncovered an organised group focused on the production of fictitious invoices relating to employment through recruitment agencies. The accounts were prepared by a person who was prosecuted in the past.
    • PRIZMA – The Tax Cobra uncovered a group of persons (19 natural persons and 5 legal entities were involved in the group) who, by means of fictitious invoices in the area of the provision of agency employment, obtained a VAT and corporate income tax advantage in a total amount of CZK 180 million. The criminal investigators seized property worth up to CZK 120 million.

    If you have any questions on the above topic, please contact the authors of the article or your usual EY advisory team.

    The most frequent findings were in the area of claiming deductions for fictitious transactions, transfer pricing, the application of deductible items and exemption of interest income from crown-denominated bonds.

  • The SAC has again ruled that the performance of the function of a statutory body is an independent economic activity for VAT purposes

    Stanislav Kryl, Jevgenija Bajzíková

    In June of this year, the Supreme Administrative Court (“SAC”) ruled in case 3 Afs 82/2019-38 that the performance of the function of the statutory body is an independently performed economic activity for VAT purposes. The chair of the board of directors of a joint stock company may become a VAT payer by virtue of their office. A joint stock company is entitled to deduct tax on invoices received for the chair’s services, provided that the general conditions are met.

    This is the second judgment in which the SAC expressed a similar opinion. While the first judgment 2 Afs 100/2016 - 296 of 2016 concerning the performance of the function of managing director was in many respects a surprise, it is now clear that it was no coincidence. The tax administration will have to start respecting established case law, so a change in the statutory regulation can be expected.

    The legislation in a nutshell

    • The Czech VAT Act contains a legal fiction7 according to which the activities of persons that are taxed as income from dependent activities pursuant to §6 of the ITA are not regarded as self-employed economic activities for VAT purposes and are excluded from the subject of VAT (i.e. are not taxed or counted in the turnover for VAT registration). This applies to remuneration of members of corporate bodies.
    • According to the SAC, this regulation goes beyond Article 10 of the VAT Directive8. The Directive excludes from economic activity persons other than employees whose relationship to the employer is similar8, but such a relationship must be assessed on a case-by-case basis, not on the basis of a blanket fiction.
    • The Government of the Czech Republic attempted to resolve the conflict between the VAT Act and the European Directive with an amendment in 201910, which ultimately failed to pass in the Chamber of Deputies (an amendment ultimately preserved the contradiction).

    More details on the new SAC judgment

    In the case under review, the board of directors chair invoiced the joint stock company (the applicant) for remuneration for the performance of their duties, inclusive of VAT. The tax administrator refused to recognise the company’s right to deduct VAT on invoices received from the chair, arguing that this activity is taxed as a dependent activity under §6 of the ITA and thus the chair does not act as a taxable person in the performance of their duties.

    The SAC rejected this view and stated that the position of the board of directors chair of a joint stock company is, in principle, identical to that of the managing director of a limited liability company, meaning there are no relevant grounds for departing from its previous judgment 2 Afs 100/2016-29. It therefore reiterated that the wording of the Czech VAT Act contradicts Articles 9 and 10 of the European Directive and that it is therefore necessary to proceed in direct accordance with the Directive. In the Czech legal environment, the performance of the function of the chair of the board of directors, or more generally a member of the statutory body of a legal company, must be considered an independent economic activity because the board of directors chair (i) bears their own economic risk11 and (ii) is not in a subordinate relationship to a Czech joint stock company11.

    As in the previous judgment, the SAC analyzed the relevant decisions of the CJEU in its reasoning – C‑355/06 J. A. van der Steen and C-420/18 IO. Both decisions concerned Dutch law and in both cases the CJEU held that a member of the statutory body is not a taxable person. The SAC did not find that the CJEU’s contrary conclusions contradicted its own judgments in any way, since the Dutch law on members of statutory bodies is, according to the SAC, different as regards the bearing of the economic risk of such officers (a Dutch managing director does not, therefore, appear to bear any risks associated with the exercise of this office).

    Practical findings

    In its decision, the SAC states that the defendant (the Appellate Financial Directorate) was aware of the SAC’s legal opinion, yet refused to follow it because it deemed it Incorrect13. The Czech Tax Administration will probably have to make efforts again to ensure that the already established opinion of the SAC is reflected in the law. Thus, we can probably expect a similar legislative proposal to the one rejected in 2019, i.e. the deletion of the legal fiction by reference to taxation under §6 of the ITA. After the potential legislative change, managing directors and members of boards of directors of legal entities will register as VAT payers when exceeding the turnover and will apply VAT on the remuneration for the performance of their functions.

