Annual International Bar Association Conference 2015 Vienna Recent Tax Developments in the Czech Republic

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1 Annual International Bar Association Conference 2015 Vienna Recent Tax Developments in the Czech Republic Helena Navrátilová Kocián Šolc Balaštík, advokátní kancelář, s.r.o.

2 1. RECENT CHANGES IN TAX LAW 1.1. Income Tax Law Amendments Gratuitous Income The Income Tax Act's provisions concerning gratuitous income (which replace the rules incorporated in the former Inheritance and Gift Tax Act) that were introduced in 2014 were substantially amended with effect from 1 January Gratuitous income of any taxpayer in any form, including gifts, is now subject to personal or corporate income tax as appropriate, except gifts among lineal descendants and some other close physical persons. Income from inheritance remains exempt for all taxpayers. For example, interest free loans give rise to gratuitous income (property benefit), which is subject to income tax at the debtor. The income is considered to be equal to the amount of interest on comparable loans. For individuals and legal entities the tax exemption involves deemed interest of no more than CZK 100,000 from one creditor per tax period Transfer of property into a foreign trust A transfer of assets by the settlor or contributor for no consideration into a foreign trust is subject to tax at the rate of 15% or 35% unless certain conditions are met. These conditions are stipulated in an official guidance issued by the General Finance Directorate. In particular, the foreign trust needs to constitute an entity comparable to a svěřenský fond (Czech trust) a trust formed under the Civil Code of the Czech Republic effective from 1 January 2014 in terms of its essential legal characteristics and tax status. Consequently, it shall be recognized as a trust under Czech law. In particular, the foreign trust shall be an irrevocable discretionary trust with no reserved investment powers to the settlor/contributor and the purpose of the trust shall be immutable. From a tax perspective, the foreign trust must not be a legal entity under the laws of the country where it was established, its income must be subject to corporate income tax and it must be recognized as a person for tax treaty purposes. The foreign trust is then entitled to treaty benefits. It is not clear how the withholding tax applies in the case of a transfer of non-monetary assets. A transfer of assets for no consideration by the settlor/contributor to a qualifying trust is treated as a capital contribution for corporate income tax purposes Related Party Transactions It has been clarified that transactions between related parties for no consideration are not subject to the rules concerning gratuitous income. Related parties need to apply the arm s length principle in both domestic and international intra-group transactions. This implies that a price agreed outside the range of arm s length prices requires the income tax base on both sides of the transaction to be adjusted. However, if the difference was not actually settled, the amount decreasing the tax base must be added back to the tax base of the respective taxpayer.

3 Taxation of Foundations and Charitable Funds Income from not-for-profit activities is not subject to tax, provided that the relevant expenses exceed such income. The business income and expenses of such organizations are considered separately. However, entities earning income on a notfor-profit basis may claim a tax exemption of gratuitous income in the form of gifts and donations designated for qualified purposes, such as education, culture, health care, charity etc Basic Investment Fund The corporate income tax rate of 19% was reduced for qualified basic investment funds to 5% (the only other reduced rate (0%) applies to pension funds and pension institutions). From 1 January 2015 a basic investment fund is newly defined as an open end unit fund or investment fund established in accordance with the Act on Management Companies and Investment Funds whose units or shares were admitted to trading on a regulated European market or an investment fund investing more than 90% of its funds into eligible financial assets. The same rules apply to foreign investment funds provided that they satisfy the qualified essential legal characteristics of a Czech investment fund or open end unit fund. Consequently, the majority of qualified investors funds are currently not able to benefit from the reduced corporate income tax rate Reports on Related Party Transactions The introduction of a new Appendix to the 2014 Corporate Income Tax Return disclosing transactions with related parties is an expression of the Czech tax authorities' increased focus on transfer prices. The companies that satisfy at least one of the criteria for an accounting audit and perform transactions with an related party whose registered office is outside the Czech Republic or that disclose a tax loss and carry transactions with a domestic or foreign related entity or receive investment incentives must report the type and volume of transactions separately for each related party. The report does not by itself have any tax impact but shall be subject to a risk analysis that may prompt a tax inspection DUTY TO FILE TAX RETURNS ELECTRONICALLY 1.3. FATCA As of 1 January 2015, all data box owners and parties required to have their annual accounts audited are obliged to file all their tax forms with the tax authority electronically. The requirement applies to, without limitation, registration applications, notices on changes to registered information, due and additional tax returns, reports, settlement of accounts, etc. The electronic filing in XML format can be made via a data message signed by an acknowledged electronic signature, by verifying the filing party s identity via the Tax Authority s Electronic Submissions Application, or the relevant form can be sent via the data box etc. This filing obligation also applies to statutory financial statements. In response to the US's Foreign Account Tax Compliance Act (FATCA) and the associated international treaty entered into between the Czech Republic and the United States, the Czech Act on Exchange of Information on Foreign Accounts with

