For pdf version please click here: TAX NEWS 01_2020

• VAT amendment: 2019 Tax Package and other issues under consideration
• New EET phases as of May 2020
• Average wages
• Apartments in family houses exempt from Real Estate Transfer Tax
• Kateřina Navrátilová, officially a tax adviser
• LERIKA staff reinforcements
• Jokes featuring accountants, auditors and finance directors

Newsletter autumn 2019

• LERIKA´s new premises
• Tax changes since 2019
• Amendment of the Electronic Sales of Records Act
• An accounting department reinforcement
• A joke about accountants

Newsletter autumn 2018

• Payroll-related changes in 2018
• Personal income tax: new features as of 2018
• Real estate transfer tax: VAT not part of tax base
• Electronic records of sales generally applicable only in 2019?
• Legal disputes over the VAT Control Statement come to an end
• New members of LERIKA team
• Of accountants and dogs
• LERIKA is cooking

Newsletter winter 2017

The reporting obligation applies to multinational groups with annual consolidated sales exceeding EUR 750m. The reporting is performed on behalf of the whole group by the ultimate parent company (or by a surrogate parent company) to the locally competent tax authority in the format and structure prescribed by the tax administration of the country where the ultimate parent company (or a surrogate company) is resident.

The Czech subsidiaries of the qualifying multinational groups will be obliged to provide the relevant information to the ultimate parent company (or to a surrogate company) so that the latter can fulfill its obligation in the country where it is resident and also to file the so-called Notification (Ohlášení in Czech) until 31 October 2017. The Notification is filed with the Specialised financial authority and serves to identify the ultimate parent company of the group and inform the tax authorities about the company that will perform the filing on behalf of the group. If there is a change in any of the information being notified, a new Notification has to be filed within 15 days from the date when the change occurred.

The Notification is filed through the digital filing platform of the Czech tax administration (EPO) and is available via the following link: https://adisdpr.mfcr.cz/adistc/adis/idpr_epo/cbc/ohl/II_oddil.faces 

If the Czech company is the ultimate parent company (or a surrogate company), it will be obliged to file a different form (Oznámení in Czech) with the Specialised tax authority. The form will be published on the server of the Czech tax administration. Based on information in the media, there will be around 10-15 Czech multinational groups qualifying for this obligation.

If you need further information, please contact us at any time.

• New Labor Code
• VAT when calculating real estate transfer tax
• David Lafata vs. tax administration
• New company benefit – book subsidies
• Jokes
• Kubík baby boy

Newsletter autumn 2017

Tax NEWS July – August 2017

TAX PACKAGE – INCOME TAX

In the last issue of the Tax News, we already covered the tax package extensively. In this issue, we would like to provide you with a summary of the selected changes.

1) The most important changes effective for tax periods started in year 2017

• Tax bonus for children 
  • In 2017, it is possible to utilize the new amount of tax bonus for the second (CZK 19,404) and any other (CZK 24,204) child.
• Lump sum tax 
  • In 2017, it is newly possible to determine the tax as lump sum also for those taxpayers who have employment income in addition to the business income, as well as to taxpayers with business income and employees.
• Monetary gift provided for the purpose of purchasing tangible assets 
  • Income in the form of a gift designated for the purchase of a tangible asset or its technical improvement in accordance with Article 29 Section 1 of Income Taxes Act (“ITA”) reduces the purchase price of the tangible asset regardless of the fact whether it was exempt from tax, was not subject to tax or it did not increase taxable income in accordance with the provision of Article 23, Section 3, Subsection a Point 16 of ITA.
• Lump sum expenses for self-employed individuals – 2017 
  • In connection with the utilization of lump sum expenses, self-employed individuals have the option to claim the lump sum provided for by the amendment (which is reduced by half compared to the prior amount) and claim the tax credit for a spouse under care as well as tax bonuses for children (until now, this was not possible when lump sum expenses were claimed). The other option is to claim lump sum expense in 2017 based on the legacy tax law prior to the amendment.