    Similarly, in the past, the Czech Tax Administration had to amend the Czech VAT Act (or the Tax Code) in response to some key rulings of the Supreme Administrative Court and findings of the Constitutional Court. Examples include SAC judgments 7 Aps 3/2013 - 34, 1 Afs 445/2019 - 47 (known as “Kordárna”), where the SAC repeatedly stated that a VAT payer is entitled to interest on withheld excessive deductions in the amount of the market value of money. Further, for example, the ruling II. ÚS 819/18, according to which withholding an undisputed part of the excessive VAT deduction is a violation of the right to protection of property and the lack of a procedural step for refunding part of the excessive deduction does not entitle the tax administrator to withhold it.

    For the sake of completeness, it should be noted that the potential change may not affect income tax in any way, i.e. the income of members of statutory bodies may still be considered as income from employment and subject to social and health insurance (§6 of the ITA).

    Pending the amendment, members of statutory bodies will then be able to decide for themselves whether it is advantageous for them to follow the Czech VAT Act and not tax their remuneration, or to rely on the wording of the European Directive and tax their remuneration according to the above-mentioned SAC judgments. This will allow them to claim a VAT deduction on inputs that they purchase and use themselves for the performance of their function (e.g. a car, rental of non-residential premises). Any transition to taxation will need to be contractually detailed, e.g. the tax base for services, how benefits or option plans are taxed14.

    If a managing director or a member of the board of directors decides to tax their services, then the tax authorities should not dispute the right to deduct VAT for companies, provided of course that the general conditions for its application are met.  

    If you have any questions, please contact the authors of the article or your usual EY advisory team.

     

    The SAC confirmed that the performance of the function of the statutory body meets the criteria for an independent economic activity for VAT purposes. Therefore, if the board of directors chair of a joint stock company exceeds the turnover and becomes a VAT payer, then the joint stock company is entitled to deduct tax from the invoices received for the chair’s services, provided the statutory conditions are met.

  • Dutch court on the non-recognition of acquisition interest and abuse of law

    Karel Hronek

    As a matter of interest, here is a Dutch court decision on the non-recognition of acquisition interest and abuse of law. Please note that for our outline summary, we only rely on general information in the English press.

    • The judgment is from this year and relates to events in 2011.
    • A Private Equity (PE) structure held a 100% stake in a Dutch holding company (NL HoldCo) through four French investment companies (FR InvCos).
    • NL HoldCo acquired a 100% stake in the Dutch retail group, financed by a mix of equity and loans from FR InvCos.
    • Following the acquisition, NL HoldCo formed a fiscal group with the retail group whereby interest on acquisition loans was deducted against the profits of the retail group.
    • As we understand it, interest on an acquisition loan from a related party was generally not deductible under the Dutch tax law in force at the time (related party limit of 33.3%). The fact that there were four investment companies did not technically meet the relatedness requirement.
    • The Dutch tax authorities challenged the deduction, arguing that the structure was primarily motivated by the aim of circumventing the rule and that it therefore constituted an abuse of law.
    • The Dutch Supreme Court sided with the tax authority - its main arguments were as follows:
    • Equity at the investment company level has been “converted” into credit at the NL HoldCo level, with no material change in the financial position of the investment companies.
    • The acquisition interest was deducted against the profit of the acquired company.
    • Acquisition interest was not reasonably taxed for the investment companies.
    • The deduction of acquisition interest would be contrary to the purpose and objectives of the Dutch tax regime.
    • It is evident here that the predominant motive was to achieve a deduction.

    If you have any questions, please contact the author of the article or your usual EY advisory team.

    According to the court, equity at the level of the investment companies was “converted” into credit at the level of NL HoldCo, and this did not result in a material change in the financial position of the investment companies.

  • The SAC and regional courts have repeatedly confirmed the importance of evidence in tax proceedings

    Radek Matuštík, Pavlína Kubešová

    We’d like to present two recent Supreme Administrative Court (“SAC”) judgments. Although the subject-matter of the disputes was completely different, the judgments are linked in that the cassation complaints of the taxable entities were rejected primarily because, in the opinion of the Supreme Administrative Court (and the Regional Court and tax administrator in the previous proceedings), the taxable entity was unable to sufficiently prove its statements.

    In our opinion, these judgments confirm the growing trend of tax administrators increasingly focusing their control activities on whether the taxpayer is able to bear the burden of proof in relation to alleged facts (§92[3] of the Tax Code). Whether or not the taxpayer’s technical position was correctly applied in a particular case is only assessed if the taxpayer’s factual and legal statements are proven. Thus, it is often not the interpretation of the law (a question of law) that is in dispute between the parties, but rather the demonstration that the conditions of the law have been met.

    We believe that the role of in-house tax departments and external tax advisers can follow this trend over the long term, moving primarily from assessing the correct application of (tax) legislation to producing documentation that will enable the burden of proof to be met where necessary, often with a significant time lag.

