Rate package to tax one-crown bonds

The government has passed a so called rate package aiming to boost public budget revenues. Some points were added to the finance ministry’s original bill, in particular the taxation of one-crown bonds. The proposed taxation of insurers’ technical provisions changed as well. The increases in tax rates on gambling, spirits, cigarettes and tobacco remained as originally proposed.

The proposed amendment to some tax laws aiming to increase revenues of public budgets, referred to as a rate package, was submitted to the deputies’ chamber in June. The bill we wrote about in the May issue of Tax and Legal Update  is expected to enter into effect on 1 January 2020; this effective date is conditional upon the completion of the legislative process by the end of the year.

Unlike the original wording, the bill now also stipulates the taxation of one-crown bonds in a transitional provision applicable to Section 36 (3) of the Income Tax Act (which, however, remains unchanged by the proposed amendment). In the taxation periods following the amendment’s effective date, interest income from bonds with a low nominal value issued before 2013 would no longer be rounded (down) for each individual security; this treatment in effect meant not taxing this income at all. Under the amendment, the generally applied rounding whereby the tax base (i.e. the interest income) is not rounded, and only the final tax is rounded, for each taxpayer, would apply to all bonds, regardless of the date of issue.

The proposed amendment to the Reserves Act has also undergone changes in the commenting procedure: it still applies that only the technical provisions under the EU Solvency II Directive, with certain adjustments, will be tax-deductible, not the technical provisions under accounting standards. The ministry has also partly responded to comments raised by the professional public and proposes to reduce the amount of tax-deductible provisions by amounts recoverable under reinsurance agreements, while increasing them by the balance of deferred acquisition costs of insurance contracts. Unlike the original wording, which proposed the one-off taxation of the difference between the technical provisions under the accounting standards and the adjusted technical provisions under Solvency II, the governmental wording now proposes to spread the impact of the change over two taxation periods following the amendment’s effective date. Any additional taxation would thus take place in 2020 and 2021. In its explanatory report, the ministry also updated the estimated one-off increase in public budget revenues from CZK 3.8 billion to CZK 10.5 billion.

The government also proposes a limited tax exemption of winnings from gambling/betting, to amounts not exceeding CZK 100,000. Winnings above this amount would be subject to a 15% withholding tax. As the proposed taxation does not allow to deduct the amount of the wager from the tax base, situations may occur in gambling/betting where the actual winning would be lower than the tax withheld.

The rate package is yet to be discussed by parliament; we thus have to wait and see what the concrete tax regulation of individual areas will be like.
 

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