Amendment to Income Tax Act responding to new Accounting Act
The Ministry of Finance has published a draft amendment to the Income Tax Act, responding to the new draft Accounting Act. The proposed effective date of 1 January 2025 and other parts of the amendment may change during the legislative process. Selected changes are summarised below.
Changes to asset and debt valuation
Assets, debts and receivables are defined for tax purposes, based on their accounting treatment. The autonomous concept of the ‘tax value of an asset’ has been newly defined and represents the maximum amount that can be claimed as an expense for the purposes of the Income Tax Act either in the current taxable period or in subsequent taxable periods (depending on the type of asset). The term 'technical improvement' is replaced by 'additional improvement', which will be the case if its amount exceeds the greater of CZK 100,000 or 10% of the asset value. Amounts above CZK 10 million should always be regarded as an additional improvement of an asset. Similarly, the tax value of a debt and the tax value of a receivable are defined for tax purposes. The tax value of a receivable will be affected by its repayment and the creation of adjustments, while these will be created independently of the accounting.
Simplified tax depreciation
A significant simplification of the system of depreciation for tax purposes is being proposed. Depreciation groups will be abolished, and the tax value of an asset will be decisive for defining the asset being depreciated and its depreciation period. The threshold for tax depreciation will be increased to CZK 100,000 and three basic tax depreciation periods will be introduced, with a minimum period over which the asset can be depreciated as follows:
- 60 months for all movable and immovable assets with a value up to CZK 2,000,000
- 360 months for other immovable assets, and
- 180 months for goodwill.
Tax depreciation will now be applied on a monthly basis. The straight-line and declining-balance depreciation methods will be abolished, as will the option to suspend tax depreciation. For improvements to assets, the depreciation period will be extended.
Application of international accounting standards
Profit or loss under international accounting standards can be used as a basis for determining the tax base. However, IFRS profit or loss will need to be adjusted for permanent differences from Czech accounting, and transactions that were accounted for on a balance sheet basis under IFRS but would have been accounted for on a profit and loss basis under Czech accounting standards will also have to be reflected in the tax base. When switching from the Czech accounting tax base to the IFRS tax base, differences in the tax value of assets and debts under each accounting system will need to be identified and reflected in the tax base over a 10-year period.
Determining the tax base of foreign taxpayers
Foreign corporate taxpayers (including those with a permanent establishment in the Czech Republic) will not be considered an accounting entity and therefore not obliged to keep accounting records under the Accounting Act. Those who have a permanent establishment in the Czech Republic (except for one established based on concluding contracts) will keep accounts only to the extent necessary to determine the tax base and the tax amount on the basis of the so-called accrual principle in relation to that establishment (i.e. based on Czech or international accounting regulations, or based on the foreign taxpayer’s accounting). Foreign taxpayers with permanent establishments established based on their continued presence (provision of services, construction and assembly projects) or on concluded contracts, and those who have income from other sources (e.g. sale of securities, real estate) can follow this procedure voluntarily.
A new concept of finance leases
For finance leases, taxpayers with an accrual tax base (accounting under the Czech Accounting Act or the international accounting standards) mainly follow the accounting rules and only deviate from them in specific instances. Under the new accounting regulation, finance leases will be treated similarly to international accounting standards, i.e., an asset is created on the part of the lessee, in the form of a right of use with a subsequent purchase. This right-of-use asset will be tax deductible by the user if statutory conditions are met.
New definition of the taxable period for legal entities
The taxable period for corporate income tax will now be fully linked to the accounting period and may therefore in some cases be determined by calendar weeks. If the taxpayer is not an accounting entity under the Accounting Act, the taxable period will be the calendar year. Exceptions will be selected foreign taxpayers with limited income from sources in the Czech Republic who will have the option to choose if they keep accounts abroad and their accounting period does not correspond to the calendar year.
Special scheme for taxpayers with accounting records kept in euros
Taxpayers whose accounting currency is the euro will be able to report their tax base and the tax itself in their tax return directly in euros without having to convert it into Czech crowns (this obligation will remain for other foreign currencies if they are functional currencies) and will also be able to pay it in euros.
Transitional provisions
The amendment contains special transitional provisions under which the rules for the tax value of an asset, the determination of tax depreciation periods, and the rules for finance leases will also apply to assets acquired before the amendment entered into effect.
Other selected changes
For social security contributions and contractual fines and penalties, the tax treatment linked to their payment is being abolished, and their accounting recognition shall be decisive.
The new regulation in the Reserves Act abolishes the obligation to recognise a tax-deductible adjustment or provisions; these shall be created independently of the accounting.
The situations where changes in fair values shall be included in the tax base are extended to include:
- the part of the valuation of a receivable or bill of exchange/promissory note equal to the interest for the taxable period, and
- a remeasurement to market value where the taxpayer follows IAS 40, IAS 41, and IFRS.
More detailed information on the latest draft of the new Accounting Act can be found here and on the accompanying law containing the amendment to the Income Tax Act here.