    On Judgment 6 Afs 193/2019 of 3 June 2021 – [on the tax deductibility of a reduction of revenue from a bonus (discount)]

    The Tax Office assessed corporate income tax on the taxpayer, a manufacturer and seller of (among other things) paper, as the tax administrator did not recognize as legitimate the reduction in proceeds from quantity bonuses granted to customers in the group, but also to an unrelated company.

    In the course of the tax audit, the taxpayer submitted accounting records to the tax administrator, including tables with a list of credits provided and their calculation in relation to individual customers depending on the development of market prices; framework agreements with customers, which also include a bonus scheme; minutes of meetings with customers; an expert opinion on transfer prices, and e-mail correspondence.

    The Regional Court dismissed the taxpayer’s action on the ground that the applicant (the taxpayer) had failed to discharge the burden of proof by failing to prove the legitimacy (i.e. the tax deductibility) of the reduction of revenue by means of the quantity bonuses and issued credit notes.

    The SAC confirmed this conclusion and, citing earlier case law, reiterated that the taxpayer bears the obligation to claim, and the burden of proof regarding the existence and amount of, the expenditure incurred and its purpose, since it is the taxpayer which, in accordance with §92(3) of the Tax Code, proves all the facts stated in the tax return.

    The SAC further stressed that there must be a clear link between the expenses (costs) incurred and the business activity of the taxpayer, and that such expenses (costs) cannot be recognised which clearly do not correspond to economically rational (reasonable) behaviour, i.e. do not make sense from an economic point of view. Expenses (costs) deductible under §24(1) of the Income Tax Act are primarily linked to the demonstration of the reasonableness of their expenditure.

    In the view of the court, not only did the taxpayer fail to prove this, but the evidence presented showed that the taxpayer had no ability to influence the prices of its products, as the sales activities were handled by the parent company, which coordinated the supply of paper to the final customers centrally. The granting of quantity bonuses in such a situation does not, on the face of it, make economic sense. Therefore, according to the court, the tax administrator did not err in any way when it questioned the tax effectiveness of the bonuses granted (in the case of granting them to the parent company, by stating that the discount was not reflected in the costs of individual customers, or by pointing out the illogicality and impracticality of such a bonus-granting method).

    The applicant further argued that the quantity bonuses are part of the price for goods charged between related parties. If the tax administrator wished to challenge them, it would then have to posit and prove a conflict with the arm’s-length principle under §23(7) of the Income Tax Act. The SAC upheld the Regional Court’s conclusion that these objections were irrelevant because, due to the failure to prove the tax deductibility of the claimed expenses (costs) within the meaning of §24(1) of the Income Tax Act, or due to the failure to meet the burden of proof under §92(3) of the Tax Code, it was not necessary to apply §23(7) of that Act.

    On Judgment 1 Afs 89/2021 of 20 July 2021 – [on the obligation of the taxpayer to prove receipt of a loan in order for the interest on the loan to be tax deductible]

    The Tax Office assessed corporate income tax by concluding that the taxpayer had wrongly claimed the interest costs on a loan as tax deductible on the grounds that the taxpayer had failed to provide evidence of the actual receipt of the funds, not only in relation to the last declared link in the chain of creditors, but also in relation to the previous creditors. Furthermore, in the opinion of the tax administrator, neither the actual receipt of specific amounts of the loan, its consolidation, nor the actual assignment of the funds to the alleged creditor was proven.

    The Regional Court concluded that the applicant did not meet the burden of proof in relation to proving that the lender of the loan in question became the owner of the corresponding receivable, therefore the taxpayer did not meet the conditions for claiming the costs relating to the interest on the declared loan agreement as costs within the meaning of §24(1) of the Income Tax Act. The court upheld the tax administrator’s conclusion that the taxpayer was unable to prove either that it had received loans from the original lenders or that the individual loans had actually been assigned and consolidated, as alleged during the tax audit.

    The SAC agreed with the Regional Court in this respect and further summarised, with reference to settled case law, that an expenditure is tax deductible only if four conditions are met: 1) the expense was actually incurred, 2) the expense was incurred in connection with the receipt of taxable income, 3) the expense was incurred in the taxable year, 4) the law provides that it is a tax deductible expense. In the event of doubt, the taxpayer entering the expenditure in the accounts and subsequently in the tax return is obliged to prove the expenditure was actually incurred in the manner declared on the relevant accounting document.

    The SAC also agreed with the Regional Court that the agreements on assignment of receivables and consolidation of loans submitted by the taxpayer are only formal documents that do not indicate anything about the factual situation (and that their probative value was further diminished by the fact that they were partly concluded between related persons). The SAC also pointed out that the cash documents submitted by the taxpayer did not comply with the statutory requirements and were not reflected in the submitted accounting records; therefore, the initial receipt of the full amount of the loan in question could not be regarded as proven.

