What will global minimum effective tax do to Czech companies?

The finalisation of the global minimum effective tax regulation is progressing at the OECD and EU levels in parallel. There is a general consensus on the introduction of a 15% tax. EU member states are obligated to adopt the relevant legislation as early as 2023, although its application may in some cases be postponed. The Czech implementing bill has not yet been published. The impact on Czech companies will undoubtedly be broader than is currently generally assumed.

The global minimum tax will apply to companies that are part of a corporate group whose consolidated turnover exceeds EUR 750 million (CZK 18 billion). If the effective tax rate determined (on a simplified basis) as the tax (current and deferred) reported by the group in a jurisdiction divided by the pre-tax profit determined under International Accounting Standards for that jurisdiction is less than 15%, the obligation to pay a top-up tax will arise.

The use of International Accounting Standards will therefore be decisive in the minimum effective tax calculation. The tax liability will include both current income tax payable in the jurisdiction and deferred tax. The effective tax may therefore differ significantly from the statutory tax rate (e.g., due to tax credits and allowances) and may also apply to companies that are not in low taxation jurisdictions, i.e., jurisdictions with a statutory rate above 15%.

The rules for calculating the effective tax and the top-up tax will be uniform for all jurisdictions. The state of the parent company will collect the top-up tax on behalf of the parent company's subsidiaries. However, even the state of the subsidiary will be able to opt to collect this tax. In such a case, the top-up tax paid by the subsidiary will be offset against the parent company's tax liability. It can be assumed that the Czech Republic will decide to collect any top-up tax arising at the Czech subsidiary level or impose the obligation on the subsidiaries to prove that no top-up tax has arisen. Otherwise, the top-up tax will be a revenue of the parent company's state budget even if it relates to the business activity of the Czech subsidiary.

From this perspective, Czech companies can be roughly divided into two categories:

  • The first category includes Czech companies that are at the top of the consolidated group of corporate groups reporting a turnover of over EUR 750 million. These companies will have to examine the amount of effective tax for all jurisdictions in which they carry out their business activities.
  • The second category includes Czech subsidiaries that are part of a consolidated group with a turnover of over EUR 750 million. These companies will have to examine the amount of effective tax at the level of the Czech Republic.
  • In both cases, in addition to the occurrence of a potential top-up tax liability, this will entail the need to meet several obligations related to proving that a top-up liability has not arisen.

We will further discuss this topic in upcoming issues of the Tax and Legal Update.

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