2) Changes effective when the amendment came into force (from 1 July 2017)

• Depreciation of intangibles 
  • The tax amendment provides that the amount of time for depreciation of intangibles that had previously been fixed should now be considered as only the minimum period required. The taxpayers will thus be able to depreciate intangibles over a longer period of time, based on their own considerations. The conditions stipulated in Article 32a ITA (e.g. linear depreciation) are preserved.
• Technical improvements of leased assets 
  • Article 28 Section 3 ITA extended the number of taxpayers that are entitled to depreciate technical improvements made on assets of others. Apart from lessees and users of assets under financial lease, the depreciation will now be claimable also by sub-lessees.
• Deduction of fuel costs 
  • Deduction of fuel costs for business travel with a motor vehicle used on the basis of a lease contract concluded with a creditor for the time when a debt is to be secured through transfer of ownership to the motor vehicle will now be possible. Until now, the fuel costs were claimed through a lump sum compensation.
• Liquidation of buildings as part of new construction 
  • Until now, when a building had to be liquidated as part of new construction, the net book value of the building being liquidated entered the purchase price (tax base) of the new construction. Newly, the net tax value shall enter the purchase price. This means that new constructions will newly show different purchase prices for tax and accounting purposes.

3) Changes applicable as of 2018

• Tax bonus
  • Starting in 2018, it will no longer be possible to reach the limit triggering the tax bonus (six times the minimum wages) with income from capital gains or from lease. Newly, the tax bonus for children under care will only be provided to taxpayers with income from employment or from business.
• Tax refund
  • ITA now has a new provision concerning the request for a tax refund. If a taxpayer files the tax return together with a request for a tax refund before the deadline for the tax return has elapsed, the request is considered as having been filed on the last date for the filing of the tax return. This will eliminate situations when the taxpayer filed a tax return including the refund request e.g. as early as January (i.e. more than 60 days before the tax return deadline) and then had to repeat the refund request in March due to the fact that a request made more than 60 days before the tax refund arose was not to be accepted.
• Lump sum expenses for self-employed individuals – 2018
  • As of 2018, the maximum lump sum expense amounts will be reduced in half. However, the taxpayers claiming them will be able to utilize the tax credit for a spouse under care as well as the tax bonus for children.
• Withholding tax
  • Newly, withholding tax will generally apply to income from employment in situations where the taxpayer does not sign the special tax declaration form and the gross monthly income with one taxpayer does not exceed CZK 2,500. Until now, the rule has applied to one-off job agreements of up to CZK 10,000 (for which the current procedure remains in force).

petr.hajek@lerika.eu

VAT NEWS – INPUT VAT CORRECTION AND ADJUSTMENTS

1 July 2017, an amendment of Act No. 235/2004 Coll., on VAT, as further amended (“VAT Act”) has introduced the obligation to perform a correction of input VAT in accordance with Article 77 Section 2 Subsection c) and an obligation to adjust the input VAT deduction entitlement in accordance with Article 78e of the VAT Act upon non-substantiated cases of loss, theft or destruction of business assets.

In a situation where business assets are destroyed, lost or stolen and this fact is properly substantiated, the input VAT deduction is not subject to correction. In a reverse scenario, the input VAT deduction needs to be adjusted via “correction” or “adjustment” of the input VAT entitlement. Whether to correct or adjust the input VAT is provided for by Articles 77 and 78 of the VAT Act whereby correction of input VAT applies to tangible assets and adjustment applies to other business assets (e.g. inventory).

The key aspect is the substantiation of the above facts so that the input VAT need not be adjusted for. In case of destruction of business assets through fire, a report by the state fire authority or by a fire investigation authority is requested. In case of storm, information about the storm characteristics needs to be obtained (from a reputable source such as the Czech Hydrometeorological Institute) and in case of destruction of business assets in a flood, a confirmation by a flood committee that the given area was subject to a flood needs to be obtained.

When substantiating loss of business assets, it is important to distinguish whether the shrinkage was within or above a specified norm for natural shrinkage. The former needs to be substantiated via internal directives of the taxpayer. The latter needs to be substantiated by e.g. statement issued by an insurance company or through a receivable against a third party which caused the loss.