    With regard to the taxpayer’s objections to the time delay between the tax audit and the period in which the facts being proved occurred, the SAC stated that these circumstances could not change the fact that the taxable entity bore the burden of proof.

    Also interesting is the SAC’s commentary on the international request, which according to the court “does not constitute a normal way of establishing the facts in tax proceedings and the tax authorities should resort to it only if such a procedure is expedient and, in particular, in situations where the necessary supporting documents cannot be obtained in any other way, or where it is not even in the applicant’s power to obtain them.”

    Practical advice

    In view of the above trend, we recommend that emphasis be placed on the continuous creation of documentation proving the facts stated in tax returns and other submissions (§92[3] of the Tax Code), as well as justifying their tax deductibility (legitimacy), economic expediency and other specific circumstances leading to the adoption of related decisions at a given time (e-mail correspondence, minutes of internal meetings, the current market situation, etc.).

    If you have any questions about the above topic, please contact the authors of the article or your usual EY advisory team.

    In our opinion, these judgments confirm the growing trend in that tax administrators are increasingly focusing their control activities on whether the taxpayer is able to bear its burden of proof in relation to the alleged facts.

  • Tax excerpts from the political programs

    In this issue, we have decided to present excerpts from the programs announced by political parties and movements regarding tax issues.

    These are primarily verbatim extracts from the official programs of individual political entities – with no or minimal editing and no interpretation or evaluative commentary. The main existing parliamentary parties that had published their official programs by the closing date were included in the selection, with political entities listed in alphabetical order.

    The purpose of this supplement is not to express any political preferences, but only to provide readers with unedited data to help formulate their own points of view.

    ANO [YES]15

    • We don’t want to increase taxes, but rather to continue to simplify them and abolish tax exemptions.
    • We will expand the MY Taxes portal to build on the successful flat-rate tax project, so taxes and insurance will be in one place for everyone.
    • We have been able to prevent tax optimisation and tax evasion by multinational companies and will continue to do so consistently.
    • We will increase the threshold for compulsory VAT registration from 1 million to 2 million crowns of annual turnover.
    • We will increase tax benefits for families with children.
    • We will merge the state business support agencies CzechInvest, CzechTrade and CzechTourism, and limit the provision of investment incentives to high-tech.
    • We will connect the Citizen’s Portal and the Entrepreneur’s Portal, fully digitize services for sole traders. All forms for sole traders and businesses will be pre-filled and interactive.
    • We will strive for lower VAT on construction materials in order to make apartment construction cheaper.
    • We will propose ending tax support for the financial product ‘investment life insurance’ and shifting it to products that have a greater effect for clients.
    • We will negotiate an exemption for the Czech Republic in negotiations with the EU regarding the reduction of the VAT rate for the activities of insolvency administrators and executors in order to reduce the costs of the recovery process.
    • We will facilitate faster write-offs of bad debts to help creditors (beneficiaries) get rid more quickly of debts they know are lost, but find it tax disadvantageous to stop collecting. This will right the injustice of taxing money that the creditor does not have. The lender will write off the tax debt and not continue to pursue futile foreclosures.

