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Amendment of the Income Tax Act brings positive changes for investors

The amendment of the Income Tax Act, which came into force on 1 January 2006, has brought numerous positive changes influencing tax obligations in the Czech Republic. In addtion to the most significant employment-related modifications – lower tax burden for natural persons and simplified tax administration – the amendment also introduces undeniable benefits for investors. Support of the mobility of the labour force in the form of tax-deductible expenses related to both the transport of employees to the workplace and temporary housing, the commom system for taxation of parent companies and subsidiaries, and the tax ememption of income from dividends are only some of the changes strengthening the attractiveness of the Czech Republic’s business environment, especially for foreign companies.

17.02.2006

“The current amendment of the Income Tax Act represents further progress in improving the business environment in the area of taxation. An additional goal of ours is to enact a completely new Income Tax Act instead of only amending the current Act. Therefore, we have initiated the creation of an expert group that will prepare a proposal, as well as a discussion forum for professionals and entrepreneurs whose suggestions we can use as a resource in our own work,“ says Dana Trezziova, Deputy Minister of Finance of the CR.

The Investment and Business Development Agency CzechInvest is one of the regular contributors to public discussion on the state of the business environment and is the originator of many proposals for its improvement. Through its membership in the Business Environment Development Council, an interdepartmental advisory body of the Ministry of Industry and Trade, CzechInvest identifies and proposes solutions for a wide spectrum of potential problem areas for business. In so doing, the Agency often draws from the actual experience of foreign investors.

“We maintain constant contact with our investors and we make every effort to assist them even when they are already operating in the Czech Republic. Their input and opinions are indispensible for us as feedback on setting up the whole system of the business environment,“ says CzechInvest CEO Tomas Hruda. “In this regard, cooperation with the Ministry of Finance is of the utmost importance. This is positively reflected in the recent introduction of tax relief related to employers‘ expenses for transport and temporary housing of employees, thus increasing the mobility of the labour force, which is one of the frequent issues that we address with investors.“

AfterCare, CzechInvest’s department for relations with investors that have already invested in the Czech Republic, has the task of helping those investors to solve any potential problems related to investment, identifying existing barriers in the investment climate and providing feedback to the government in order to aid in eventually removing those barriers.


SUMMARY OF THE MOST SIGNIFICANT CHANGES FROM THE PERSPECTIVE OF INVESTORS

· Expenses related to transport of employees and temporary housing
In order to increase the mobility of the labour force, tax relief related to the transpart of workers to their place of employment and their temporary housing has been recently implemented. This specifically concerns tax-deductible expenses of the employer for the transport of employees to or from the workplace, such transport being ensured by the employer using its own or rented means of transportation, or those of a contract carrier. Means of transportation are considered to be motor-vehicles intended for the transport of 10 or more persons. This has further led to the specification of tax-deductible expenses for temporary housing for employees, with the exception of temporary housing in family houses or flats, up to a maximum amount of CZK 3,500 per month.

· Taxation of securities and derivatives
For the purpose of simplifying the taxation of securities and derivatives, the amendment established that their taxation will stem fully from trading income ascertained from accounting standards. This adjustment can already be utilized for the tax period beginning in 2005. To date, it has been possible to deduct an unrealized loss from derivative instruments from the tax base in, at most, 3 tax periods or periods for which a tax declaration is submitted.

· Binding assessment of methods of setting prices in business relationships between connected entities
With effect from 1 January 2006, the Income Tax Act was complemented by a new provision according to which a taxpayer can request from the tax administrator a binding assessment of whether the method by which a price was established in a business relationship with a connected entity corresponds to the method by which the price was established in independent relationships. The possibility to request from the tax administrator a binding assessment in the aforementioned cases is tied to the implementation of this institution with effect from 1 January 2004, when it first became possible to request from the tax administrator a binding assessment for cases of deducting taxable losses from the tax base in the period following a substantial change in the composition of partners. The Income Tax Act specifies the documents and information that the taxpayer must enclose with the application for the binding assessment. In connection with the new possibility to request from the tax administration a binding assessment in the area of transfer prices, the Fee Administration Act was also complemented, according to which the taxpayer is obligated to pay a fee in the amount of CZK 50,000 upon issuance of the decision.