In a situation when a taxpayer is unable to receive damage compensation from an insurance company or a third party, the tax authority may consider the loss of business assets as being intentional and conclude that the taxpayer did not satisfyingly substantiate the loss of assets in the first place. This leads to an obligation to adjust the prior input VAT entitlement. Correction (adjustment) should be made from the amount of the original input VAT deduction. If the taxpayer cannot ascertain the amount of the originally claimed input VAT deduction, the method to ascertain it should be the same as the one generally used for accounting purposes (FIFO or simple average).

Correction (adjustment) of the prior input VAT deduction is performed with respect to assets for which the period to claim the input VAT deduction (or its adjustment) has not yet elapsed.

Theft of business assets should also include situations where the taxpayer has obtained a decision on deferral of the matter by the Czech Police, decision on commencement of criminal proceedings or a decision on their suspension.

In a situation where a loss, destruction or theft of assets is identified and the taxpayer is not capable of satisfyingly substantiating this fact through evidence, the taxpayer is obliged to correct or adjust the originally claimed input VAT deduction in respect of business assets in the tax period in which the situation occurred or in the tax period during which the taxpayer could or should have been informed about the occurrence. In cases where the taxpayer was not or could not have been informed, the taxpayer is obliged to correct or adjust the input VAT deduction as of the day of stock taking at the latest. If the taxpayer does not perform the correction or adjustment, the latter will be performed by the tax administration during a tax audit.

Conditions to apply the VAT correction or adjustment mechanism are further detailed under the following link: http://www.financnisprava.cz/assets/cs/obrazky/d/Informace-par77_ZDPH.pdf .

petr.hajek@lerika.eu

DIGITAL FILINGS UPON REQUEST

The tax administration decided to mitigate consequences of failing to communicate with the tax administrator digitally in case of certain submission. As of 1 August 2017, paper submissions of personal income tax returns and real estate tax returns that were supposed to be filed digitally will no longer attract any sanctions.

When digital communication with tax authorities via data boxes was implemented, a list was drawn up of submissions that were supposed to be carried out in a digital form only. Upon non-fulfilment of this obligation, the taxpayer was automatically assessed a fine of CZK 2,000 and subject to another fine of CZK 50,000 if the tax administration considered that the non-fulfilment of the digital submission significantly impaired the act of tax administration. The taxpayer was not notified about the filing mistake and was not requested to correct it.

As of 1 August 2017, an exemption is being introduced for personal income tax returns and real estate tax returns. These submissions are excluded from the list of digital submissions and an automatic sanction will not be applied. In practice, this means that the taxpayer will first be notified about the oversight and only if they fail to make the submission digitally will they be assessed a fine for the wrong submission. Through this decision, the tax administration mitigated the consequences for those personal income tax and real estate taxpayers who set up their data boxes in the past and, upon filing, did not realize that they were obliged to use them or lost access information thereto.

The list of submissions that need to be made solely in digital form includes regular and amended tax returns (to income tax, VAT, from lottery winnings and similar games), registration forms, notifications on changes in registration details, applications for deregistration as well as various other tax reports. All individuals with an active data box, entities with an obligation to have financial statements audited and all VAT payers are obliged to make their filings digitally.

katerina.navratilova@lerika.eu

THE FUTURE OF THE CONTROL STATEMENT IS STILL UNCERTAIN

The government only has 3 months to react to the legislative insufficiencies of the provisions on Control Statements that we informed you about in our last issue of Tax News. The Parliamentary Print No. 1060/1, which reacts to the decision of the Constitutional Court in the form of an “appendix” to the government’s law proposal amending laws in connection with the adoption of the law on cash transfers, is currently still subject to negotiation by the Parliament and a third reading is scheduled shortly.

Based on the newly proposed law, the VAT Act should directly list specific requirements for the Control Statement. These requirements should include the identification and contact details of the taxpayer, identification details of the customer or vendor and information regarding supplies, payments and input VAT deductions. Although these requirements are already part of existing Control Statement, the Constitutional Court has decided that their absence directly in the law is undesirable and has stipulated a period to remedy the currently insufficient wording of the law until 1 January 2018.

