April Dear readers,

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1 April 2014 Dear readers, In mid-march, the Minister of Finance presented several measures he plans to introduce in the tax area in 2015 and In our opinion, the most important information to come out of his presentation is that the single collection point project planned by the previous government will not be launched. This project aimed at unifying the collection of personal income tax with that of public insurance contributions. The project also intended to eventually bring together the collection of taxes and customs duties. After a slew of delays and postponements, the project was originally to be launched in two phases: the voluntary filing of a single form at a single point electronically commencing in January 2014 and the mandatory use of the single collection point starting in January The Ministry instead plans to further evaluate the conceptual changes and assess their potential impact. Only the principles associated with the unification of tax and assessment bases for public insurance premiums will be taken from the law and preserved. Even though the issue of tax on the aggregate of wages (payroll tax) paid by employers was not explicitly mentioned in the material presented by the Ministry, we expect that the concept concerning tax paid by employers on the aggregate of wages and leading to the transfer of social security and health insurance payments under the Income Tax Act and the establishment of the aggregate cap will not be carried out. An amendment to the Income Tax Act currently in preparation aims to remove deficiencies arising from the last amendment adopted in connection with the recodification of private law. Legislative activities are still in progress Marika Konečná LEGISLATION Cancellation of plans for a single collection point An amendment to the Income Tax Act primarily aims to remove deficiencies arising from the last amendment adopted in connection with the recodification of private law. The law establishing a single collection point will be repealed. Changes in the place of taxable supply relating to certain services from 1 January 2015 A draft amendment to the VAT Act involves changes in the place of taxable supply when rendering telecommunication services, radio and television broadcasting services, and electronically supplied services to persons that are not liable to tax. Support of professional and vocational education in the Income Tax Act The new deduction is calculated as the sum of expenses incurred by taxpayers to acquire fixed assets used for professional and vocational education plus expenses incurred per pupil or student. Complementary agreement on social security between CR and USA The new agreement will remove the duplicity of health insurance payments made by U.S. citizens working at branches or subsidiaries of U.S. companies in the Czech Republic.

2 EU Extended exchange of information within the EU Savings Taxation Directive The amendment to the Savings Taxation Directive extends the types of income of an interest nature to include income from life assurance and other income generated from investment funds. CASE LAW Supreme Administrative Court: tax losses can also be claimed as deductible during tax inspections If a tax entity desires to claim tax losses as deductible during a tax inspection, the tax administrator must take this into consideration when making any additional tax assessment. Supreme Administrative Court: the entitlement to a VAT deduction claimed by entities involved in fraudulent chains The entitlement to a VAT deduction can be forfeited through involvement in fraudulent chains if the taxpayers knew or could have known that they were participating in fraudulent taxable supplies CJEU on the right to deduct VAT affected by an incorrectly applied VAT regime and on repeated tax investigations Neither the VAT Directive nor the principle of fiscal neutrality precludes the recipient of services from being deprived of the right to deduct VAT which the recipient paid to the service provider without legal grounds. Supreme Court of the Netherlands on hybrid financing instruments The Court claimed that taxpayers are by law free to choose the method of financing of their subsidiaries, selecting either debt or equity financing. The Court also refused to apply the abuse of rights concept as the fact that taxpayers use their freedom of choice does not mean that they are at variance with the intention of the Dutch law. SLOVAKIA Slovak Ministry of Finance published a white list of countries A qualified withholding tax rate of 35% applicable to the countries not included in the white list has been in effect in Slovakia since 1 March 2014.

