Summary of legislative changesSeptember 2009
Václav Baňka IntroductionWelcome to the September issue of Financial Update, a monthly bulletin focusing primarily on Czech and European tax and accounting legislation news, published by KPMG Czech Republic. Starting from next year, major changes are expected in the VAT area in the Czech Republic and the European Union: relevant information about the changes can be found in the first article of this issue of Financial Update. We would also like to draw your attention to the possibility of obtaining subsidies from EU structural funds and have included an outline of funding options, including deadlines for filing the applications. We hope that you will find the information contained in this edition of Financial Update useful in your work. Taxation and accountingScrap subsidy approvedOn 9 September 2009, the Chamber of Deputies passed the Act on Supporting Economic Growth and Social Stability (print 743), which had been vetoed by the President in July. The Act introduced the “scrap subsidy”: financial support of CZK 30,000.00 granted to an individual for purchasing a new car costing up to CZK 500,000.00 with CO2 emissions lower than 160 grams per kilometre. The car must also comply with the emission limit of EURO 4 and above. The individual must dispose of a car older than 10 years, which he/she has owned for at least two years, must not have any income from business or other independent gainful activity and must not be a VAT payer or a person liable to VAT. For purchase of an electromobile, a car running on hybrid fuel or compressed natural gas and costing up to CZK 700,000.00, the subsidy will be CZK 60,000.00. The subsidy can be applied only after the relevant regulation is issued by the Government. In the area of employment and social support, unemployment benefits have been increased for a temporary period from 1 November 2009 to 31 December 2010, and the period for which benefits are paid has been extended. The range of families receiving child contribution has been extended for a temporary period (from 1 July 2009 to 31 December 2010), and the contributions have been increased temporarily by CZK 50.00 in all age categories. The Act also changes the regulation of providing wage compensation in the first 14 days of inability to work for persons with unevenly scheduled working hours. The authors of the article:Petr Toman, ptoman@kpmg.cz, Tel.: 222 123 602 VAT package: changes in 2010Starting from 1 January 2010, the Czech Republic is to implement major changes to the VAT Act as the first phase of the “VAT package”. In August, the Government accordingly submitted the respective amendment to Parliament, and suggested discussing it in an accelerated procedure. The proposed amendment contains a modification to a number of provisions of the Act, changing some of its existing principles. Place of taxable supply when rendering services The main change concerns the general rules for determining the place of supply for services rendered between tax entities (usually services provided between business entities – “B2B” services). From now on, the place of supply for these services should be the service recipient’s country. This extends application of the “reverse charge” principle, in contrast to the current status. However, exceptions will remain, for example, for property-related services, education services and some other services. Taxpayers will also have to include services subject to the reverse charge in their EC Sales list (as they do for delivery of goods to the EU), while the report will be filed on monthly basis, save exceptions, and exclusively in electronic format. These changes will require taxpayers to carry out a detailed review of all services rendered and received in terms of VAT implications. This will involve adjusting their invoicing and information systems for the purpose of compiling the VAT return; leaving aside additional administrative expenses, the final effect on the taxpayers may be both positive and negative (for taxpayers with a limited entitlement to deduct VAT). In practice, the change will affect, for example, work carried out on a movable item (repairs, assembly work, etc), the long-term lease of a means of transport, administrative services not included under data services, accounting services, intermediary services provided to entities resident outside the European Union, and transportation services. Reclaiming VAT from other EU states The procedure for reclaiming tax paid in an EU member state other than that where the taxpayer is resident and registered for tax should be simplified substantially. Applications filed after 1 January 2010 (including those for 2009) should be filed in electronic format only, in the member state where the VAT payer is resident, not in the country where the VAT was paid, as it is now. Taxpayers resident in the Czech Republic could thus submit an application in the Czech Republic for all countries where they claim a VAT refund. Change in the rate In line with an agreement reached by EU finance ministers, some services are to be permanently transferred from the basic VAT rate to the reduced rate in the first half of this year. The proposal is a part of a separate amendment to the VAT Act, which means that the change in the rate may occur even before 1 January 2010. It concerns certain labour-intensive services, such as hairdressing and catering, repairs of residential buildings, bicycle repairs, and clothes and soft furnishings repairs. Books taking the form of optical and sound media will also be permanently