We will keep you informed about the progress of the law approval process and potential consequences, should the law not be adopted on time.

katerina.navratilova@lerika.eu

CHANGES IN TAX EXEMPTION UPON ACQUISITION OF OWNERSHIP IN A RESIDENTIAL UNIT IN A FAMILY HOUSE

In the last issue of Tax News, we informed you about the inconvenience caused to the taxpayers in respect of the definition of real estate transfer tax exemption upon acquisition of ownership of a residential unit in a family house. To recap – due to the absence of tax exemption applicable to acquisition of ownership of residential units in family houses, additional tax has been assessed in respect of transfers of these units even in cases where the taxpayer had proceeded in line with instructions from the tax authorities and had filed a tax return claiming tax exemption. The tax administration became aware of its error in granting tax exemptions and assessed tax (including late payment interest) to the affected taxpayers. Subsequently, General Financial Directorate issued a directive enabling the waiver of late payment interest of up to 100% in those situations when the tax exemption had been granted by error.

In reaction to this finding, an amendment of the legislative measure on real estate transfer tax was proposed in April of this year which aimed to extend a tax exemption to acquisition of ownership in residential units in family houses that would apply within 5 years from the date of construction or first use (Article 7 of the Legislative Measure of the Senate No. 340/2016 Coll, on real estate transfer tax). This would put an end to the difference in current treatment of tax exemptions of residential units in family houses. The law amendment was presented to the Parliament in a way that a direct approval in the first reading could be sought. The government and its organizing committee approved the reading which is scheduled for September. After the approval of the law in its first reading, the law will be subject to approval by the Senate and then signed by the President. The law effectiveness is set for the first day of the calendar month following its publication in the Collection of Laws.

katerina.navratilova@lerika.eu

• One-crown bonds as abuse of law in tax area
• Changes in lump-sum deductions
• Covert threat of carousel frauds
• Risk of embezzlement for smal and mid-size enterprises
• Introducing Renata Stará
• Jokes about accountants

Newsletter summer 2017

Tax NEWS May 2017

2017 Tax package 

The tax package that we informed you about in the January issue of the tax news has been subject to an uneasy endorsement process that has not come to its end yet. Although it was signed by the President on 28 April 2017 already, it has not yet been promulgated in the Collection of Laws and so has not come into effect. The planned effective date was set for 1 April 2017, this date was also stated in the law proposal. Based on the current law, the tax package will thus become effective on the 15th day after its publication in the Collection of Laws. For quarterly VAT payers, it is desirable that the effective date is not later than 16 June 2017 so that the changes become effective as of 1 July 2017.

During the course of the endorsement process the Parliament rejected changes proposed by the Senate the purpose of which was to narrow down the definition of land destined for construction, which would extend the scope of VAT exemption of land (or its surroundings) that is subject to construction works. In addition, it also rejected extension of VAT exemption of land forming one functional unit with a building (without containing a building itself).

The tax package was thus approved in the wording submitted by the Parliament, introducing changes for both 2017 and 2018 tax years. We provide a summary of the main changes below.

Tax year 2017

With retroactive effect for the whole of 2017, the Income Taxes Act amendment has introduced an increase of the tax bonus for the second, third and any other child. This increase shall be effective when calculating payroll tax advances since the law’s effectiveness and retroactively for the whole of 2017 when making the payroll tax settlement in the tax return.

The year-on-year comparison of tax bonus amounts is provided in the following table (in CZK):

Another important change for the 2017 tax year is the lifting of bans to apply the tax credit for a spouse without income and tax credit for children for self-employed individuals claiming lump-sum expenses whose taxable income from business does not exceed 50% of the total taxable income (the current law as per Article 35ca of Income Taxes Act). The qualifying condition is that the taxpayer uses the limitation on lump-sum expenses which we further detail below.

Tax year 2018

The most significant and the most discussed change for 2018 is the limitation of maximum personal income tax lump-sum expenses. Although the existing lump-sum percentages remain in place, the absolute limit on lump-sums have been put in place.

