Expected income tax changes
A tax package, containing changes in income taxes, VAT and tax procedure rules, has passed its third reading in the chamber of deputies and is currently moving to the senate. The important changes to the Income Tax Act that have already been approved are as follows:
- The amendment rectifies the former inaccurate implementation of an amendment to the EU Parent-Subsidiary Directive regarding the exemption of dividends. The exemption of dividends paid to parent companies should not apply to all dividends treated as items decreasing the tax base by the entity paying the dividends.
- Under the new regulations, the periods of amortisation of intangible assets prescribed by law will be set as the minimum periods. However, it will be possible to apply longer amortisation periods to intangible assets put into use after the amendment’s effective date.
- Sub-lessees will also be allowed to depreciate technical improvements but only those put into use after the amendment’s effective date.
- In accordance with the amendment, instead of the net book value, the tax residual value of assets being liquidated will be included in the cost of a new construction.
- Under the new regulations, non-residents’ gratuitous income from tax residents or Czech permanent establishments relating to the transfer of real estate located in the CR, ownership interests in corporations with their registered offices in the CR and business establishments located in the CR will be subject to withholding tax.
- The amendment introduces a two-year deadline for filing a request for clarification whether correct tax amounts were withheld. Foreign entities will hence have additional time and space to arrange for all administrative papers and certificates required by the Czech tax administration.
- When refunding advance payments for profit shares, the tax withheld will be refunded to the entity obligated to refund the advance payment. The new regulations also explicitly confirm the current approach, consisting of separate assessments of exemption criteria for advance payments and additional payments.
- The maximum amount of expenses that can be claimed as a percentage of income by individuals (natural persons) will be reduced to 50%. On the other hand, even taxpayers claiming expenses as a percentage of income will be allowed to apply tax credits for their spouse and for dependent children.
- It will be possible to apply for a binding ruling regarding the tax base allocated to a permanent establishment of a foreign entity.
- The amendment also anticipates a further increase in tax credits for the second and third child to CZK 19 404 and CZK 24 204.
- The rule under which a 15% withholding tax is applied on income generated from an agreement to perform work and not exceeding CZK 10 thousand a month, in cases when a payroll tax statement has not been signed with one employer, will also apply to small-scale income in accordance with the social security rules. This involves an amount of up to CZK 2 500 irrespective of the legal title of a relevant contract.
As the amendment was not discussed before the end of 2016, its effective date has been postponed to 1 April 2017. As a result, the majority of approved changes will be applied in the taxable periods started after the amendment’s effective date. This means an application not before 2018 for all taxpayers who use calendar years as their taxable periods (mostly all natural persons). However, certain provisions of the amendment that are explicitly mentioned in the transitional provisions will already be applied in 2017. This, for example, applies to the increases in tax credits.