- On Friday 13 December, the Czech Parliament approved a significant number of amendments to the Income Tax Act.
- These amendments go beyond the original proposals by the Ministry of Finance and will have a significant impact on many taxpayers. The information presented below is a summary of the key changes and is based upon a preliminary review of Parliamentary drafts.
- Until the law is published in its final form, uncertainties will remain as to the full impact of these changes. Companies or individuals who believe the changes will have an impact on their activities should contact the partner or a manager who normally deals with their affairs or one of the individuals listed at the bottom of this page.
- The effective date of almost all the amendments is 1 January 1997.
PERSONAL TAX RATES
- No changes in the overall rate structure have been implemented. However, the varies 'bands' of income have been expanded as follows:
From (Ke) To (Ke) Rate 0 84 000 15 % 84 000 168 000 20 % 168 000 252 000 25 % 252 000 756 000 32 % 756 000 40 %
Minor changes in the (tax free) personal allowances have been implemented.
SALE OF SECURITIES
The personal tax exemption for the sale of securities has been changed so that gains are only exempt if the securities are held for six months or longer. For securities acquired before 1 January 1997 the previous holding period of three months remains valid.
The 'six months exemption' will not, however, apply to the sale of securities acquired through the conversion of limited liability companies or limited partnerships into joint stock companies. In these cases a five year holding period will be required to achieve the exemption from tax.
STATE BONDS
The exemption from income tax for income from state bonds (previously available for both individuals and companies) has been abolished for bonds issued after 31 December 1996. Such bonds will now become subject to 25% withholding tax.
FOREIGN EMPLOYEES
For 'foreign experts', the tax exempt amount, which under the 1996 law was equal to 25% of gross taxable income, has been abolished completely. This is an unexpected development, as the Ministry of Finance had previously proposed a gradual phase out of this relief. The abolition of this relief will raise the top marginal tax rate for most expatriate personnel to 40%.
A new provision has been introduced requiring Czech companies to withhold tax from salaries of foreign workers who, although legally employed from abroad, actually work under instruction of management of a Czech company. This provision has been apparently been designed to capture payroll taxes from workers who are temporarily assigned to the Czech Republic from neighbouring countries such as Slovakia and Ukraine. However, the changes could impact other management service agreements in place between foreign group companies and their Czech subsidiaries.
CORPORATE TAX CHANGES
No change was made to the current corporate tax rate of 39%.
Receivables contributed after 1 July 1996 to the capital of the company other than through a transformation or merger will no longer qualify for bad debt tax relief. Certain other technical restrictions for bad debt relief have also been introduced.
A number of categories of technical equipment (including some laboratory equipment) have been moved from the 15 year depreciation group to the 8 year depreciation group. These reclassifications are effective in the 1996 tax year.
A number of technical adjustments to the treatment of capital expenditure by lessees have been implemented.
ANTI-AVOIDANCE PROVISIONS
The "transfer pricing" rules requiring transactions between related parties to be set at market rates have been extended such that interest on loans governed by the Civil Code is regarded as a market rate if set at 140% of the CNB discount rate.
The scope of the 25% withholding tax has been widened to include interest paid to a foreign resident which is disallowed under the thin capitalisation rules. Double tax treaty provisions should, however, override this new rule.
Similarly, the 25% withholding tax may now be applied to payments to foreign residents which are disallowed under the transfer pricing rules.
INVESTMENT AND PENSION FUNDS
Special rules have been introduced to apportion income/expense upon a transformation to or from an investment fund during the tax year.
The claiming by pension funds of a credit for the 25% withholding tax on bonds has been severely restricted in 1997.
The tax treatment of the liquidation surplus upon liquidation of a mutual fund has been clarified and is subject to 25 % withholding tax.
ADMINISTRATIVE PROCEDURES
The amendments extend the range and circumstances when taxpayers can file supplementary returns showing lower tax liabilities.
The content of this article is intended to provide a general guide to the subject matter. It is therefore not a substitute for specialist advice.
For further information contact Paul Antrobus or Richard Fletcher, Arthur Andersen Prague, tel +42 2 2440 1300 or enter a text search 'Arthur Andersen' and 'Business Monitor'.