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Chamber of deputies approves long-term investment product

In its third reading, the chamber of deputies has approved a bill on the development of the financial market and the promotion of old-age security, which, among other things, introduces a long-term investment product as a new tax-efficient old-age savings product. The bill will now be debated by the senate.

The final regulation of the long-term investment product primarily derives from the government bill that we wrote about in the May issue of our Tax and Legal Update. However, the amending proposals submitted during the approval procedure have brought about several partial changes.

Notification obligation for providers

The first change is the obligation for providers to notify the Czech National Bank of the commencement and termination of the provision of a long-term investment product. The CNB will now maintain a list of providers that will be disclosed on its website.

Adjusted scope of financial products

The scope of financial products that may constitute assets registered under a long-term investment product has also been partially modified. For investment securities and money market instruments, a requirement that these instruments be traded on public markets has been introduced, which means that the assets registered under a long-term investment product are limited only to the most regulated products, such as publicly traded instruments, government and covered bonds, collective investment securities, and bank accounts.

Abolition of the portfolio approach

From a tax perspective, the most significant change is the abolition of the ‘portfolio approach’ through which all income from the transfer of assets registered under a long-term investment product for consideration was to be exempt from tax. Thus, all transactions carried out by the taxpayer or provider were to be tax-exempt.

The abolition of this additional tax relief will thus result in the preservation of the standard rules for the taxation of investments while allowing an exemption where the value or time test is met.

However, the abolition of the portfolio approach may be problematic where providers are actively involved in portfolio management or where the investment strategy related to a long-term investment product changes. Although providers can be expected to notify taxpayers of any potential tax implications of individual transactions, this notification obligation is not part of the proposed legislation. Providers may thus perform transactions that may give rise to taxable income from the sale of assets. Taxpayers will thus have to file tax returns, which was not foreseen in the original government bill, and there will also be practical implications on taxpayers when paying the tax if the tax cannot be paid from the funds in the long-term investment product, as this would breach the conditions of the tax relief.

Stricter rules but tax relief still in application

Although the adopted changes substantially increase the demand on the taxpayers' tax awareness and the liquidity of their funds where taxable income has arisen, the long-term investment product is still an interesting alternative to other tax-efficient old-age savings products. However, only practice will show whether the set-up of the adopted legislation meets the needs of the target group of taxpayers. We will inform you about further changes in tax relief for old-age savings products in the January issue.