Tax NEWS January 2014

In the last issue of Tax News, we informed you about the obligation of the employers to file selected forms purely in digital form. However, during the course of December, this obligation was withdrawn and deferred until the beginning of next year. Until 31 December 2014, it is thus still possible to file in written form not only selected forms for self-employed individuals but also forms for employers.

We would like to further summarize selected important news in the taxation area introduced in 2014.

Tax NEWS January 2014



Starting 2014, time test for exemption of income from sale of selected securities changes. The six-month test is henceforth extended to three years. However, securities purchased at the end of 2013 are still subject to the original six-month test. At the same time, starting 2014, the 5-year exemption period is shortened to 3 years. Income obtained from sale of securities which do not form business assets and the value of which does not exceed CZK 100,000 is fully exempt.

Taxation of employees through withholding tax is also subject to a change. Newly, the withholding tax is applied as long as the total income being paid to an employee does not exceed CZK 10,000 a month. However, this only applies to payments from special purpose short-term contracts („dohody o provedení práce“ in Czech) under the condition that the employee does not sign a tax declaration, regardless of the fact whether the employee also receives other taxable income from the employer or not. Taxation of the short-term contracts is provided for in a way that the taxable income for application of withholding tax equals income that is not subject to social security or health insurance premiums.

As of 2014, the Czech Republic has introduced the legal concept of trust into its local legislation. The purpose of the trust is to carve out a part of one’s property to serve a particular purpose. The person forming a trust loses ownership rights over the carved-out property and becomes the settlor. The property is then held and administered by the trustee who supervises that the purpose of the trust is being fulfilled.

The person who is entitled to the proceeds from the trust is called the beneficiary. However, until that point, the property is held by the trust which, though does not constituting a legal entity, qualifies as a corporate income tax payer nevertheless.

2014 brings abolition of inheritance and gift taxes. Income obtained in such manner is newly subject to income tax. The standard inheritance and gift tax exemptions are observed. In addition, inheritance tax no longer applies e.g. to individuals inheriting assets from a very distant relative. Until now, 20% inheritance tax was in place for such cases. In contrast, gift tax rate is newly standardized at 15% which means that most transactions will newly be subject to a heavier tax burden than previously. On the other hand, integration of gift tax into the scope of income tax brings some positive effects as well. For example, provision of an interest-free loan by the employer to an employee is newly not subject to taxation at employee level as a non-monetary benefit.

Starting 2014, classification of some tangible assets into tax depreciation groups changes. This change applies e.g. to equipment for transport of lump material which was reclassified from the 2nd depreciation group to the 3rd one. This extends their depreciation period to 10 years. This change was justified on the grounds of disparity of tax treatment of equipment for transport of lump and non-lump material though the actual lifetime is similar for both types of equipment.

Starting 2014, rules for tax deductibility of loss on sale of land change. The loss can be claimed as deductible by corporations. For individuals, the historical limit on deductibility is retained.

As of 1 January 2014, deduction of gifts (free-of-charge supplies) from taxable income is subject to a change as well. The limits for deduction are increased for both corporations and individuals. Individuals can newly claim up to 15% from the previous 10% of taxable income. Corporations can claim up to 10% of taxable income.

Deduction on research & development-related expenses is subject to new, increased limits. It will also be possible to deduct from taxable income financial lease costs and services purchased from a public university or research institution.

Controversial proposal on exemption of dividends from income tax that was to be implemented as of January 2014 was eventually scrapped by the Senate last fall (12.9.2013)

Limits on deductibility of cash incentives for students are increased from CZK 2,000 to CZK 5,000 for regular students and from CZK 5,000 to CZK 10,000 for university students.



In 2014, rules for creation of provisions to business receivables have changed. The number of tax provision brackets has been reduced down to two. Newly, tax effective provisions can be created for up to 50% of the outstanding balance sheet value of receivables once the latter have been outstanding for at least 18 months. This increases to 100% once the receivables have been outstanding for more than 36 months. For most cases, the rule requiring that active steps towards collection of receivables be made was abolished. However, it is noteworthy that under the transitional provisions, the previous rules apply to receivables arisen until the end of 2013. This not only requires keeping of double records but also means that the new rules will only apply for the first time for the 2015 tax period (as receivables arisen after 1 January 2014 will not have been outstanding for 18 months sooner than that). Practically, the taxpayers will thus apply the new rules in 2016 when preparing financial statements for the 2015 year.



This tax is also subject to some important changes in 2014 that are worth introducing. For example, real estate tax payers have to assess whether they are obliged to file a tax return until the end of January. This can occur even in cases when no real estate was acquired or disposed of. For example, real estate used for business activities is subject to an important change regarding tax treatment of floors above ground level. Until now, the tax rate per 1 square meter was increased by CZK 0.75 for every floor regardless of its area. As a result, even small additional constructions not representing separate floors were subject to taxation. However, as of January 2014, this law provision changes and the tax rate increase is only applied in case that the floor area exceeds one third of the area occupied by the building for business activities. Some buildings for business activities will have fewer floors for the purpose of real estate tax calculation as a result. Even though this step may lead to the reduction of the tax burden, the tax payer is required to file a tax return for 2014 nevertheless. The same consequences also apply for buildings that are newly classified as being in scope of land tax as opposed to building tax.

In connection with real estate tax, it is worth mentioning the new method of adjusting tax base of apartments (units) which include land exceeding the apartment area. In such case, the adjusted floor area is multiplied by 1.22 coefficient whereas the land is not subject to land tax. The same coefficient is also used in case that the built-over land is co-owned by all apartment owners (this applies to apartments that arose as a result of the owner’s decision until 31 December 2013). If these conditions are not fulfilled e.g. as a result of the fact that the land was co-owned only by some owners, the tax base of apartment is adjusted through 1.2 coefficient and the land exceeding the apartment area would be subject to land tax.



Starting January 2014, transfer of vacant land that was not subject to a construction permit or an authorization to construct a notified building is exempt from VAT. However, in some cases even built-over land can be exempt from VAT. This possibility arises within five years of the issuance of the final building approval or of the day when the building was first put to use, whichever of the two events occurs earlier. It is also critical how the land is classified in the real estate cadaster. If the cadaster records indicate two separate plots of land, one underneath the building and one adjacent, only the plot of land underneath the building follows the tax treatment of the building itself.


Our January issue of our Tax News was prepared by Petr Hájek. In case of any questions to the above, please do not hesitate to contact us to seek further support.