Top-up tax: postponed deadlines and other proposed changes

We informed you about the first draft of the amendment here. The amended version contains, among other things, the following changes.

The deadline for filing tax returns for the allocated and Czech top-up tax has been unified to 22 months from the end of the reporting period (i.e., for the calendar year 2024, it will be 31 October 2026). The deadline for filing information returns for the allocated and Czech top-up tax is 15 months from the end of the reporting period, 18 months in the case of the first-time period. The deadline for filing the information returns for the first-time period of calendar year 2024 is thus 30 June 2026.

A new option regarding the information obligation for the Czech top-up tax has been introduced: the obligation can be met by filing an information return on the allocated top-up tax, provided that it contains the essential information as required for the information return on the Czech top-up tax and that the taxpayer using this option notifies the tax administrator of this. In this respect, it is not clear whether and under what conditions it will be possible to combine this method of fulfilling the information obligation with the option of the information return being filed by the ultimate parent entity.

The explanatory memorandum emphasises the finance ministry’s priority to ensure the qualified status of the Czech top-up tax and thus let the Czech top-up tax meet the safe harbour rules. For this reason, the draft amendment:

• extends the range of payers of Czech top-up tax to joint ventures and their affiliates (a joint venture group), stateless (not resident in any state) main entities whose activities are carried out in the Czech Republic provided that these activities can be taxed in the Czech Republic under the relevant international treaty, and tax transparent entities established under Czech law that are not resident in any state
• defines a sub-group as a set of entities for which the calculation of effective tax rate and jurisdictional top-up tax is made separately from other taxpayers (i.e., not jointly within one jurisdiction)
• removed the option to choose a different standard for the purposes of Czech top-up tax than the one used in the calculation of the allocated top-up tax; the rules on the use of the accounting standard will be based on the rules for the allocated top-up tax as per the model rules. 
   

The definition of a tax credit has been clarified: it means a credit with a direct effect on the tax liability (a discount, bonus). Deductions from the tax base (allowances), accelerated depreciation charges, and similar items shall not be considered tax credits for the purposes of the top-up tax although they also reduce the effective tax rate. A refundable tax credit is one that is paid to the taxpayer in cash. If it is paid within four years of its origination, it is a qualified tax credit that shall not reduce the amount of tax for the purposes of calculating the effective tax rate and will be included in the calculation of qualifying gain or loss (essentially, it shall be treated as a subsidy whereby the tax credit shall be added to the tax payable and at the same time increase the qualifying gain). Other refundable and non-refundable tax credits shall reduce the effective tax rate.

Currency conversion rules have also been clarified. All calculations of top-up tax shall be made in the currency in which the accounting records are kept for the purposes of the consolidated financial statements (the reporting currency). To convert amounts determined in another currency to the reporting currency, the same method as in the preparation of consolidated financial statements shall be used. Subsequently, for the purposes of tax payment and administration, the amounts calculated in the reporting currency shall be converted into Czech currency at the foreign exchange market rate announced by the Czech National Bank for the last day of the taxable period. Where the law stipulates a condition that is based on an amount expressed in euros, to assess (the compliance with) that condition, the amounts in the reporting currency shall be converted to euros at the average exchange rate announced by the European Central Bank for the month of December preceding the reporting period.

Following the model rules, adjustments have been made to the definition of decisions (one-off, short-term, medium-term, and long-term), which shall only be made within the information return and not in a separate filing.

The amendment will now be discussed by the government and should enter into effect on the day following the date of its promulgation. However, according to a transitional provision, the amended wording shall already apply to tax periods commencing on or after 31 December 2023.