On 27 March 2019, Act No. 80/2019, representing a set of amendments to tax laws, particularly the Income Tax Act, the Value Added Tax Act and the Tax Code, was promulgated in the Collection of Laws. The Act takes effect on 1 April 2019. The first part below presents an overview of the main changes related to income tax.
Change in income from employment activity subject to withholding tax
The original limit of CZK 2,500 per calendar month subject to taxpayer withholding tax has been increased to the amount level decisive for employee participation in sickness insurance. It currently amounts to CZK 3,000 and should be increased in relation to the growth of the average wage.
In accordance with the amendment’s effect, the new amount is applicable for the first time for April 2019.
Increase in the flat rate limit to the 2017 level
The amendment increases the flat rate expenditure limit for sole traders, doubling the current level. While at present the maximum flat rate expenditure limit that may be applied by entrepreneurs is calculated from the amount of CZK 1 million, the new amount returns to the 2017 level, i.e. CZK 2 million. Thus, the maximum flat rate expenditure limit will be doubled. The amounts of the applicable flat rates in percentage terms depending on individual professions (40% to 80%) remain unchanged. Under the transitional provisions, the increase in the limit to CZK 2 million will be applicable for the first time for 2019.
Measures against tax evasion
Major changes have been made to the Income Tax Act in connection with the transposition of the Anti-Tax Avoidance Directive (ATAD), which proposes several measures against tax evasion, especially by large corporations.
In particular, the amendment introduces the following measures:
- limitation of interest deductibility,
- taxation in the event of relocating assets without changing ownership,
- taxation of controlled foreign companies,
- introduction of a rule against abuse of tax system incompatibility.
Limitation of tax deductibility of excessive borrowing costs
The taxpayer is now obliged to increase the tax base by the amount corresponding to the positive difference between excessive borrowing costs and the limit of CZK 80 million or 30% of EBITDA.
For income tax purposes, excessive borrowing costs are tax deductible borrowing costs less taxable borrowing income. Borrowing costs and, as the case may be, income are listed exhaustively in the relevant provisions of the Income Tax Act. Such costs or, as the case may be, income will also include the exchange rate difference related to a liability arising from a credit instrument. The law allows reapplication of excluded excessive borrowing costs under the specified conditions in the period following the period in which such excessive borrowing costs were excluded.
The regulation of excessive borrowing costs does not apply, inter alia, to companies that are not obliged to prepare consolidated financial statements and are not consolidating entities under the Accounting Act.
The new rules for limiting the tax deductibility of excessive borrowing costs will be applied for the first time for the tax period started after 1 April 2019. For standard calendar year taxpayers, excessive borrowing costs will be tested for the first time in 2020. However, costs from all agreements previously entered into or, as the case may be, from any amendments to these agreements will be included in excessive borrowing costs.
Taxation in the event of relocating assets without changing ownership
The amendment introduces the institute of taxation in the event of relocating assets without changing ownership. The taxpayer thus incurs a tax liability already at the time of relocating assets to another country from an amount equal to the market value of the relocated assets after their tax value is deducted.
This income has also been added to Section 22 and is thus considered to be income from sources in the territory of the Czech Republic.
Under the transitional provisions, taxation will only apply to assets relocated after 1 January 2020.
Deduction for science and research
Changes to the Income Tax Act will also affect the rules for applying the tax deduction to research and development. Entrepreneurs will no longer be obliged to prepare necessary project documents before carrying out research activities but only to meet the deadline for filing the tax return for the relevant tax period. A new obligation for entrepreneurs has been introduced in the respect, namely to send a simple advice to the tax office on commencing work on a research project, clearly setting the date from which the entrepreneur may apply the costs associated with the research project in the form of this tax deduction. So far, proving the commencement date of work on a research project has been one of the frequent problems in tax audits.
The taxpayer reporting obligation has been transferred to the separate provision of Section 38da and is extended to cover, for example, tax-exempt income.