    ČSSD [Czech Social Democratic Party]16

    • Progressive taxation of personal income is essential to correct the changes approved in 2020. We will prevent the real taxation of anyone up to three times the average wage from increasing.
    • We will reduce VAT on basic foods (bread, vegetables, fruit, meat, fish, etc.) to the lowest rate.
    • Reducing taxes for SMEs and increasing them for the largest corporations can be achieved by simply changing the single rate to three (reduced, standard as today, and increased) so that 99.8% of businesses benefit from the change while significantly increasing government revenue.
    • We will introduce a so-called millionaire's tax, i.e. a tax on giant fortunes above CZK 100 million at a rate of 1% per year, following the example of the current German discussion. Assets over 100 million will therefore be subject to the wealth reporting.
    • We will maintain the zero rate of inheritance tax in the direct line for estates up to CZK 50 million, but introduce a progressive inheritance tax for large estates exceeding this value.
    • We will abolish the option to depreciate luxury passenger cars over CZK 1.5 million and consider transforming the not-so-efficient road tax towards a greener version.
    • We will maintain low property taxes for the 1st to 3rd property per individual, but implement taxes that will discourage speculation and underutilization of apartments through taxation of the 4th and additional properties and consideration of penalties/taxes for long-term vacancy and speculation in the real estate market.
    • We will keep the relief for non-working spouses caring for minor children, but abolish the non-systemic relief for spouses not caring for minor children, which today is only a support for high-income families without minor children and also causes inequalities in the labour market and reduces employment.
    • We will introduce a fair tax on property sales. The tax will be waived on sales that take place to one individual more than five years after the last sale, so that speculation is avoided but the tax does not fall on ordinary citizens.
    • We will harmonise taxation and levies on capital income so that income from labour is not taxed more than income from capital and annuities, as it is today.
    • We will introduce a bank asset tax with progressive rates.
    • We will introduce a 7% digital tax to create fairness between national and international IT companies.
    • We will support work on the European proposal to introduce an import tax on CO2, which should restore the competitiveness of Czech and European companies and, above all, stop the outflow of these activities abroad.
    • We will support the European proposal for a tax on speculative financial transactions, to which ten European countries have already agreed.
    • We will revisit all existing green taxes, but with an emphasis on ensuring they do not affect employees, pensioners or sole traders. The focus of these taxes will be on high earners who already have the largest carbon and environmental footprint.
    • We are open to a Europe-wide debate on a tax on non-recycled plastics to encourage companies to recycle more plastics to save natural resources and protect the environment, or consider deposit schemes for some packaging and supporting existing packaging.
    • We will consider a robot tax, i.e. a special tax on capital to reflect the replacement of professions by automation and robots.
    • We will eliminate tax exemptions for large corporations by reviewing the exemptions that companies use the most. Many large corporations use specific tax exemptions precisely to increase the resulting revenue outflow.
    • We will require a Europe-wide consolidation of corporate tax bases, which is already being worked on at European level. This is designed to end the practice of transfer pricing, which covertly increases profit leakage.
    • We will strengthen the tax administration to more effectively prevent tax evasion by large corporations through transfer pricing abuse and aggressive base erosion.
    • We will introduce more detailed tax yearbooks and statistics to provide a clear and transparent picture of who really bears the costs of running the state and public services.
    • We will make it impossible for companies based in tax havens to compete for subsidies and state contracts or support from kurzarbeit.
    • We will carry out a comprehensive audit of double tax treaties to reduce capital outflow from the Czech Republic.
    • In the area of investment incentives, we will seek to provide state incentives for large companies only if the investor reinvests 70% of its profits in the Czech Republic within 7 years of the start of the supported production.
    • Working pensioners will have lower taxes.
    • We will make small municipalities “tax havens”, exempting local pubs and grocery stores from income tax, provided the operator is a resident of the municipalities and uses local resources. The exemption will be subject to an application by the municipality.
    • We will promote all initiatives in the EU to fight tax evasion and tax havens. The first step is to enforce a minimum corporate tax rate in all EU countries, with a specific higher rate being a matter for Member States. We will also support the concept of a consolidated common corporate tax base for companies with a certain turnover, which will not only limit the spillover of profits to countries with a more favourable tax rate, but will also significantly reduce the administrative burden for companies doing business in multiple EU countries. For smaller companies, we propose the system as voluntary.
    • We will increase the amount of the tax deduction for trade union membership.
    • We will link Child Benefit to the Child Tax Credit so that the state does not pay out support to families through two very demanding and expensive systems. Following the example of Germany and Poland, we will introduce a child benefit of CZK 3,000 per month for families in which at least one parent works.
    • As a next step in pension reform, we will push through tax reform to provide additional revenue for the pension account. The solidarity elements should be systemically financed by universal tax revenues from the state budget, so that all citizens, not just employees who pay contributions, share in them.
    • By law, we will regulate services such as Airbnb, i.e. those that serve other purposes than long-term housing. Following the example of Western Europe, we will set clear tax rules for short-term tourist rentals so that owners are incentivised to rent long-term.
    • We will provide tax breaks or support through public procurement for entities that use sorted raw materials. We will give tax benefits for waste reuse and repair services.
    • We will advocate a fundamental change in the system of investment incentives and support programs so that support is directed to a much greater extent towards the development of technologies with higher added value that can remain in the Czech Republic, especially in Czech SMEs. We will turn investment policy more towards direct support, especially in the area of research and development or the employment allowance for apprentices and school students. A minimum level of wages paid to employees will also be set as an entry condition for this support. This will be based on the average wage in the region. Companies wishing to receive an investment incentive from the state will have to make a binding promise that they will invest a greater part of the profits generated in the Czech Republic, for example in the development of new technologies. This will help to limit the outflow of profits beyond our borders.
    • We will exclude cooperatives from the Business Corporations Act, facilitate their establishment and give tax advantages to their activities, thus emphasizing their indispensable social and democratic role in the local economy.