3 LEGISLATION Cancellation of plans for a single collection point In the middle of March, the Minister of Finance presented several tax measures planned for 2015 and For income tax, there are two important facts that should be highlighted in respect of First, the Ministry of Finance will not significantly alter the current income tax system as it initially plans to carefully review any potential conceptual changes to assess their impact. Secondly, the single collection point planned by the previous government will not be launched in An amendment to the Income Tax Act which is currently in preparation aims to remove deficiencies arising from the last amendment adopted in connection with the recodification of private law (especially where it concerns real estate, trusts, and donations). The law establishing a single collection point will be repealed. Even though the issue of tax on the aggregate of wages (payroll tax) paid by employers has not been explicitly mentioned in the material presented by the Ministry, we expect that the concept of tax paid by employers on the aggregate of wages (and the associated transfer of social security and health insurance payments under the Income Tax Act and the establishment of an aggregate cap) will not be introduced in 2015 as the law itself will be repealed. Only the principles associated with the unification of tax and assessment bases for public insurance premiums will be taken from the law and preserved. In addition, the proposed amendment may also adjust the taxation of investment funds, increase tax credits for second and additional children, reintroduce a basic tax credit for working pensioners, restrict lump-sum expenses deducted by selfemployed persons, and cancel the duty to file income tax returns for employees subject to a solidarity tax surcharge. The Ministry is planning to introduce conceptual changes effective from These will specifically involve the cancellation of the super-gross salary and the introduction of a second tax bracket (resulting in the cancellation of the solidarity tax surcharge). Concerning VAT, the Ministry plans to focus on measures preventing tax evasion. These involve, in particular, the extension of the reverse-charge mechanism and its implementation for specific commodities (2015), the introduction of electronic taxable supply evidence (2016), the extension of the unreliable payer concept (2015), and the establishment of a bank account central register (2015). For excise duties, we can expect stricter conditions for the issuance or change of permits for the purpose of excise duties, extended competencies of customs authorities during criminal proceedings relating to other taxes, and the introduction of a system to monitor movements of fuel. On the subject of direct taxes, the Ministry intends to introduce measures to prevent tax evasion, such as the on-line registration of sales, a higher tax on lotteries, the digitalisation of tax administration, and the extension of the automatic exchange of information on a cross-border basis.

4 An amendment to the VAT Act, which ought to come into effect in 2015, will soon be discussed by the government (please see the next article). The amendment to the Income Tax Act will be submitted for comments in April. We will keep you informed about developments in this area in future issues of Financial Update. Ladislav Malůšek, tel.: Lenka Fialková, tel.: Changes in the place of taxable supply relating to certain services from 1 January 2015 The Ministry of Finance submitted to the Government a draft amendment to the VAT Act which primarily aims at implementing approved EU regulations. This mainly involves changes in the place of taxable supply when rendering telecommunication services, radio and television broadcasting services, and electronically supplied services to persons that are not liable to tax. From 1 January 2015, all these services will be taxed in the state in which services are provided and used. To reduce the administrative burden, a mini VAT One Stop Shop scheme as a special tax administration regime has been introduced. The core principle of this voluntary scheme is that the provider of the above services will file tax returns and make VAT payments arising in relevant member states through an electronic portal in one member state only, i.e. the service provider will not have to register for VAT in individual member states. Another proposed change arising from EU Directives is the adjustment of the territorial jurisdiction for certain French Overseas Departments and Territories, which will be regarded as third countries. The amendment also more clearly defines certain terms of the existing VAT Act (such as a new definition of the place of residence of an individual complying with Council Implementing Regulation (EU) No. 282/2011). The amendment has been proposed to become effective on 1 January 2015; the territorial jurisdiction adjustment should come into effect on 1 October Persons willing to submit to the special tax administration regime will be able to apply for registration from 1 October 2014, allowing them to register for the mini VAT One Stop Shop scheme effective from 1 January Tomáš Havel, thavel@kpmg.cz, tel.: Support of professional and vocational education in the Income Tax Act An amendment to the Income Tax Act in effect from 1 January 2014 introduced the possibility to reduce the tax base by a new deduction intended to support professional education. This deduction is calculated as the sum of expenses incurred by taxpayers to acquire fixed assets (by means of

