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Direct taxes

Czech tax news

The Finance Ministry’s Austerity Package for Lowering the Budget Deficit Has Been Published in the Collection of Laws

On 20 October 2009, Act No. 362/2009 Coll. amending several acts related to the Czech state budget bill for 2010 was published in the Collection of Laws. With effect from 1 January 2010, this act will increase both VAT rates by 1%, the excise tax will be increased, and the maximum basis of assessment for social security and health insurance contributions will be increased to 72 multiples of the average monthly salary.

In the area of income taxation, minimum changes will be applied. The income tax rate for individuals will remain at 15% and the previously approved decrease in the corporate income tax to 19% remains unchanged. Nevertheless, with effect from the New Year, expense allowances for certain individuals, ie for individuals involved in business under special regulations (attorneys-at-law, notaries, tax advisors, etc) and for individuals who are engaged in another self-employed gainful activity (ie author’s fees), will decrease from 60% to 40%.

Real Estate Tax

Based on Act No. 362/2009 Coll, the following changes will take place in respect of real estate taxation:

• The doubling of the rate of tax on land located within built-up areas and courtyards, building lots and other areas; and
• The doubling of basic tax rates, except for buildings which serve for other business activities.

Currently, the increase in tax rates is defined directly by the Act on Real Estate Tax, and is therefore applicable to all of the defined types of real estate, regardless of the municipality in which they are located.

However, municipalities still have the possibility to amend the real estate tax amount by setting coefficients within a generally binding regulation, whereby this regulation must have come into force by 1 August of the preceding year.

For the 2010 taxation period, the deadline for municipalities to issue a regulation is extended to 30 November 2009. The regulation must come into force by 1 January 2010 at the latest. Within the same deadline, municipalities may reconsider the exemption of agricultural land from the property tax. The information about the issued regulations should be available at the municipal office which issued the relevant generally binding regulation.

If there are no other changes which are decisive for the tax liability of the real estate taxpayer, the taxpayer does not have to submit a new tax return due to the increase in the tax rates. The local tax authority automatically assesses the real estate tax in the amended amount.

Contrary to the original assumption, there is no change in the real estate transfer tax rate; this rate remains at 3%.

The maximum assessment base for social security and health insurance

On 8 October 2009, Governmental Regulation No. 339/2009 Coll. was published in the Collection of Laws. This regulation determines the amount of the assessment base and the recalculation coefficient for pension insurance purposes. Pursuant to this regulation, the monthly average salary for the purpose of calculating the maximum assessment base for social security and health insurance for 2010 is CZK 23,709.

Reflecting the changes approved under the austerity package of the Finance Ministry defining the new maximum assessment base for 2010 as a 72 multiple of the average salary, the amount of the maximum assessment base for 2010 increases to CZK 1,707,048. The insurance for 2010 is thus capped at CZK 580,397 for the employer and CZK 187,776 for the employee.

Indirect taxes

Brief news

Res Judicata Obstruction Principle Amendment to the Value Added Tax Act – VAT Rates Increase

On 25 September 2009, the Chamber of Deputies approved a draft amendment to increase both VAT rates by 1% as of 1 January 2010. If the draft amendment to the VAT Act is approved by the Senate and signed by the President, the VAT tax rates effective in the Czech Republic as of 1 January 2010 will be as follows: the basic VAT rate – 20%; and the reduced VAT rate – 10%

The transitional provisions of the draft amendment outline, among other things, different schedules for prepayments received before the end of 2009 relating to supplies rendered after 1 January 2010, the taxation of certain supplies rendered on an ongoing basis in the period between the end of 2009 and beginning of 2010, and VAT recovery in the case of finance lease contracts entered into before the effective date of the amendment. Corrections of the tax base or tax rates made subsequent to 1 January 2010 in respect of supplies that have been taxed before the end of 2009 are being dealt with separately.

Amendment to the Value Added Tax Act – Changes in Determining the Place of Supply

The amendment to the VAT Act is included in the agenda of the meeting of the Chamber of Deputies, which is to begin on 20 October 2009. Among other things, the amendment implements the European directives regarding the new rules for determining the place of supply. At the meeting, the amendment is to be discussed in its second and third readings and submitted to further discussion by the Senate of the Czech Republic.

Amendment to European VAT Legislation

In September 2009, the European Commission proposed a motion to temporarily adjust the rules for VAT application related to trade with selected goods and services. In this respect, domestic supplies between two tax payers would be subject to taxation in a similar manner as acquisitions of goods from other EU member countries. As a result, instead of being assessed by the supplier, VAT could be self-assessed by the customer who, subject to meeting the general conditions, would have the option to seek recovery of this tax.

EU member states could require this taxation treatment only for supplies of selected goods (eg mobile telephones, microprocessors, perfumes and precious metals). A service taxed by the customer could be the sale of emission allowances.

As the Ministry of Finance of the Czech Republic has already shown its interest in implementing a similar VAT regime in the Czech VAT Act relating to the treatment of certain supplies, we can expect this amendment to the European VAT legislation, if approved by the Ministry of Finance, to be utilised and reflected in the wording of some of the future amendments to the Czech VAT Act.

