Tax & Legal News
Welcome to the latest issue of Deloitte Czech Republic’s Tax & Legal News, giving you all the latest local and international tax information in one newsletter. As always, you can read the newsletter in fulltext below or download the PDF file.
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In This Issue
CZECH TAX NEWS
Amendment to the Income Tax Act
The Amendment to the Act on Social Services including the Amendment of the Income Tax Act was published in the Collection of Laws under 29/2007 Coll. as of 20 February 2007. The amendment states that the allowance pursuant to the Social Services Act for care of a related person or another person entitled to such a allowance shall be exempt from personal income tax. The amendment took effect on 20 February 2007 and the amendment will also apply to the tax period that commenced in 2007.
List of Corporate Legal Forms and Taxes pursuant to EU Directives
On 9 February 2007, the Czech Ministry of Finance published a note commenting on Section 19 (3) of the Income Tax Act on its website. The note lists corporate legal forms and taxes pursuant to various EU directives:
- Council’s Directive 90/435/EC on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States;
- Council’s Directive 90/434/EC on the common system of taxation applicable to mergers, divisions, transfer of assets and exchanges of shares concerning companies of different Member State;
- Council’s Directive 2003/49/EC on a common system of taxation applicable to interest and royalty payments made between associated companies of different Member States.
Judgement of the European Court of Justice on the Taxation of Dividends
On 6 March 2007, the European Court of Justice (ECJ) ruled in the case number C-292/04, the Meilicke case, that different taxation of dividends paid from sources abroad and sources from the respective home country represent a restriction on the free movement of capital. Between 1995 and 1997, Mr. Meilicke, who is a German tax resident, received dividends from shares he held in Danish and Dutch companies. The German law effective in the said period allowed offsetting tax allowances against income from dividends. The tax allowance, however, related neither to payments of dividends coming from a source in Germany and made to the benefit of a German tax resident, nor to the distribution of dividends coming from a source abroad and paid to the benefit of a German tax resident. Thus, Mr. Meilicke was not allowed to claim the tax allowance in the period when the dividends were to be paid out. At that time, the tax allowance amounted to 3/7 of the gross dividend amount.
Real estate funds — VAT issues
A complex issue regarding the taxation of special real estate funds was discussed within the Coordination Committee of the Ministry of Finance and the Czech Chamber of Tax Advisors. There are several potential VAT issues related to this type of funds that are not covered by the current wording of the Czech VAT Act. These include, the rules for recovering input VAT related solely to the activities of the real estate fund, which as an open-ended mutual fund does not represent a separate legal entity. Furthermore, the Ministry of Finance confirmed that in the absence of specific rules, the current valid provisions would apply. However, it can be expected that certain areas of the VAT Act would need to be amended to reserve a uniform VAT application for the transactions of the real estate funds.
Cash accounting schemes
The EU council adopted a decision authorising several EU Member States to operate an optional cash accounting scheme. Starting 1 January 2007 a taxable person opting for this scheme must postpone deducting input VAT until the payment for goods or services has been made to its supplier. Conversely, suppliers of goods and services must under this scheme account for VAT when they receive payment from their customers. This cash accounting scheme operates in Estonia, Slovenia, Sweden and the UK for the period of three years (until 31 December 2009) under certain additional country-specific conditions.
Rules combating carousel fraud in France
On 1 January 2007, France introduced new rules for combating carousel frauds, which also affect companies that make intra-community supplies to or from France. These suppliers must be able to demonstrate that all necessary steps and appropriate due diligence was undertaken to ensure that their clients and suppliers are reliable.
The new rules generally disallow an exemption of an intra-community supply or disallow the recovery of French VAT unless it can be demonstrated that:
- customers carry out actual business activities;
- suppliers that supply French businesses with goods and charge VAT are not involved in a carousel fraud scheme; and
- all VAT due during the previous supply of the same goods has been paid to the tax authorities.
These new rules are a reaction to the growing number of carousel frauds and recent decisions of the ECJ in this area.
Management of closed-ended funds
An opinion of the Advocate General was recently delivered in case number C-363/05 JP Morgan Fleming The Association of Investment Trust Companies, a case concerning the scope of VAT exempt management of special investment funds. The main question in the case deals with the possibility to exempt the management of investment trusts (or more broadly of closed-ended funds in general) from VAT. This case follows the recent decision of the ECJ in the Abbey National case, which defined certain conditions for exempting the management of open-ended funds from VAT. The Advocate General confirmed the view of the taxpayer that the management of special investment funds should also include the management of closed-ended funds. Furthermore, the Advocate General stated that the provisions of the EU Sixth Directive in this respect have direct effect in favour of those who under national law cannot enjoy such exemption.
