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Upcoming tax changes: an overview

The new government and chamber of deputies have begun another four-year legislative cycle in which they will try to push through their agenda. The implementation of several EU directives may bring about important changes, especially in direct taxes. Here is an overview of selected regulations and amendments in the pipeline.

The substance of the new Accounting Act was already approved by the previous government. Work should continue on the wording of the individual sections of the new law, and of the laws to be affected by the new regulation. According to the legislative plan, the act could come into force in 2024. The following changes might be of interest to entrepreneurs:

  • extended possibility to apply International Accounting Standards instead of Czech accounting regulations
  • possibility to use a currency other than the Czech crown even when accounting under Czech accounting regulations
  • higher emphasis on general accounting principles.

It will also be important how the changes will be reflected in the Income Tax Act. A rather significant simplification could occur if the new act allows for determining the tax base directly by adjusting the result of operations determined under International Accounting Standards or for paying the tax in the foreign currency in which the accounts are kept.

Value added tax

The Czech Republic has asked the European Commission to increase the limit for VAT registration from CZK 1 million to CZK 2 million. The Ministry of Finance has already sent the request and hopes that it will be granted in the first quarter of this year. Czech legislation will then be amended accordingly.

European Union and OECD

Last year, the Council of the EU adopted a directive that establishes a new reporting obligation for platform operators (DAC 7) and a directive that introduces the obligation to disclose selected information on income tax paid in individual EU member states. The Czech Republic should implement both directives with effect from 1 January 2023 and June 2024, respectively.

The European Commission is preparing several initiatives relating to direct taxes, such as the introduction of a special tax allowance for equity financing (debt-equity bias reduction allowance, DEBRA) or the limitation of tax advantages for companies without economic substance. However, the legislative process at EU level is only at an early stage.

During 2022, we can also expect developments in the reallocation of taxing rights for companies of corporate groups with a turnover of more than EUR 20 billion (Pillar 1) and the introduction of a global minimum effective tax of 15% for companies of corporate groups with a turnover of more than EUR 750 million (Pillar 2). The effective date has ambitiously been set for as early as 2023.

We already know the draft wording of the EU directive implementing the global minimum effective tax at EU level. However, it is not yet clear how the Czech Republic will proceed with the implementation and how it will use the possibilities provided by the directive. The original version anticipated that this tax would be calculated and collected for subsidiaries only at the level of the parent company. However, the draft directive as well as the OECD model rules now give countries the option to levy the minimum tax at the level of the jurisdiction in which the corporate group has subsidiaries. The nominal income tax rate in the Czech Republic is above 15%. There may be situations where the effective tax will be below 15% (because of income tax credits, R&D allowances, differences between the profit recognised under the International Accounting Standards, which are used to calculate the effective tax, and the Czech tax base). The approach to this issue may affect the obligations of foreign companies operating in the Czech Republic in future years.

The OECD has not yet finalised the Pillar 1 rules. It is unclear whether an EU directive will be prepared to unify implementation across the EU or whether the rules will be introduced through a multilateral instrument currently being drafted. However, these regulations will only affect companies in corporate groups with a turnover of over EUR 20 billion and profitability above 10% that sell goods or services in the Czech Republic regardless of whether they have a subsidiary or a permanent establishment here.

We will keep you informed of any new developments in this respect.