5 purchase or finance lease) used for professional and vocational education plus expenses incurred per pupil or student. This deduction can be applied by taxpayers who provide educational services within the scope of practical training at secondary schools, professional training at tertiary vocational schools, or accredited study programmes at universities. Taxpayers must have a licence to carry out the relevant profession or vocation that is taught at the appropriate school and will also have to conclude a contract on the content and scope of practical training and education with this school. Taxpayers must also keep records of their educational activities. The deduction is applied annually during the preparation of annual income tax returns. If the income tax base is low or if a tax loss has been incurred, the deduction can be applied for the following three years. Taxpayers utilising investment incentives must claim this deduction if they are entitled to it. The deduction relating to the acquisition of fixed assets is calculated as 110% of the acquisition cost of the particular asset. The essential prerequisite is that the asset is and will continue to be used for professional education in three subsequent taxable periods, making up more than 50% of its entire period of operation. If the asset is used for 30 to 50% of its entire period of its operation, it is possible to apply a deduction in the amount of 50% of the acquisition cost of this asset. This deduction can be applied to assets acquired after 1 January A deduction aimed at providing support to students is calculated in the amount of CZK 200 per every hour spent at a taxpayer s premises on practical training, internships and educational activities as part of accredited study programmes at universities. Another positive change effective from the beginning of this year relating to professional and vocational education is the tax exemption of income earned by pupils and students during their practical training. This helps decrease the administrative burden of employers as the exemption from income tax now follows the exemption from social security and health insurance contributions. Markéta Kubíčková, mkubickova@kpmg.cz, tel.: Martin Jeníček, mjenicek@kpmg.cz, tel.: Complementary agreement on social security between CR and USA A complementary agreement amending the social security agreement between the Czech Republic and USA in effect from 1 January 2009 was submitted to parliament. This complementary agreement aims to remove the duplicity of health insurance payments made by U.S. citizens working at branches or subsidiaries of U.S. companies in the Czech Republic. These employees seconded to the Czech Republic must pay health insurance contributions despite the fact that they continue to contribute to the U.S. social insurance scheme which also includes health insurance. The reason for the duplicity of health insurance payments is the existence of two different systems as well as the fact that the existing social security agreement which was intended to eliminate this disparity only covers social security and not health insurance on the Czech part since the Czech Republic has, in contrast to the USA, a separate health insurance scheme. Consequently, the principle of exempting U.S. citizens seconded to the Czech Republic from health insurance in the state in which work is performed (i.e. the Czech Republic) cannot be applied.

6 On the other hand, persons seconded from the Czech Republic to the USA are not obliged to pay social and health insurance contributions if they continue to contribute to the Czech insurance scheme. The complementary agreement must on the Czech side be approved by parliament and ratified by the president. We will keep you informed about the date on which this agreement becomes effective. Iva Krákorová, tel.: Mária Marhefková, tel.: EU Extended exchange of information within the EU Savings Taxation Directive The Council of the European Union approved an amendment to Directive No. 2003/48/EC, on taxation of savings income in the form of interest payments ( the Savings Taxation Directive ), which member states had been working on since Under global pressure to adopt measures preventing tax evasion (FATCA, BEPS, OECD s global standard), the member states finally came to an agreement and plan to start applying the adjusted rules from January The new rules must be implemented by the member states into their local legislation before January The Savings Taxation Directive has already been in effect for eight years. It imposes a duty on the financial institutions of individual member states to report information about the interest income of EU resident individuals to local tax authorities which subsequently exchange this information with the appropriate tax authorities in other member states. This system also encompasses Switzerland, Lichtenstein, Monaco, Andorra and San Marino as well as the dependent or overseas territories of some member states such as the Netherlands Antilles and the British Virgin Islands. Certain states and territories have been granted an exception: instead of exchanging information they withhold a 35% tax on income at source and send revenues from the collected tax (75%) to the appropriate jurisdictions. This applies to member states such as Luxemburg and Austria. Luxemburg has also declared its will to exchange information about the income of taxpayers from 1 January The amendment to the Savings Taxation Directive extends the types of income of an interest nature to include income from life assurance and other income generated from investment funds. The amendment also introduces a look-through approach according to which financial institutions will have to ascertain whether an entity receiving interest has not only been established as an intermediary between a financial institution and an individual. The amended directive is fully compatible with the global standard for the automatic exchange of information which was presented by the OECD last month. Luděk Vacík, lvacik@kpmg.cz, tel.: Lenka Fialková, lfialkova@kpmg.cz, tel.:

7 CASE LAW Supreme Administrative Court: tax losses can also be claimed as deductible during tax inspections In its recently published Decision No. 9 Afs 41/2013 the Supreme Administrative Court ( the SAC ) again discussed the issue of claiming tax losses carried forward as deductible during a tax inspection. In the case concerned, a tax entity wanted to apply tax losses from previous years during a tax inspection. The tax administrator rejected the tax entity s claim and this decision was confirmed by both the appellate authority and the regional court. The tax administrator s argumentation derived from the case law relating to the Act on Administration of Taxes and Fees which did not allow the claiming of tax losses carried forward as deductible items during tax inspections. This was also later confirmed by Decision No. 8 Afs 111/2005 issued by the extended panel of judges of the SAC. However, the Supreme Administrative Court arrived at the conclusion that the situation had changed as a result of the effectiveness of the Tax Procedure Rules. While the tax administration at the time when the Act on Administration of Taxes and Fees was in effect aimed at determining and collecting tax in a manner not intended to reduce taxable income, the Tax Procedure Rules give preference to substantive accuracy, i.e. the rules primary aim is to determine tax correctly, which must be taken into account also during tax inspections. Consequently, if a tax entity desires to claim tax losses as deductible during a tax inspection, the tax administrator must take this into consideration when making any additional tax assessment. Nevertheless, the tax administrator itself is not obliged to search for any tax benefits in favour of a tax entity. The question is how a tax entity can apply tax losses carried forward during a tax inspection when the filing of an additional tax return is not allowed. In the case concerned, the tax entity s will was recorded in a protocol on the discussion of the tax inspection report. The tax entity s will to apply tax losses was also mentioned during the appellate proceedings. In accordance with the current case law of the SAC, tax losses can be applied not only in additional tax returns but practically also at any time during the entire action proceedings, for example, during the procedures for the removal of deficiencies (8 Afs 45/2012), during an appeal against the assessment of tax (2 Afs 77/2012) and during a tax inspection (9 Afs 41/2013). It is possible to claim tax losses as deductible during any action proceedings if these are carried out in compliance with the Tax Procedure Rules. It is even possible to apply tax losses where some circumstances related to the matter occurred at the time the Act on Administration of Taxes and Fees was in effect provided that some other conditions are also met. This involves cases such as losses previously assessed or tax that is subject to an inspection determined in compliance with the Act on Administration of Taxes and Fees. In Decision 9 Afs 41/2013 the Supreme Administrative Court allows for the application of tax losses even where a tax inspection was performed under the previous legislation and the appellate proceedings are carried out under the Tax Procedure Rules.

8 We recommend taking into account tax losses carried forward during any tax inspections and demonstrating the will to apply these losses in any appellate proceedings. The tax administrator cannot be expected to reflect tax losses on its own initiative without the tax entity s expression of will. Petr Toman, ptoman@kpmg.cz, tel.: Zdeněk Strmiska, zstrmiska@kpmg.cz, tel.: Supreme Administrative Court: the entitlement to a VAT deduction claimed by entities involved in fraudulent chains In its recently published Decision 8 Afs 43/ the Supreme Administrative Court expressed its opinion on entities involved in fraudulent chains reciprocally reselling advertising services. In this particular case, the price charged for the resale of advertising services had increased 22 times the original price set according to the price list. It was subsequently proven that this chain had been created for the purpose of claiming an unlawful entitlement to a VAT deduction. The Court had to deal with the question of whether or not the final component of the fraudulent chain was entitled to a VAT deduction on advertising services acquired for the increased price as discussed above. Based on existing case law, the entitlement to a VAT deduction can be forfeited through involvement in fraudulent chains if the taxpayers knew or could have known that they were participating in fraudulent taxable supplies. The Court came to the conclusion that the particular taxpayer could have at least known about his participation in fraudulent taxable supplies as he was unable to provide any rational reasons as to why he had paid the increased price. The Court was therefore of the opinion that the taxpayer s primary objective was not advertising through TV commercials. According to the Court, in this case, the entitlement to deduction cannot be awarded, not even in the amount corresponding to the arm s length price charged for advertising services, as the taxpayer s action constituted an abuse of rights, i.e. unlawful conduct that cannot give rise to the entitlement to a VAT deduction. Aleš Krempa, akrempa@kpmg.cz, tel.: Klára Kameníková, kkamenikova@kpmg.cz, tel.: CJEU on the right to deduct VAT affected by an incorrectly applied VAT regime and on repeated tax investigations In Case C-424/12 the Court of Justice of the EU ( the CJEU ) evaluated whether the EU VAT Directive and the principle of fiscal neutrality allow individual member states to impose sanctions by depriving taxpayers of their right to deduct VAT. This particular case involved an invoice, submitted for the purpose of claiming a VAT deduction, which was incorrectly issued without the simplification procedure by a third person. The recipient thus ended up paying the tax included on the invoice.