    KSČM [Communist Party of Bohemia and Moravia]17

    • Maintaining lower taxes for employees on below-average wages.
    • Tax relief for families with children – increase in the tax credit for the first child, introduction of an income tax credit for children's leisure activities.
    • Developing a long-term plan for the recovery of public finances, including addressing the deficit created by the pandemic, with an emphasis on boosting tax revenues (rather than cutting social spending) and on the effect of increased public investment.
    • Progressive taxation of the rich, a billionaire’s tax - strengthening state budget revenues by taxing mainly the income and capital of large corporations and speculators, abolishing various tax breaks that benefit them.
    • Digital and banking tax (tax on financial transactions and taxation of internet giants).  Introduction of a sectoral tax not only on banks but also on retail chains and monopolies.
    • STOP money being siphoned off abroad (tax havens) and low taxes on multinational companies. Promote these steps at an international level – at least within the EU.
    • A condition that only an entity which is registered in the Czech Republic and which pays income tax in the Czech Republic may do business in the Czech Republic.
    • Advocate taxation of the difference between corporate tax in the Czech Republic and tax at the headquarters of a foreign company on profits earned in the Czech Republic.
    • Revision of treaties that allow profits generated in the Czech Republic to be exported abroad, especially in areas important for the self-sufficiency and security of the state (the so-called Tobin tax, favouring the investment of profits in the Czech Republic over their export abroad).
    • Abolition of exemptions from the payment of land tax by a church on its buildings used for economic purposes.
    • Restrict the funding of non-profit organizations, which, under the pretext of humanitarian aid, serve more as a means of unilateral political pressure, and their strict control by the Supreme Audit Office and the administrator of subsidies.
    • Continue efforts to tax church restitution.
    • Supporting local trades, especially in the area of simplifying administration, access to finance, information and tender procedures (revision and simplification of tax laws, remote online access to administration and communication with authorities).
    • Use of an effective sales registration system against the grey economy and in the interest of honest entrepreneurs and sole traders, as well as in the interest of combating tax evasion.
    • Act on Citizen Property Declarations for (for assets over CZK 100 million – millionaire’s tax), extension of information on the property situation of politicians and officials with significant powers.
    • Fundamental increase in the protection of the Agricultural Land Fund, especially against land grabbing, creation of subsidies and tax advantages for construction on already built-up and unused areas.
    • Ensuring additional sources of revenue for the state pension system (determine the share of the state budget in tax revenue).
    • Taxing the residential housing business – a significantly progressive tax on second and other properties approved for permanent housing (not the owner’s own home, but for renting out for profit) and on unused building land.
    • Possibilities of tax breaks, e.g. for the insulation of apartment buildings, discounted loans for the young and newlyweds for apartment construction, or non-repayable loans for furnishing an apartment upon the birth of a child.

