Amendment to Income Tax Act for 2021 - new taxation of bonds and monetary contribution for meals
The Ministry of Finance has submitted for external comments an amendment concerning income tax. From 2021, the amendment should change the taxation of bonds, reduce the administrative burden associated with the reporting of tax-exempt income paid to abroad, introduce monetary contributions for meals, and substantially extend the time test for exempting income from the sale of real property from tax.
We summarise the major changes as follows:
- The amendment should cancel the exemption of Czech non-residents’ interest income from bonds issued by Czech companies or the Czech Republic (i.e. Eurobonds). The cancellation of the exemption should not apply to bonds issued before the amendment’s effective date.
- For discounted bonds, the difference between the bond’s nominal (face) value and its issue price will no longer be taxed. Under the new amendment, the actual income from bonds determined as the difference between the bond’s nominal value and its acquisition cost should be taxed. The taxation method should change as well: whereas until now withholding tax has been used, from now on proceeds from bonds (in form of the difference between the bond’s nominal value redeemed and its acquisition cost) should be taxed by individuals within their income tax returns, as part of a separate income tax base – income from capital. For foreign investors, the redemption of bonds will be subject to the tax securement of up to 1% of the nominal value if other criteria are met as well.
- The ministry proposes to introduce contributions for meal allowances in monetary form: on the employee’s part, the monetary contribution would be treated as a tax-exempt income up to 70% of the meal allowance amount; on the employer’s part, as a tax-deductible expense with no limitation. The ministry thus intends to help employees as well as small entrepreneurs without their own foodservice facilities and excessively administratively burdened by meal vouchers.
- The five-year time test for exempting income from the sale of real property should be extended to fifteen years. Exemption could also be claimed before these fifteen years but only if the funds acquired are used to satisfy one’s own housing needs. According to the proposed transitional provisions, the extended time test should not apply to real property acquired before the amendment’s effective date.
- The monthly administrative burden associated with the reporting of income paid to abroad that is not subject to tax or is tax-exempt should be reduced to one summary report prepared for the entire calendar year. The monthly limit of CZK 100,000 for the reporting of tax-exempt income paid to abroad should increase to CZK 300,000. The reporting of income paid to abroad that is taxed using withholding tax on a monthly basis remains unchanged.
- The proposed cancellation of a 35% withholding tax for residents of countries outside the European Economic Area with which the Czech Republic has not concluded double taxation treaties or tax information exchange agreements (see the February issue of Tax and Legal Update) has been omitted from the amendment.
- The amendment will define a list of non-cooperative jurisdictions in the tax area, referring to the EU list of such jurisdictions. Any income of controlled entities included in the list of non-cooperative jurisdictions will automatically be included in the Czech controlling company’s tax base.