9 The VAT Directive prescribes that if it is the recipient who must pay VAT, the recipient must comply with all the formalities as laid down by individual member states. Under Romanian law, which was relevant in this particular case, if a supplier does not mark the invoice with a reverse-charge procedure note, the recipient must use the reverse-charge regime, must not pay the tax to the supplier and must add the reverse-charge procedure note to the invoice. The recipient applied for a VAT refund with the Romanian state. The Romanian tax authorities carried out a tax investigation and agreed with the refund. Subsequently, however, the tax authorities carried out another investigation which resulted in the cancellation of the applied right to deduct VAT including default penalties. The CJEU came to the conclusion that the company concerned cannot be granted the right to deduct VAT since it did not fulfil the formal requirements laid down by Romanian law and that the VAT relating to the issued invoice was paid without any legal grounds. Neither the VAT Directive nor the principle of fiscal neutrality precludes the recipient of the services from being deprived of the right to deduct VAT which the recipient paid to the service provider without legal grounds. In addition, the CJEU had to decide whether or not the tax authority violated the principle of legal certainty when it cancelled its original decision awarding the right to deduct VAT made after the first investigation and instead requested a refund of VAT together with penalties for default in the payment of tax after the second investigation. The CJEU held that the second investigation after which the tax authority cancelled its original decision was not at variance with the principle of legal certainty, providing the reasoning that the Romanian law in exceptional cases allows for a new tax investigation during the limitation period if any additional information is ascertained or any mistakes in calculations are discovered. In general, the CJEU s conclusions may directly affect the application of the Czech VAT Act. Another question is whether the conclusions relating to a second tax investigation may affect the practice generally applied by the Czech tax administration. Tax investigations are regulated by Czech Tax Procedure Rules, which state that a tax inspection can only be repeated upon the discovery of new facts or evidence which could not have been taken into account during the first tax inspection without any fault on the part of the tax administrator and which raise doubts as to the correctness, conclusive evidence and completeness of the determined tax. Since the CJEU admits that EU law does not significantly restrict the regulations applied in member states in relation to repeated tax investigations, we hence believe that this judgment of the CJEU will not have an impact on the common practice generally applied by Czech tax administrators. Aleš Krempa, akrempa@kpmg.cz, tel.: Iva Císařová, icisarova@kpmg.cz, tel.: Supreme Court of the Netherlands on hybrid financing instruments In February 2014, the Supreme Court of the Netherlands issued a decision in a case widely monitored by the public relating to hybrid instruments of financing. These involve, for example, instruments generating revenues classified by the source state as tax deductible interest whereas the other state to which income flows considers them dividends that are in many countries exempt from tax. This is