It will be possible to claim lump-sum expenses up to the following limits in 2018:

• Maximum lump-sum for income from agricultural production, forest and water management amounts to CZK 800,000
• Maximum lump-sum for income from self-employment is CZK 600,000
• Maximum lump-sum for income from lease of business assets is CZK 300,000
• For all other business pursuits, the maximum lump-sum is CZK 400,000.

We will inform you about any other changes as regards the fate of the tax package.

VAT Control Statement since 1 January 2018

VAT Control Statement, which has been in place since 1 January 2016, has already been subject to numerous changes. Another important change is in store if the government does not manage to react to the decision of the Constitutional Court from December 2016. Given the ongoing governmental crisis and the change at the post of the Finance Minister, we would like to inform you about the current situation.

The decision of the Constitutional Court from 6 December 2016 was a reaction to a proposal of a group of 21 members of the Senate (further “applicants”) on abolition of specific provisions of the VAT Act relating to the VAT Control Statement. Some of    the proposals were granted by the government even before the Constitutional Court passed its decision, others took effect upon the decision being promulgated in the Collection of Laws and one of the points was set to be resolved by 31 December 2017. The last point concerns the controversial provision of Article 101d Section 1 of the VAT Act which stipulates that in the VAT Control Statement the taxpayer is obliged to state information which is required for tax administration.

The applicants challenged this provision arguing that the scope of information that should be provided must be stated directly in the law and that is contrary to the privacy laws for such information to be required by mere forms issued by tax authorities that can be modified by government at will. Another argument was that the Charter of Rights and Freedoms states that taxes can only be imposed by means of laws. The lawgiver is thus obliged to provide for all important tax matters including those relating to tax administration and control directly in the law.

The Constitutional Court agreed with the applicants and decided that “the law must at least specify the scope of information that the taxpayer is obliged to provide”. The Ministry of Finance is not thereby precluded from requesting specific information but it must be done through a law, not just through a form.

The Parliament’s Budgetary Committee reacted to the Constitutional Court’s decision as late as 17 May 2017 by including the relevant legislative change in the Parliamentary Bulletin no. 1060/1, effectively as an annex to the governmental proposal of an amendment to the law on payments. The new wording of Article 101d Section 1 of the VAT Act should fully lay out the requested identification and contact details of the taxpayer relating to supplies, payments and input VAT deductions and identification details of customers or vendors.

Although the governmental crisis has subsided, if for any other reason the stated legislative change is not enacted, we could theoretically face a situation as of 1 January 2018 that the VAT Control Statement will find itself outside the legal constitutional Framework.

A question remains how the tax administration will cope with the situation and what it will practically mean for tax administration or the VAT Control Statement itself.

Real estate transfer tax issues relating to apartment units in family houses

In the last couple of days, the tax practice has brought a new interpretation of exemption of apartment units in family houses from real estate transfer tax.

The Legislative Measure on real estate transfer tax exempts from tax buildings for the period of 5 years since the final approval. This applies when the building in question is either an apartment in a residential building or a family house. However, the lawgiver did not cover those situations when a taxpayer acquires an apartment unit in a family house and there is no explicit exemption from tax for such transfers in Article 7 of the Legislative Measure. There was subsequently confusion among some tax administrators who not only confirmed the exemption to various taxpayers upon inquiry, but also accepted tax returns claiming the tax exemption.

Now the taxpayers can thus face a situation that they will belatedly receive a tax assessment notice, which can be for a substantial amount given the 4% tax rate, and they could also face late payment interest. For completeness – until 31 October 2016 (before the effectiveness of the Legislative Measure on real estate transfer tax) the real estate transfer tax payer was the property seller unless the seller and buyer mutually agreed on the contrary. This means that if you acquired an apartment unit in a family house with effectiveness in the real estate cadastre prior to 1 November 2016 and you were not listed in the agreement as the taxpayer, you will not be liable to any real estate transfer tax and the tax will be assessed to the seller. Since 1 November 2016, the sole taxpayer is the buyer.