VAT Deduction — costs incurred prior to becoming a taxable person
The ECJ recently delivered its decision in case number C-435/05 Investrand, a case concerning the right to deduct input VAT incurred by an entity for its activities referring to a period when the entity was not a taxable person. The main issue was the possibility to recover input VAT incurred by Investrand for advisory services related to a sale of shares effected prior to when Investrand became a taxable person. The ECJ refused such recovery of input VAT even though it was not referring to the fact that the company was not a taxable person at the given time. Nevertheless, such result is substantiated because the following general conditions for reclaiming input VAT as summarised by the ECJ were not met:
- Costs for the services form part of the general expenses of the economic activities of the taxable person;
- Such expenses are components of costs for output transactions that give rise to the right to deduct input VAT.
Basis of Assessment for Social Security
As of 1 March 2007, the Czech Government’s Regulation on determination of the basis of assessment for social security payments and the contribution to the state employment policy paid by the employer was published in the Collection of Laws under 39/2007 Coll. The Regulation took effect upon its publication as of 1 March 2007. Pursuant to the Regulation, the basis of assessment for a company to determine the social security amount and the contribution to the state employment policy corresponds to the total sum of assessment base of all the company’s employees.
If a company paid social security and the contribution to the state employment policy for the calendar months from the beginning of 2007 to 1 March 2007 (i.e. from the day on which the regulation took effect) from the aggregate assessment bases defined in the Regulation, the social security and contribution to the state employment policy is considered paid in compliance with Act 589/1992 Coll., on social security and contribution to the state employment policy, and in compliance with this Regulation.
If a company did not pay social security and the contribution to the state employment policy pursuant to this Regulation, its assessment base for the calendar month of March 2007 amounts to the sum of the assessment bases of the company’s employees for the period between 1 January 2007 and 31 March 2007.
Facilitation of Registered Share Transferability
At its 13th meeting, the Chamber of Deputies of the Parliament of the Czech Republic will discuss, in the second reading, a Senate draft of a law amending the Commercial Code 513/1991 Coll., as amended, which deals with transferability of registered shares.
According to the explanatory report of the legislation draft, the aim of the law is to eliminate the existing possibility to block a transfer of registered shares owned by minority shareholders by the general meeting of the company without any reason. The transferability of registered shares may be limited, according to the currently effective law, but not excluded. Usually, such a transfer is subject to approval by the company’s general meeting. If the transfer is not approved by the majority shareholders, the minority shareholders have no option to sell their shares.
The new legal regulation introduces an obligation for companies to list reasons in their Articles of Association that allow the withholding of approval of a transfer of registered shares, and also an obligation of the company to buy such shares at a price corresponding to their value, if a shareholder requests so. If the responsible body of the company fails to decide on the issue within two months after it receives the request, the approval is considered to have been given.
It is suggested that the amendment will take effect on 1 July 2007 and that there would be a 12-month period during which joint stock companies would be obliged to adjust their Articles of Association to the new legal regulation. After the 12 months, the Articles of Associations that would allow transferability of registered shares only subject to the approval of a company body would cease to be effective.
Acquisition of Agricultural Land and Forests by Foreign Entities
At its 13th meeting, the Chamber of Deputies of the Parliament of the Czech Republic will also discuss a government proposal for the amendment of Foreign Exchange Act 219/1995 Coll., as amended, and of Act 95/1999 Coll., on conditions of the transfer of agricultural land and forests from state ownership to another entity, as amended, that enables foreign entities to acquire agricultural land and forests.
The presented proposal aims at harmonising the currently valid legislation with the obligations the Czech Republic has in relation to its EU accession.
According to the proposal, foreign citizens would be allowed to acquire agricultural land and forests without being obliged to have three-year permanent residence in the Czech Republic, to prove their clean criminal record, professional competence and knowledge of the Czech language. If the proposal is adopted, foreigners would need to register at the relevant agricultural agency to qualify for acquisition of agricultural land and forests.
The amendment would eliminate shortcomings in the current legislation where the requirement for foreigners to have three-year permanent residence in the Czech Republic goes beyond the conditions agreed on during the EU-accession negotiations between the Czech Republic and the EU. Moreover, the amendment is slightly problematic because once a foreigner acquires a permanent residence permit, they become a “national” according to the law.
Foreigners would also be granted the right to acquire “secondary dwellings”, which will be newly defined as flats, family houses and structures for leisure activities and land built-on or to be used for the construction of family houses or structures for leisure activities. To qualify, foreigners would have to present only a confirmation of a temporary residence permit or another permission pursuant to the Act on the Residence of Foreigners on the territory of the Czech Republic.
Tax Obligations for March/April
|Friday, 2||Income tax||
|Monday, 12||Excise duty||
|Thursday, 15||Income tax||
|Monday, 26||Excise duty||
|Value added tax||
|Tuesday, 27||Excise duty||
|Monday, 2||Income Tax||
|Tuesday, 10||Excise duty||
|Friday, 20||Income Tax||
|Tuesday, 24||Excise duty||
|Wednesday, 25||Excise duty||
|Value added tax||
|Monday, 30||Income Tax||
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