Tax Reforms 2008 - Corporate Income Tax

Part 2 of 3: New legislation came into effect on January 1st that dramatically changes the tax regime governing companies in the Czech Republic

This article provided by Tax Dimension. 

On October 8th, 2007, President Klaus signed an amendment, aimed at stabilizing public finances, that changed many of the country's tax laws. Most of these changes came into effect on January 1st, 2008.

Personal Income Tax | Corporate Income Tax | Other Taxes

The corporate income tax rate will be reduced.

Between 2008 and 2010, the corporate income tax rate will be reduced in the following way:

• For the tax period beginning in 2008, by 21 percent

• For the tax period beginning in 2009, by 20 percent

• For the tax period beginning in 2010, by 19 percent

Under this reform, the tax rate valid on the first day of the tax period is applied whereas under the old legislation the rate valid on the last day of the tax period was applied.

Such a change will be less advantageous for taxpayers whose tax period is different from the calendar year, because there will always be a delay before the lower rate applies.

Financial Expenses and Thin Capitalization
The reform significantly changes the thin capitalization rules and the tax deductibility of financial expenses. These will now be assessed using the following five tests:

1) Maximum amount (limit) for tax deductible financial expenses
Financial expenses will be limited to a certain percentage of the average value of loans and credits. The maximum percentage will be determined as the average of
the reference value of interbank deposit market interest rates for 12-month maturity (PRIBOR rates for loans denominated in CZK, LIBOR rates for other currencies) plus 4 percent.

2) Tax non-deductibility of subordinated debts
Financial expenses arising from loans and credits which are subordinated to a taxpayer's other obligations are now treated as tax non-deductible.

3) Interest tied to profit
Interest arising from loans and credits where interest will be entirely or partly derived from the taxpayer's profit will be treated as tax non-deductible.

4) Thin capitalization -- credits from related parties
The tax deductibility of credits from related parties is now limited to three times the value of the debtor's equity (rather than six times under the old legislation), if the credit or loan recipient is a bank or insurance company, or double the debtor's equity for other credit and loan recipients. (Previously four times under the old legislation.)

5) Thin capitalization – credits from non-related parties
If the value of the financial expenses arising from credits and loans exceeds 1 million CZK, only financial expenses arising from credits and loans provided by non-related parties will be tax-deductible -- for 2008, up to six times the value of debtor's equity, and for 2009, four times the debtor's equity.

It is enough to fail one of the above-mentioned tests to render the financial expenses tax non-deductible.

Long-Term Assets
The current minimum input price limits for recording tangible and intangible fixed assets for tax purposes -- 40,000 CZK for movable assets and 60,000 CZK for immovable assets -- remain the same, even though initial drafts of the new tax bill included changes to these limits. Limits for technical improvements are also unchanged.

Depreciation of Cars
The depreciation period for cars has been extended from four years to five years, and includes cars that had not fully depreciated as of January 1st, 2008. This means that the 1a depreciation category will cease to exist and that cars will now be depreciated using depreciation category 2.

The current input price limitation of 1.5 million CZK will be cancelled but this relates only to cars acquired in the tax period following the tax period which began in 2007.

Outstanding Liabilities
Tax will now be assessed on outstanding liabilities that have been overdue for more than 36 months or have become statute-barred. In case of a subsequent settlement, the tax base can be reduced by the value of the liability paid or offset.

The new law also includes a number of exceptions to this rule, such as liabilities arising from contractual penalties.

This provision will also be applied to individuals who receive income from entrepreneurial or other self-employed activities, or income from rent (lease).

Finance Lease
Changes which came into effect on January 1st, 2008:

• Rent paid on a finance lease is now tax deductible, up to a maximum of 99 percent of total lease payments paid. The 99 percent restriction doesn't apply to rent paid on finance lease of up to 1 million CZK per year, however

• The minimum lease period is set differently. For movable assets it will be equal to the minimum period of depreciation and for real estate the period will increase from eight to 30 years

• The withholding tax rate for rent on finance lease payments distributed abroad increases from 1 percent to 5 percent

The lessor (landlord) now follows general depreciation rules for the depreciation of assets (either linear or accelerated) and the possibility of special lease (time) depreciation will be cancelled.

The previous regulation will be applied to lease contracts concluded by the end of 2007 until those leases ends.

Provisions for Receivables
Where the old conditions are met, the creation of provisions for receivables whose value exceeds 200,000 CZK is now possible only if the taxpayer is involved in arbitration or legal or administrative proceedings regarding the receivables.

The maximum amount remains the same. In other words, after receivables have been due for six months it will be possible to create provisions of up to 20 percent (and latterly 33 percent, 50 percent, 66 percent, 80 percent and 100 percent) of the unsettled balance sheet value of such a receivable. 

Expenses for Catering Contributions
Employee expenses relating to the operation of one's own catering facilities and contributions towards catering provided by other entities -- meal tickets, for example -- will remain tax deductible in accordance with currently valid legislation.

Mortgage Bonds
Interest from mortgage bonds issued after January 1st, 2008 will not be tax exempt. For mortgage bonds issued up until the end of 2007, the previous legislation's exemption will be applied.

Unification of Withholding Tax Rate
Since January 1st, 2008 most types of income are now subject to a 15 percent unified withholding tax rate (except the above-mentioned rent on finance lease payments distributed abroad where the rate will be 5 percent).

As of January 1st, 2009, the unified withholding tax rate will further decrease to 12.5 percent (except the finance lease payments distributed abroad and the income of tax non-residents stated in section 36 (1) b) of the Income Taxes Act where the 15 percent rate should be retained).

Binding Rulings
The bill includes the extension of the tax administrator's "editing obligations". The taxpayer will be able to ask the Financial Authority to issue binding rulings on the following:

• The distinction between technical improvements and the repair and maintenance of property

• The allocation of expenses connected with the operation of real estate by individuals who are partly using the property for business

• Expenses incurred in research and development projects and the possibility of deducting such expenses from the tax base

• The allocation of costs that can't be allocated solely to taxable income

Applying for one of these binding rulings is subject to an administrative charge of 10,000 CZK. 

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