10 primarily due to a different classification of revenues from these instruments for tax purposes in two different jurisdictions. In this particular case, a Dutch company provided to its Australian subsidiary a loan which was subsequently swapped for an equity investment for which the Dutch company received preference shares with limited maturity. These preference shares bore the right of dividends which in the subsequent ten years were to be paid to the Dutch company in an amount set beforehand. At the end of this ten-year period, the Dutch company was to have received its monetary contribution back. Under Australian tax law, a contribution against which preference shares have been issued is classified as debt financing and the dividends paid were thus tax deductible for the Australian company. The Dutch tax authority arrived at the conclusion that these payments should have been treated as interest by the Dutch company receiving these payments and not as dividends exempt from tax based on the relationship between the parent company and its subsidiary. The Supreme Court, however, rejected the opinion of the Dutch tax authority and confirmed the possibility of exempting the payments concerned from tax. The Court claimed that taxpayers are by law free to choose the method of financing of their subsidiaries, selecting either debt or equity financing. The Court also refused to apply the abuse of rights concept as the fact that taxpayers use their freedom of choice does not mean that they are at variance with the intention of the law. The Supreme Court s decision is of interest at a time when there is ongoing discussion about how to approach methods of financing that are subject to different tax regimes in two various jurisdictions. For example, in its Base Erosion and Profit Shifting action plan from July 2013, the OECD marked the neutralisation of tax benefits arising from this manner of financing as one of its objectives for the following period. In mid-march, the OECD released several discussion drafts for public consultation including proposed measures that can be adopted by member states and implemented in national regulations and relevant double taxation treaties. For more details, please see the following link: Comments on these documents can be submitted until 2 May We will keep you informed about developments in this area. Luděk Vacík, lvacik@kpmg.cz, tel.: Eva Doložílková, edolozilkova@kpmg.cz, tel.: SLOVAKIA Slovak Ministry of Finance published a white list of countries The latest amendment to the Slovak Income Tax Act ( the SITA ) introduced a qualified withholding tax rate of 35% that entered into force as of 1 March According to the new provision, the new special tax rate shall apply to certain payments made by Slovak tax residents to taxpayers of nontreaty countries. With respect to other taxpayers, the standard local withholding tax rate of 19% continues to apply. A treaty country is defined as a country that is included in a list ( the white list ) published on the official web page of the Ministry of Finance. The white list includes all countries that have concluded a double taxation treaty or an agreement on the exchange of information on tax matters with the Slovak Republic. The list also includes countries who are parties to an international treaty providing for similar

11 provisions on the exchange of information as the above mentioned treaties, provided it is binding for both the country and the Slovak Republic. The white list currently includes only countries that have concluded a double taxation treaty with the Slovak Republic. However, based on the definition of the white list in the SITA, it should also contain other countries that have concluded agreements on the exchange of information and other similar treaties. Therefore, an update can be expected in the near future. Finally, we would like to add that payments flowing from the Slovak Republic to non-eu and non-eea countries need to be scrutinised as well, as particular provisions of EU law on fundamental freedoms may still be applicable. In view of the above we recommend that taxpayers pay increased attention to the tax treatment of cross-border payments to be made after 1 March We highly recommend an internal audit of such payments and can assist you in minimising potential risks or/and point out potential tax savings. Martin Zima, mzima@kpmg.sk, tel.: NEWS IN BRIEF On its website, the General Financial Directorate informs that the Tax Portal applications that have been newly programmed in relation to the authentication services of the Public Administration Portal are currently subject to trial testing. Information about the new service enabling the log in to a tax data mailbox or filings via data messages with the verified identity of a person making a filing by logging in to that person s data mailbox will be provided shortly. In March, the OECD released discussion drafts on Action 6 (Prevent Treaty Abuse) of the BEPS Action Plan. Comments on this discussion draft should be provided by 9 April 2014 at the latest, either electronically using the taxtreaties@oecd.org address or in writing sent to the address of the OECD. Work associated with Action 6 will be coordinated with another action plan point relating to hybrid entities (relevant discussion drafts were also released by the OECD in March). Another discussion draft released for public consultation relates to Action 1 (Tax Challenges of the Digital Economy). Comments can be submitted by 14 April. For more information, please see the following links: a The Chamber of Deputies is currently discussing the drafts of the following international treaties: o a double taxation treaty with Luxembourg o a double taxation treaty with Kosovo o a protocol to the double taxation treaty with Singapore o an agreement on the exchange of information on tax matters with Andorra.

12 On the Ministry s website, the Minister of Labour and Social Affairs published her priorities for the period of her office. These involve, for example, an increase of the monthly minimum wage to CZK 10 thousand, the cancellation of the Pillar 2 pension scheme, the introduction of discounts on social insurance for persons that are difficult to employ, and the application of the law on childcare groups. Informace zde obsažené jsou obecného charakteru a nejsou určeny k řešení situace konkrétní osoby či subjektu. Ačkoliv se snažíme zajistit, aby poskytované informace byly přesné a aktuální, nelze zaručit, že budou odpovídat skutečnosti k datu, ke kterému jsou doručeny, či že budou platné i v budoucnosti. Bez důkladného prošetření konkrétní situace a řádné odborné konzultace by neměla být na základě těchto informací činěna žádná opatření.