Changes to 2019 tax package: new reporting duty and abuse of right concept

The 2019 tax package, in its external comment procedure since February, is about to be submitted to the government. The comment procedure brought a number of changes: the Ministry of Finance added a new duty to report income flowing abroad and clarified the abuse of right concept. What in particular do these changes entail and what do they mean for taxpayers?

Abuse of right

From the very beginning, the draft tax package aimed to include a general anti-abuse rule into the Tax Procedure Code. Historically, this principle has been applied based on case law. During the external comment procedure, the Ministry of Finance clarified the wording of this rule: transactions with no proper economic grounds whose main purpose or one of the main purposes is to obtain a tax or other advantage contrary to the meaning and purpose of the tax legal regulation will be regarded as abuses of right. 

Compared with the original version, the new wording is much more similar to the rule currently being applied by the Supreme Administrative Court. However, the concept is a bit wider: to qualify a juridical act or a fact as an abuse of right, it will be sufficient if a tax advantage is one of the main purposes and not just the only purpose. In its explanatory report, the ministry promises that the financial administration’s existing practice will not change dramatically. However, we will have to wait for its real application in practice, as the actual apportioning of the burden of proof will be vital. Taxpayers will be pleased that under the new explicit regulation the lack of proper economic grounds will continue to have to be proven by the tax administrator. 

Reporting duty

The Ministry of Finance proposes to introduce an entirely new reporting duty relating to income flowing abroad. The new reporting duty will replace the current reporting of withholding tax but on the other hand will significantly extend the scope of reported payments. According to the new regulation, on a monthly basis, taxpayers should not only report payments to foreign entities from which tax was withheld but also transactions generally liable to withholding tax but exempt from tax in particular cases based on either national legislation or relevant double taxation treaty. Income payments flowing abroad that were not taxed will have to be reported if they exceed CZK 100 000 monthly per taxpayer. The explanatory report mentions foreign dividends but practical implications might be much broader and include not only dividends, royalties and interest paid abroad but also gratuitous income.  

The draft preserves the possibility to ask for a release from this reporting duty, but in its new version only for a period of five years. The existing release options remain effective over one year of the amendment’s effective date but only with respect to income from which tax was really withheld. Untaxed foreign payments will be liable to the new reporting duty once the amendment enters into effect.  

Apart from the need to collect data for obligatory cross-border information exchange purposes, the amendment’s authors justify the changes in their draft by the alleged substantial outflow of income from direct foreign investments, which is unique on an international scale. The Ministry of Finance thus plans to introduce another tool to fight unlawful tax optimisation structures. Along with the proposed establishment of analytical tax records, i.e. a certain universal data collection point, this may significantly enhance the effectiveness of sharing and analysing data collected across the financial administration, elevating it up to the level of big data, using the right tools.

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