4 the United States of America for Tax Administration Purposes took effect on 29 December The information exchange includes the collection and relay of information on US tax residents' accounts from Czech tax authorities to US tax and other contact authorities and vice versa, i.e. exchange of information on Czech tax residents' accounts from US tax authorities to Czech authorities. The Czech FATCA imposes duties related to payments to non-participating financial institutions and regulates fines for failures to discharge non-cash duties owed to Czech financial institutions. The Czech FATCA took effect on 13 January NEW TREATIES ON PREVENTION OF DOUBLE TAXATION A new tax treaty concluded with the Principality of Luxembourg entered into force as of 1 January The treaty lays down the rules for creating a deemed permanent establishment in the case of services that have been provided for more than 6 months on the territory of the other state, taxation of international traffic by road and railway, and 0% withholding tax on dividends paid to a beneficial corporate shareholder holding at least a 10% share for at least 12 months. On the same date a new protocol to the tax treaty with Kazakhstan and to the tax treaty with Singapore entered into force. The protocol to the tax treaty with Singapore clarifies the rules concerning the interaction of the Articles 'Dividends' and 'Interest', lays down the test of the local place of management for creating a permanent establishment, and amends the taxing rights to royalties. A protocol to the tax treaty with Belgium that expands the rules for an information exchange will enter into force on 1 January NEW TAX INFORMATION EXCHANGE AGREEMENTS 1.6. VAT The Tax Information Exchange Agreement ( TIEA ) with the Principality of Andorra entered into force in The TIEAs with Bahamas and the Cook Islands are being approved by the Parliament Special single administrative point (mini one-stop shop) An amendment to the VAT Act extends the range of services provided to non-taxable persons for which the place of taxable supply is determined by the services recipient s place of residence regardless of who provides such services. These services are e- commerce, telecom, radio and TV broadcasting services. Moreover, the special rules applicable to a single administrative point have been expanded. In general, selected services providers can discharge VAT duties that have been established in EU Member States in which they do not have a registered office or an establishment via a website administered in the particular Member State in which the providers register for this procedure. Such providers are then not required to fulfill their VAT compliance duties in Member States in which they provide the selected services. The tax levied on the selected services is re-distributed within the EU Measures against tax fraud

5 The measures against tax fraud include broadening the scope of supplies subject to the reverse-charge mechanism (with effectiveness from 1 January 2015) and the introduction of a summary report (with effectiveness from 1 January 2016). Permanent reverse-charge mechanism (RCM) applies to the same scope of supplies as in 2014 and will newly apply to the supply of immovable items to which the taxpayer voluntarily applies VAT. Temporary RCM will apply to certain supplies specified in detail in a government decree. Without limitation in terms of their value, the RCM applies now to transfers of greenhouse gas emission allowances, cereals and technical crops that are not commonly used in an unchanged state for consumption, and raw or semi-finished metals. Further, the RCM applies to mobile phones, integrated circuits equipment, game consoles, tablets and laptops but only if the total amount of the tax base for the taxable supply exceeds CZK 100,000. Effective 1 January 2015, specific commodities or services which will be subject to the RCM under a quick reaction mechanism may be specified by the government in a government decree with the consent of the European Commission, but only for a period of nine months. 2. FUTURE DEVELOPMENTS The dividends and capital gains exemptions pursuant to the EU Parent-Subsidiary Directive are applied by the Czech Republic not only in relation to EU tax residents but also to qualified residents of tax treaty states. The Czech Republic shall put in place legislation that will ensure that Czech law is harmonized with the amendment to the Directive by 31 December 2015; in particular the subjective and objective tests pursuant to the amendment to the current anti-abuse rule must be met. The Czech Income Tax Act does not contain specific anti-abuse rules except in the case of mergers and acquisitions, which enjoy neutral tax treatment unless they were exercised with the objective, or one of the main objectives was, to avoid or decrease tax and lack genuine business reasons and rationale A tax treaty with the Principality of Lichtenstein was signed on 25 September 2014 and is currently being ratified. The treaty contains an article concerning a standard exchange of information On 1 January 2016, a review statement will be introduced as another tool available to the Czech Tax Administration Office to help fight tax fraud. Taxpayers who receive or render taxable supplies with the place of supply in the Czech Republic will be able to submit a summary VAT report in electronic form each month. The statement should give the tax administrator sufficient information on received/rendered supplies It is anticipated that in real estate transactions only the acquirer will be charged real estate transfer tax, whilst until now the seller and the acquirer could agree on who is liable and who will pay the tax.