At the end of April, the tax administration issued a notice regarding the possibility of claiming late payment interest waiver. The notice states that the taxpayer is entitled to a late payment interest waiver of 100% if the tax administrator previously accepted an incorrectly applied exemption in a real estate transfer tax return. This only applies to late payment interest that has accrued since 1 January 2015 and under assumption that all other conditions for a waiver are fulfilled (i.e. no significant infractions against tax and accounting regulations as defined by the tax administration). The waiver can be requested through an application that is subject to a CZK 1,000 stamp duty.

The tax administration acknowledges that more than 25% of tax returns have been assessed incorrectly and in most cases, there has been a long period of time between the incorrectly applied tax exemption and the tax assessment, which it considers a valid reason for the late payment interest waiver.

Payments to father for post-natal care

An amendment of the law on health insurance has been published in the Collection of Laws. The amendment introduces one week worth of paid vacation for new fathers immediately after their child is born. The law effectiveness is set for 1 February 2018 and the benefits provided for by the law can be claimed also by fathers whose child was born up to 6 weeks prior to the law effectiveness i.e. 21 December 2017. The amount of the payment will be the same as the maternity payment i.e. 70% of the daily assessment base and will be claimable by the father who is stated in the citizen register of the given municipality and who participates in the sickness insurance scheme either as an employee or as an entrepreneur.

We will be happy to support you should you have any questions to any of the information contained in the above articles.

katerina.navratilova@lerika.eu

In addition to the above, we would like to inform you about the receipts lottery, the possibility of sending real estate tax payment details via e-mails and last but not least, we would like to draw your attention to the latest interpretation of the reverse charge VAT treatment when providing digital communication services.

Tax NEWS January 2017

Income tax

The changes that come into force for the 2017 tax year include the increase of the income tax exemption limit for employer’s contributions towards employees’ supplementary pension insurance, supplementary pension savings, pension insurance and private life insurance from the current CZK 30,000 to CZK 50,000 a year. For the first time for 2017, taxpayer will also be able to claim a higher deduction for supplementary pension insurance, pension insurance and supplementary pension savings, increased from CZK 12,000 to CZK 24,000 a year and a higher deduction for paid contributions for private life insurance, increased from CZK 12,000 to CZK 24,000. As a result of the increase of the minimum wages to CZK 11,000, the maximum threshold for the tax credit for placing a child in pre-school child care will increase as well. This tax credit can be claimed by the taxpayer for the actual costs incurred when placing a child in the child care up to the amount of CZK 11,000 a year for every child. These changes were already approved before and are not part of the tax package that is currently under review.

Tax package

Retroactively for the whole tax period of 2017, the income tax amendment that is a part of the tax package introduces an increase of the tax credit for the second, third and any other child. This increase will start being reflected when calculating payroll tax since the law’s effective date (current assumption is 1 April 2017) and retroactively for the whole year when settling tax on a tax return.

However, based on the transitional provisions, most of the other changes will only become applicable for the tax periods starting after the law’s effective date i.e. 2018 tax period for those taxpayers whose taxable period is the calendar year.

One of these changes is the limitation on the maximum threshold for applying lump sum deductions by individuals to one half of the current level. It will thus be possible to apply the following lump sum deductions for the 2018 tax period:

• 80 % of income from agricultural production, forest and water management, with the cap of CZK 800,000;
• 60 % of income from self-employment, with the cap of CZK 600,000;
• 30 % of income from the lease of registered business assets, with the cap of CZK 300,000;
• 40 % of income from other types of self-employment, with the cap of CZK 400,000.

The Parliament also approved the lifting of the ban on applying a tax credit in respect of a spouse without income and in respect of tax bonus for a child by those taxpayers who applied lump sum deductions and whose income from business and lease exceeded 50% of the total taxable income (the current provisions of Article 35ca of the Income Taxes Act). Based on the transitional provisions, these self-employed individuals will be able to claim the above tax credit and tax bonus in the 2017 tax period already.

The tax law amendment will be reviewed by the Senate. The law is planned to take effect on 1 April 2017; however, as we have already covered above, some of the changes will apply as of 1 January 2017 already while others only as of 1 January 2018.

We will be happy to assist you in case of any questions to the above issues.