· Exemption of dividends, interest and license fees (Council Directive No. 2003/123/EC, agreement between the EC and Switzerland)
In order to increase the attractiveness of the Czech Republic’s business environment, the amendment brought about the easing of requirements whose fulfillment is conditioned by the exemption of dividends. Specificially, this concerns lowering the parent company’s minimum qualified share of the basic capital of the subsidiary from 20% to 10% and the minimum period of holding the share of basic capital from 24 to 12 months. This adjustment is related to the exemption of income from dividends whose payment was decided by the general meeting after 1 January 2006. On the basis of the relevant agreement concluded between the EC and Switzerland the amendment further complemented the exemption of income from dividends paid by Czech resident companies to their parent companies with headquarters in Switzerland and income from dividends paid by Swiss subsidiaries to their parent companies residing in the Czech Republic. At the same time, the exemption of interest and license fees from withholding tax was embedded in the relationship between Czech and Swiss resident companies, whereas the conditions for using the exemption are identical for other resident companies of the EU (including the transition period until 2010, during which license fees will be taxed in the Czech Republic).

· Regulations for transferring the headquarters of European companies and European cooperative societies (Council Directive No. 2005/19/EC)
In accordance with the aforementioned Directive, the amendment expanded the advantages – deferment of taxes on profits arising from restructuring, transfer of loss, reserves and rectifying items – also to the transfer of the headquarters of legal entities having the communitarian-legal form (see Council Regulation No. 2157/2001 on the Statute for a European Company (SE), Council Regulation No. 1435/2003 on the Statute for a European Cooperative Society (SCE)).

· Depreciation of intangible fixed assets
In order to increase the legal security of taxpayers, the moment at which intangible fixed assets begin to depreciate, including rounded depreciations was directly established (until this time, this regime had been taken from the arrangement for tangible fixed assets). The following could be considered a more fundamental change: the special arrangement in the case of expanding the usability or facilities of an intangible fixed asset or upon performance of alterations resulting in a change of the purpose of the intangible fixed asset if the expenses exceed the amount of CZK 40,000 (the limit is identical to that for technical appraisal of tangible fixed assets) upon their termination. In accordance with the approved arrangement, after termination of these expenses the market entry price of the intangible fixed asset increases by value of those expenses taking into account that during the remaining months depreciation is from the level of the increased market entry price. With an intangible fixed asset with the utilization right for a fixed period the increased market entry price depreciates only until the end of the period of the agreed utilization right, or as the case may be, until the end of an extended period of the utilization right. With an intangible asset with an unlimited utilization right, the period of depreciation is extended as a result of a technical appraisal by a maximum of half of the legally established depreciation period.

· Low capitalization
The new definition of connected entities pertaining to regulations of low capitalization (also extended to sister companies) valid with effect from 1 January 2004 will be used, for the first time, for the tax period or period for which a tax declaration is submitted that commenced in 2005, and this only for interest from loans and interest from credit paid on the basis of agreements concluded after 1 January 2004. The impact of the aforemention definition of connected entities is also extended to interest paid on the basis of amendments to agreements concluded before 1 January 2004 increasing the amount of a loan or credit.

· Support of research and development
For the first time for the tax period that commenced in 2005, the taxpayer can claim a deduction from the income-tax base in the amount of 100% of expenses incurred during the implementation of a research-and-development project. From 2006, this possibility pertains to the partner of a public trading company and limited partnerships. At the same time, in order to increase the legal security of taxpayers and the tax administrator, the Income Tax Act was complemented by a definition of a research-and-development project which the taxpayer must comply with before beginning the solution.