Pillar Two: draft amendment to Top-Up Tax Act

The adoption of the amendment is particularly important for preserving the qualified status of the Czech top-up tax. Otherwise, there could be a risk that the income of Czech constituent entities would be subject to top-up tax not only in the Czech Republic but also in other jurisdictions in which the group operates, through the allocated top-up tax mechanism.

In addition to the changes arising from the Side-by-Side package (see our earlier article here), which, among other things, extends the availability of the transitional CbCR safe harbour to 2027, the amendment contains a number of other changes. We summarise the most significant of these below.
 

Changes to tax return filing deadlines

The amendment shortens the deadline for filing tax returns for both top-up taxes from the current 22 months after the end of the taxable period to three months after the deadline for filing the GloBE information return. As a result, the deadline for filing the top-up tax return will generally fall on the same day as the deadline for filing the corporate income tax return, although in relation to the preceding taxable period.

Under the transitional provisions, the current 22-month tax return filing deadline will continue to apply to taxable periods beginning before the amendment takes effect. It is therefore certain that the existing deadline will remain in place for taxable periods beginning in 2024 and 2025; depending on the amendment’s effective date, the same can also be expected for taxable periods beginning in 2026.
 

Changes concerning notifications

The amendment also introduces a welcome change regarding notifications that the obligation to file a GloBE information return has been fulfilled. It will now be sufficient to submit the notification only once. A further notification will be required only if previously reported information changes, similarly to notifications relating to country-by-country reporting.

At the same time, the notification will become a prescribed-form filing: it will have to be submitted in the format and structure specified by the Financial Administration. We expect notifications submitted in free form (i.e. without using a prescribed form) before the amendment takes effect to remain acceptable.
 

Transfer of tax liability by operation of law

In addition to the general provisions of the Tax Procedure Code, the amendment introduces special rules for the transfer (by operation of law) of top-up tax liability where a taxpayer ceases to exist without a legal successor or becomes insolvent. This reflects the specific features of the top-up tax rules, under which the amount of tax may not be reliably determinable when the taxpayer enters liquidation or insolvency, as the Pillar Two rules do not allow a tax return to be filed for part of a taxable period.

If a taxpayer ceases to exist without a legal successor, any top-up tax liability will be transferred by operation of law to another constituent entity of the same group, primarily the entity holding the largest direct interest in the taxpayer, or alternatively to another entity designated by the tax authority. Similarly, if a taxpayer becomes insolvent, its top-up tax liability is to be transferred by operation of law to another constituent entity of the same group; the top-up tax will therefore not become a claim asserted against the original taxpayer in insolvency proceedings.

Under the transitional provisions, these rules will apply only after the new act takes effect, i.e. on the day following its promulgation in the Collection of Laws.
 

Effective date

With the two exceptions described above (the changes to tax return filing deadlines and the transfer of tax liability), the new wording of the law will also apply to taxable periods beginning on or after 31 December 2023.

Given the current stage of the legislative process, we do not expect the amendment to take effect before sometime next year.