VAT

The last significant change in the VAT law was the reduction of the VAT rate applying to catering services and to the provision of non-alcoholic beverages from 21% to 15% as of 1 December 2016. Mid-December, the Senate also approved the reclassification of provision of news to the 10% VAT rate. The planned effect of the amendment was on 1 January 2017; however, it was vetoed by Miloš Zeman, the President. However, the veto was overruled by the Parliament on 10 January 2017 and the amendment will become effective as of the date of its publication in the Collection of Laws.

The changes included in the tax package for the 2017 tax period with the planned effect as of 1 April 2017 are technical in nature. See below a summary of the following ones:

• Abolishment of the difference in VAT treatment for taxpayers conducting business activities through entities without legal status. The standard VAT rules will apply for these taxpayers.
• One-off adjustment to the VAT deduction (its clawback) for fixed assets that were destroyed, lost or stolen.
• Extension of the domestic reverse charge VAT treatment to the provision of labor for construction or assembly works to the taxpayer.

Receipts lottery

The Ministry Finance has presented the concept of the receipts lottery under the name Účtenkovka (Czech diminutive for the word receipt). The receipts which the customers will be able to submit through a web service as well as a mobile app, will be subject to a draw on the 15^th of every month. The winners will receive between 20 and 30 thousand tangible as well as cash prizes each month. The annual value of the prizes will be CZK 65m. The launch of the lottery is planned midway through this year.

EET – no change for e-shops and small entrepreneurs

The first wave of Electronic Sales Records (referred to as “EET” in Czech) was launched more than a month ago and all the way until its launch, it looked as if the law’s wording had already been final.

The disputed point of the law (or rather its methodological decree) is the obligation to keep electronic records of sales also in case of cashless payments via payment portals i.e. transactions that we encounter when making purchases via e-shops (the launch of the record keeping is as of 1 April 2017). As regards the e-shops, mid-November last year, the General Financial Directorate (“GFD”) issued guidance in which it confirmed that cashless transfers are subject to electronic record keeping whenever the transfer of cash is authorized by the payer through the recipient i.e. through the seller who is supposed to keep the relating record of the sale. As for payment portals, GFD stated in its guidance that the providers of payment services should know which services they provide and it is up to the payer to find this out. The provider of payment services should thus be able to inform the seller whether the cash transfer taking place is being authorized by the payer through the recipient, enabling the seller to assess whether the relating sale is subject to record keeping or not. In case of doubt, the payer can request the tax administrator to issue a binding ruling. In this guidance, GFD also confirmed that the transfers from one bank account to the other are not subject to record keeping, cash collection and cash deposits made to banks, savings companies or other financial institutions.

Less than a week later, the Minister of Finance, Andrej Babiš, decided that payments which are received by e-shops would be exempt from the law on record keeping. He tried to push this through via an amendment which he submitted after the second round of vote on the tax package. However, the Parliament rejected these changes in the third reading of the tax package.

The Parliament also rejected the other planned change of the law on record keeping which proved to be contentious i.e. obligation to keep records of sales for small entrepreneurs. In response to a public outcry, the Minister of Finance tried to exempt from record keeping small entrepreneurs who pay (or would start paying) lump sum tax and whose annual income in the last three tax periods did not exceed CZK 250,000.

It’s worthwhile pointing out that several other Members of Parliament took advantage of the possibility to introduce a change in the law on record keeping of sales and, as a result, the amendment included a few additional proposals such as annulment of the obligations to keep records of sales (i) when paying in a shop in a cashless way with a credit card, (ii) for individuals with annual income of up to CZK 414,000, (iii) for sales made at farmer markets and (iv) for individuals who only pursue own business as an auxiliary activity. However, none of these proposals was accepted by the Parliament and it seems unlikely that the Parliament would revisit these proposals until the implementation of the second wave of EET for wholesale and retail.

Real estate tax: sending payment details via e-mails

With the onset of the 2017 tax period, the Tax administration has introduced a new feature which includes the sending of real estate tax payment details via e-mail. The service is aimed at those taxpayers who currently get the information via a money order. Therefore, it is only aimed at legal entities with data box or for those payers who pay tax via the SIPO service.