    Piráti and Starostové [Pirates and Mayors]18

    • We will ensure the sustainability of public finances through faster economic growth, savings and efficiency gains on the government side, improving people's participation in the legal labour market, cutting tax exemptions, improving tax collection and other resources through selected measures. 
    • The taxpayer rebate will be regularly indexed to inflation.
    • We will propose a reform of personal income tax to improve the taxation of part-time and non-standard arrangements. We will better reflect part-time work in the system of social contributions, rebates and tax bonuses to support parents, carers and working seniors.
    • We will take reinvestments into account in corporate taxation. This will support the development of emerging companies, start-ups or investment in research in the Czech Republic.
    • We will commission an analysis to harmonise taxes and insurance premiums in order to simplify the tax system and prevent tax avoidance.
    • We recognise the need to seek significant new sources of revenue to mitigate the impact of the 2020 tax changes on the state budget and slow the pace of debt. 
    • We will make income taxation clearer by removing non-systematic exemptions. For example, it is not sustainable in the long term for a significant proportion of capital income to be taxed at 0%.
    • We will gain at least billions of crowns through adequate taxation of digital giants, greater emphasis on environmental elements of taxation, taxation of cannabis sales and negative externalities.
    • Municipalities, regions and the state will receive more money from the extraction of mineral resources on their territory thanks to the taxation of mining. We will also remember adjacent municipalities.
    • We will gradually increase the taxation of commercial real estate.
    • At the European Council, we will push for transparent reporting of profits by country of origin, which will make illegal tax optimization at the expense of Czech citizens more difficult.
    • We will focus on rigorous control of transfer pricing and illegal practices in tax optimization so that a fair share of profits is taxed in the Czech Republic.
    • Most of the changes need to be implemented almost immediately to come into force and take effect on 1 January 2023.
    • What might I be thinking of when I think of green taxes? Environmental taxes cover a wide range of taxes and charges. These include, for example, fuel excise duties, road tax, road tolls, mineral extraction charges, charges for the withdrawal of agricultural land, the European Emission Allowance Scheme and, in a way, property tax. It is also necessary to include new tax law institutes, both at the European and national level. These include, for example, a levy on non-sortable plastics, which the European Union is considering introducing, or, for example, a carbon offset tax on sectors not yet covered by the European Allowances Scheme
    • On the MY Taxes portal, we will make it possible to manage taxes and social and health insurance contributions in one place.
    • We will eliminate duplicate controls on businesses by merging tax and levy collection under one institution and a shared control system for participating institutions. 
    • Instead of “kneeling”, we will promote a pro-client Financial Administration approach to citizens. 
    • We will reduce fines in cases where there is only administrative misconduct.
    • We will not introduce the 3rd and 4th wave of the EET [electronic records of sales] for craftsmen and small entrepreneurs. We will decide on the abolition of the EET for entrepreneurs in the 1st and 2nd wave after a thorough evaluation of its benefits. If retained, EET must also bring user benefits to businesses.
    • We will link the MY Taxes portal with the Land Registry, saving time for filing a tax return and subsequent inspection by the tax office.
    • We will set up automated checks that will largely replace physical checks by tax office staff with links to control statements, VAT, corporate and personal income tax, etc. These will make it easier to concentrate checks on suspicious cases.
    • For companies, we will set up automatic publication of financial statements on justice.cz, so that they do not have to resend statements already sent once to the Financial Administration.
    • The Czech export economy is already strongly linked to the euro area. Many transactions – including domestic ones – are already conducted in the common European currency. We will therefore allow companies to keep their accounts and tax records in euros, if they wish to do so.
    • We will make available information on projected pension levels. Every citizen will be able to see an up-to-date overview of their social security contributions, know their pension estimate and how many years they have left to work to qualify. On the basis of this information, they will be able to decide, for example, whether to continue working after pension eligibility or to increase their savings.
    • Seniors should pay less social insurance.
    • In cooperation with the Ministry of Finance (MoF) we will propose resources for decent pensions.
    • We will use the materials already prepared by the pension commissions and the Ministry of Labour and Social Affairs (MLSA) to guarantee a basic component of the pension to everyone who has worked the necessary years, the amount of which should reflect the requirements for dignity of life in old age and the financial possibilities of the state. The merit component will then depend on contributions to the system
    • We will prepare for the establishment of a state or public fund where people will be able to save voluntarily over and above the compulsory social insurance. At the same time, we will also make saving in the third pillar more efficient by reducing asset management fees or adjusting the possibility of withdrawing funds for one's own housing. We will encourage the gradual drawdown of funds in the form of long-term annuities
    • Full-time doctoral studies take the form of work activity and should therefore count towards the total period of insurance at a maximum of 4 years.
    • We will introduce a lower VAT rate for recycled products and recyclables.
    • We will submit an amendment to the VAT Act and reduce VAT rates on culture within the limits set by European law. This will save consumers hundreds of millions of crowns.
    • Through appropriate regulation and tax incentives, we will encourage the clever.
    • We will support the introduction of a carbon tax at the European level. This will not only help to protect the climate but also to level the market playing field for European industry.
    • We will allow small and young companies to carry forward R&D tax losses in the form of an employee tax credit.
    • We will support tax reinvestment in research. We will set up programs to support research in SMEs and start-ups in a way that is truly effective. We will build on the mapping of the needs and absorptive capacity of innovative industries and start-ups. 
    • We will introduce taxation of commercially distributed cannabis through an appropriate indirect tax, thereby providing the state with funds to, for example, supplement healthcare and prevention services for risky addictive behaviours.
    • We will adjust tax laws and the level of stringency of regulation based on the real societal dangers of substances.

    SPD [Freedom and Direct Democracy]19

    • Promotion of a bill introducing the obligation to prove the origin of assets from the threshold of CZK 20 million onwards with retroactive effect. Property whose origin the owner fails to prove and whose owner fails to prove it comes from legal income would be taxed at 100% and forfeited to the state.
    • We reject further increases in the tax burden on our citizens.
    • If the Czech economy grows by at least 3%, the state budget must be balanced.
    • We reject payments to solar barons and the subsidy system, including biofuels.
    • We support reducing the tax burden on employees, sole traders, small entrepreneurs and companies.
    • We will abolish the EET.
    • We advocate a flat tax for sole traders according to the amount of turnover.
    • We repeatedly propose taxing dividends for foreign owners of domestic corporations.
    • We will consolidate into one payment the levies of sole traders and companies.
    • We propose to calculate VAT payments from actually paid invoices.
    • We propose a significant increase in child tax credits – to double for the first and second child in a family and quadruple for the third (and each additional) child.

