Major Income Tax Act amendment to reshape the rules on assets, depreciation, leasing and more
A comprehensive amendment to the Income Tax Act is being prepared alongside the new Accounting Act. The changes go well beyond terminology. In response to changes in accounting legislation, the proposal introduces a number of conceptual changes, particularly relating to tangible fixed assets and tax depreciation, finance leases and other leases, and tax provisions and impairment allowances.
The draft amendment is currently undergoing the comment procedure and still contains no transitional provisions whatsoever. These will be essential, among other things, for determining the treatment of assets already being depreciated and of existing provisions and impairment allowances. According to realistic estimates, the new legislation, which may still change significantly during the remainder of the legislative process, is therefore unlikely to take effect before 2030.
In this article, we focus on the main proposed changes concerning corporate income tax. Changes relating to personal income tax will be covered separately.
Accrual-basis and cash-basis taxpayers
A conceptual innovation is the systematic distinction between accrual-basis taxpayers and cash-basis taxpayers. In general, taxpayers that keep accounts will be regarded as accrual-basis taxpayers. Their tax base should be more closely aligned with the accounting recognition of assets, revenues and expenses based on their economic substance. By contrast, the cash principle will remain paramount for cash-basis taxpayers who are not required to keep accounts: their tax base will be determined as the difference between income received and expenses paid, with the link to assets and legal ownership expected to be key.
New tax depreciation system
One of the most significant changes is the new concept of tax depreciation. Tax depreciation of tangible fixed assets would be calculated monthly rather than annually, as is currently the case. The proposal also envisages a substantial simplification of depreciation categories, the abolition of the existing formulas for straight-line and accelerated depreciation, and the introduction of an option to apply component depreciation for tax purposes.
The value threshold for movable tangible assets is to increase from the current CZK 80,000 to CZK 100,000. For accrual-basis taxpayers, the definition of tangible assets will also be more closely linked to the accounting definition of tangible fixed assets and tangible investment assets.
The new rules will therefore require changes to asset records and the configuration of tax depreciation schedules. However, their impact on existing assets will only become clear once the transitional provisions are available.
Finance leases and other leases
Finance leases are also set to undergo a major transformation, being newly conceived as a method of acquiring tangible assets. The user will recognise a right-of-use asset arising from a finance lease, which will be treated as a tangible asset for tax purposes. Instead of claiming lease payments for tax purposes, the user will therefore claim tax depreciation on the right-of-use asset.
The changes are also expected to affect other leases, particularly for accrual-basis taxpayers, where the new tax treatment will in some cases follow the accounting recognition of a right-of-use asset.
Additional improvement to an asset for tax purposes
The existing concept of technical improvements is to be replaced by additional improvements to an asset for tax purposes. A significant change is the principle that such improvement should generally be depreciated for tax purposes by the taxpayer that bears its economic cost. It will therefore no longer be necessary to obtain the lessor’s consent for a lessee to depreciate improvements for tax purposes.
Subject to certain conditions, the new rules will also allow repairs and maintenance to be included in the additional improvement regime if the taxpayer elects to do so.
Provisions and impairment allowances
The distinction between accounting provisions and impairment allowances and provisions and adjustments under the Act on Reserves may have a significant practical impact. Accounting provisions and impairment allowances are generally intended to be neutral for tax-base purposes, while tax provisions and tax adjustments are to be calculated and reflected in the tax base separately, irrespective of their accounting treatment.
In practice, this may place greater demands on the separate tracking of these items for tax purposes.
Other proposed changes
The rules governing the taxable periods of corporate income tax payers are also changing. A taxpayer’s taxable period is to be derived directly from their individual accounting period. The current concept of a “period for which a tax return is filed” is to be abolished, and certain rules relating to corporate transformations and changes in accounting periods are also to be amended.
The new rules also address fair value remeasurement. In general, they are intended to determine when an accounting remeasurement is reflected in the tax base while preserving continuity in tax values, for example in corporate transformations and contributions.
What happens next?
The proposed changes may have significant practical implications for companies, whether concerning asset records and tax depreciation, the classification of leases and finance leases, or the separate tracking of provisions and adjustments for tax purposes.
Given the early stage of the legislative process, however, the further development of the proposal – and particularly the still-missing transitional provisions – will be crucial. We will therefore continue to monitor developments and examine selected areas and their practical implications in greater detail in future issues of Tax and Legal Update.