The service consists in the annual provision of the complete payment details in the pdf format to a designated e-mail address. The e-mail address is provided by the taxpayer on a designated form which is filed with the locally competent tax office (if the taxpayer has several locally competent tax office, he or she must file the form with each one individually) until 15 March of the given tax period. If the form is filed later, the payment details will only be provided for the following tax period.

TAX ALERT: Additional information to the reverse charge VAT treatment when providing digital communication services

At the start of November last year, we informed you via a TAX ALERT about the extension of the reverse charge VAT treatment to digital communication services. A month later, GFD issued additional guidance to the original law which aimed at answering the numerous questions that had arisen. The additional guidance introduced several modifications.

The reverse charge VAT treatment for digital communication services (telephone, internet and similar services) will only apply in cases when the provider as well as the service recipient are VAT payers and, in addition, both parties are also designated as entrepreneurs in the digital communication business. Therefore, the qualifying condition is that both parties act as entrepreneurs when providing digital communication services and are required by the law to be listed in the Register of entrepreneurs providing digital communication services. In other words, when they purchase and sell digital communication services consistently with an aim to seek profit.

The above effectively means that all taxpayers who only recharge digital communication services without doing so in their own name as part of their business activities and without an aim to seek profit (i.e. they are mere intermediaries) are not required to apply the reverse charge VAT treatment. Consequently, the providers of digital communication services will continue to issue invoices with VAT and the recipient will be able to claim the corresponding input VAT deduction. Upon fulfillment of the above conditions, the reverse charge VAT treatment will not apply in the following cases:

• The service recipient is an end user,
• The service recipient enables the use of the service to another end user e.g. employee, subsidiary, lessee or another subject (e.g. free wifi),
• The service recipient recharges the service without any mark-up.

katerina.navratilova@lerika.eu

Czech court rules on the use of Cost Plus Method

In its recent decision, the Czech Supreme Administrative Court (“SAC”) ruled on the acceptability of loss realized by a toll manufacturer.

The underlying situation concerned a Czech toller which provided services of manufacturing cables to its German principal. The toller used a CP Method for which it had corresponding Transfer Pricing Documentation. The toller’s services were charged based on a budget, with no year-end true-up in place. Since the toller’s capacity utilization was unexpectedly low in 2008 with the onset of the financial crisis, the toller could not absorb its fixed costs in the price of its services and realized a loss.

The Tax Authorities challenged the loss, performing their own benchmark to establish the arm’s length range of Cost Plus Mark-ups and subsequently restating the taxpayer’s taxable income to the minimum value in the range.

The taxpayer argued that the loss was a result of objective market conditions and as such should be regarded as arm’s length. However, the taxpayer’s appeal was ultimately struck down by SAC. First, SAC ruled that the use of the CP Method is justified for a low risk toller. SAC then sided with the Tax Authorities in ruling that a toller whose functions only concern routine manufacturing should not bear the capacity utilization risk and this risk should be for the account of the principal. Therefore, implicitly, the only situation in which a toller could justifiably end up in a loss position would be in case extra costs resulted from its own manufacturing inefficiencies. SAC also upheld the benchmark performed by the Tax Authorities in commercial databases (including Amadeus).

In our view, the case showcases the quickly increasing sophistication of the Czech Tax Authorities as well as courts in transfer pricing matters. Our main takeaways are as follows:

• In case there is no reliable basis for the use of the CUP Method, the use of other (margin-based) methods is justified. SAC has repeatedly ruled in this manner, using basic economic principles without referencing OECD Transfer Pricing Guidelines;
• TP adjustment should afford the most favorable result to the taxpayer i.e. in case of an upward adjustment to the lowest point in the range. This is a very taxpayer-friendly approach that not many other countries would follow (the more common practice is to adjust to the median);
• Targeting margins based on budget without subsequent true-up is not acceptable in case the risks incurred by the tested party as a result of budget-to-actual variance are not commensurate with its functions;
• SAC consistently follows the substance-over-form principle, dwelling less on formal legal arrangements and putting emphasis on the underlying economic substance of the related party transactions.

David Zářecký

https://nl.linkedin.com/in/david-zarecky/cs