    Spolu [Together]20

    • We will always base our policy on the principle of low taxation of labour, which will accelerate catching up to western wages.
    • We will do everything possible to bring the deficit down to 1.5% of GDP by the end of our term.
    • But we will only make major tax changes once in our entire term, so that everyone can be well prepared for them and know what lies ahead.
    • We will create a tax brake rule that caps the tax burden. Once the composite tax quota reaches it, tax increases will automatically be ruled out.
    • In the interest of sound public finances, we are committed to meeting the fiscal Maastricht criteria and the Fiscal Compact as soon as possible.
    • Companies will be able to book in euros.
    • We will make work cheaper. We will reduce social insurance on the employer’s side by 2 percentage points. We will contributions on part-time arrangements.
    • We will help families. We will introduce tax holidays for families who are on parental benefits or have three or more children. We will introduce the ability to deduct payments for care services from tax (up to a limit).
    • We will crack down on tax evasion. We will fight tax evasion by internet companies. We will cut off companies from tax havens from public money. We will reduce the size of the grey economy, including by tackling the situation of people in foreclosure.
    • We will fight the outflow of dividends abroad. The solution is not higher taxation of foreign capital, but favouring the investment of profits back into the Czech economy.
    • We will contribute to a common digital tax solution at the EU and OECD levels.
    • We will crack down hard on illegal gambling. Operators of socially risky gambling will pay reasonably high but not unrealistic taxes (to keep them in the legal sphere and therefore under effective state control).
    • We will motivate companies to operate in an environmentally-friendly way. We will reduce VAT on all green products, where possible.
    • Excise duties will take harmfulness into account.
    • We will reduce the number of depreciation groups and shorten the depreciation period.
    • We will support family relations: we will introduce a voluntary joint assessment for spouses. Each person gets the option of paying 1 percentage point of his or her pension directly to his or her parents or grandparents.
    • Private pension savings will be more efficient. We will expand it with options that have already proved successful abroad, such as a long-term investment account.
    • Citizens can easily check their pension information online.
    • We will give people more freedom to decide, but reward those who want to keep working. We will reduce the length of time required to 25 years (for pensions).
    • We will set clear retirement rules for physically-demanding professions. For others, we will gradually set a new age limit (by 2030).
    • We will remove the inequities in the pension system: Both contributions and the number of children will be reflected in the pension. Today’s women pensioners will already get a bonus for having raised children. We will increase the currently demeaning widows’ pensions. The standard period of study will revert to a replacement period.
    • We will create a central catalogue of recycled building elements and build ‘recycling hubs” to produce tax-efficient building materials from waste.
    • Tax benefits for individuals and companies in construction and reconstruction. Reduction of VAT to 10%.
    • We will support investments – we will shorten the deadline for applying income tax on the sale of real estate to five years.
    • We will push for a reduction in VAT on the construction or reconstruction of standard apartments from 15% to 10%.
    • We will reduce the depreciation period for investments with minimal consumption (photovoltaic roof panels, rainwater harvesting, heat pump for heating).
    • Appreciation and support of the family in all natural functions throughout life. Tax credits and holidays, reconciliation of family and professional life, more time for raising children and caring for loved ones.
    • We support working from home. We will introduce a wide range of part-time options (including favourable taxation) and increase the overall flexibility of the Labour Code.
    • We will support working parents with increased child tax credits and introduce tax relief for mothers and carers when they return to work. Grandparents will also be able to receive parental allowance.
    • We will support the development of services for families and households; costs will be tax deductible.
    • You can deduct the cost of social services from your taxes.
    • We will reduce social security contributions for employers and increase the limits for agreements on work performance and work activity.
    • We will tax-motivate employers to systematically contribute to providing for employees not only in old age, but also in crisis situations (loss of self-sufficiency, need for long-term care...).
    • We will propose financial support for tuition fees up to a certain level (tax deductibility of tuition fees in private and religious schools).
    • We will expand tax deductibility of costs in financing applied research and innovation.
    • We will push for the standardisation of cultural goods and services in the lowest VAT rate. We will push for higher tax benefits for patronage and sponsorship as a step towards the functional multi-source financing of culture.
    • We will standardise and simplify the obligations of citizens and entrepreneurs towards the state: payments can be made at a single collection point, duplicated and unnecessary requirements will be removed from reviews, communication with the state administration will be governed by uniform, clear and predictable rules.
    • We will simplify the subsidy system. We will launch a portal for a single overview of subsidy possibilities. Subsidy reviews will no longer be duplicated. We will regularly assess whether the state is transparent in its decisions on subsidies and public procurement.

     

Summary

Tax and Legal News - September 2021.

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About this article

Libor Frýzek
By Libor Frýzek

EY Česká republika, vedoucí partner týmu daňového poradenství

Libor Frýzek je vedoucím partnerem týmu daňového poradenství a odpovídá za vedení daňového oddělení v České republice. Je také členem Komory daňových poradců České republiky.

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