Position of the Person Liable for Tax

At the beginning of October, the European Court of Justice expressed its view on whether certain activities are deemed taxable when the income arising from such activities is not intended to generate profit, but only to partially recover incurred losses, the income also being subsidies provided by entities which do not directly participate in the results of the particular entity.

In addressing case No. C-267/08 SPÖ Landesorganisation Kärnten, in line with its previous rulings, the Court once again decided that such income is not subject to VAT. In our view, the above-mentioned ruling can impact the Czech VAT payers who are currently running foundations and other not-for-profit projects.

Grants and incentives

Czech Republic

Support for the Formation of Industrial Zones and Corporate Real Estate Restoration

Applications for subsidies for restoring corporate real estate and forming industrial zones will be accepted from 1 September 2009 to 31 March 2010. A total of CZK 4 billion will be distributed among applicants and individual subsidies may amount up to CZK 0.5 billion. Subsidies will be provided to business entities of all sizes for the projects focusing on the formation of industrial zones, renovation of business premises, construction of premises to be leased (only for territorially self-governing units), and preparation of project documentation.

Employee Training Infrastructure

On 1 September 2009, the second call within the Training Centres programme focusing on the formation of employee training infrastructures, particularly in the processing industry, was announced. Application for subsidies will be accepted from 1 November 2009 to 31 May 2010. Individual subsidies may amount up to CZK 100 million. Business entities regardless of their size and corporate or citizen associations can apply. The programme supports the construction and restoration of training centres, including furniture, training aids and programmes, etc.

Science and Technology Parks and Enterprise Incubators

Applications for subsidies for the “Prosperity“ programme will be accepted from 1 November 2009 to 30 June 2010. Subsidies will be provided for projects focusing on the foundation and operations of science and technology parks, enterprise incubators and transfer technology centres. All business entities regardless of their size, science and research organisations, universities, other educational institutions and self-governing units can apply for the subsidy. Up to CZK 300 million may be granted per project, and a total of CZK 4 billion will be distributed among applicants.

Reduction of Industrial Pollution

Applications for subsidies for projects focusing on reducing industrial pollution and decreasing environmental risks will be accepted in October and November 2009. Subsidies will be predominantly provided for projects involving the renovation or the purchase of technologies for monitoring and reducing pollution, and creating BAT centres, information centres, etc. Applications can be sent to the State Environmental Fund by business entities regardless of their size. The maximum amount of the subsidy has not yet been determined.

Slovak Republic

Support for Innovations in Businesses

On 3 September 2009, the Slovak Ministry of Economy announced the call in the Competition and Economic Growth operational programme, specifically Priority Axis 1 – Innovation and Competition Growth, Regulation 1.3 – Support for Innovation Activities in Businesses. The call focuses on projects involving industrial research, experimental development and innovations, support for the introduction of quality management systems, support for industrial rights protection, support for accreditation and certification, and support for the implementation of technical standards in production and services. Only small and medium-sized businesses based outside Bratislava are eligible for the subsidy. Applications may be submitted until 3 December 2009.

Support for Air Protection Projects

Applications for subsidies under Priority Axis 3 Air Protection and Minimising of Adverse Impacts of the Climate Change for projects focusing on reducing emissions of basic and other pollutants in the air, specifically solid pollutants, SO2, NOX, benzene, VOC, NH3 and heavy metals will be accepted until 3 November 2009. The maximum subsidy for one project is EUR 25 million. Predominantly entities from the public administration sector and certain specified business entities are eligible for the subsidy.

Planned Calls in Slovakia

Research and development operational programme:

• Renewal and creation of research and development technical infrastructure – the anticipated date of the call is November 2009; the sum allocated for the call is EUR 80 million.
• Renewal and creation of research and development technical infrastructure in the Bratislava region – the anticipated date of the call is November 2009; the sum allocated for the call is EUR 40 million.

Employment and social inclusion operational programme:

• Support for keeping persons with families on the job market through employer innovation programmes – the anticipated date of the call is November 2009; the sum allocated for the call is EUR 1,5 million.

Other

Double Taxation Treaty between the Czech Republic and Cyprus

On 7 October 2009, the new Double Taxation Treaty between the Czech Republic and Cyprus, which was signed on 28 April 2009, was ratified. The new treaty will replace the current Double Taxation Treaty with Cyprus, which was concluded on 15 April 2008. An integral part of the new treaty is the protocol including the most favoured nation clause, which is related to the taxation of industrial royalty fees and which entitles the relevant authorities of the contractual states to deny the advantages arising from individual clauses of the treaty after an agreement of the relevant authorities and upon fulfilment of the particular conditions.

This treaty will most likely come into effect on 1 January 2010. A comparison of the current and new treaty in respect of the withholding tax rates related to selected types of income is outlined in the table below:

Tax Liabilities in November 2009 and December 2009

Source: www.mfcr.cz, www.czso.cz

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