classified in the reduced-rate category. Arm’s-length price between related parties The amendment to the VAT Act introduces rules regarding adjusting the tax base to the arm’s-length price level where transactions have been executed between related parties. The definition of a related party is rather broad: it covers entities related by capital (a 25% share of the registered capital or voting rights is sufficient) or otherwise, as defined for the purposes of group registration, as well as e.g. the taxpayer’s employees, close persons (relatives). In some respects, the definition is even wider than that for the purposes of the Income Tax Act. However, the duty to determine the tax base at the arm’s-length price level is limited to situations where applying another price might result in a reduction of the budget income. For instance, the provisions shall not apply to transactions between two VAT payers that are fully entitled to deduct VAT. Exemption of the transfer of a business share In line with European legislation, the proposed amendment specifies that the transfer of a business share as well as a share in a cooperative are supplies exempted from VAT without entitlement for deduction. Sale of a business share, and mediating such transaction, will therefore no longer be viewed as supplies not subject to VAT, but as supplies exempt from VAT, the same as for the sale of shares. This means that starting from the effective date of the amendment, claiming a deduction for related supplies will not be possible. The authors of the article:Petr Toman, ptoman@kpmg.cz, Tel.: 222 123 602 Proposed amendment to the Excise Duty ActIn August, the Government submitted to the Chamber of Deputies a draft amendment to the Excise Duty Act, which will incorporate Council Directive 2008/118/EC into Czech law. Member states are obliged to implement the directive by 1 April 2010; therefore the government has suggested passing the amendment at the first reading. The proposed amendment also contains changes in some provisions regarding excise duty on beer, based on the practical experience of taxpayers and tax administrators. The Directive establishes a legal basis for an electronic control system for the intra-community movement of products subject to excise duty – the EMCS (Excise Movement and Control System). The electronic system, with a single electronic transit document, will replace the existing “paper” system of four documents. The time allowance for transactions within the customs systems will thus be reduced to three days. Businesses will not have to submit the documents to customs offices, as they will be automatically available in the EMCS. The customs officers expect the new system to eliminate tax evasion thanks to easier monitoring of the movement of goods. In July, Commission Regulation (EC) No. 684/2009 implementing Council Directive 2008/118/EC as regards computerised procedures for the movement of excise goods under suspension of excise duty was published in the Official Journal of the European Union. The European Commission also resumed publication of the EMCS Newsletter – a semi-annual periodical providing information about recent developments in the EMCS system. The newsletter is available on the following website. The authors of the article:Petr Toman, ptoman@kpmg.cz, Tel.: 222 123 602 Mortgage interest deductionThe Ministry of Finance has published Instruction D- 324 on its website, specifying the conditions for claiming interest paid on loans for housing needs as an item that can be deducted from an individual’s income tax base. Interest on a loan for housing purposes may be deducted by taxpayers from the tax base. In cases where the taxpayer refinanced the original loan or mortgage through another loan, it was not completely clear from the relevant provisions of the Income Tax Act whether the taxpayer may consider interest on such a refinancing loan as interest on financing housing needs. By issuing the Instruction, the Ministry of Finance has confirmed that the manner of loan financing is not decisive factor for claiming the deductible item. Therefore, interest on loans taken by the taxpayer to repay subsequent mortgage loans or construction saving loans that refinance previous loans for financing housing needs (for instance a second refinancing of the original mortgage loan) can be deducted from the tax base. The authors of the article: Iva Krákorová, ikrakorova@kpmg.cz, Tel.: 222 123 837 LegislationDrawing of EU structural funds – newsReal Estate Programme In July, the Ministry of Industry and Trade announced the 2nd Call for Proposals for the Real Estate Programme under the Operational Programme Enterprise and Innovation (OPEI). The programme supports projects involving construction and development of commercial real estate, including related infrastructure, for instance business park development, reconstruction of buildings, construction of properties to let, and project documentation preparation. The programme now also encourages renewable and secondary energy sources (heat pumps, co-generation units or solar panels). A prerequisite is that the support recipient must consume the power thus generated as part of the activity carried out in the building, i.e. it must not sell the generated power. The Call for Proposals is also open to large businesses, although only for projects to be implemented in the Czech Republic, excluding Prague. The user must own the real estate, and the activity carried out must fall under the categories of processing industry (CZ-NACE 10-33), technology centres and strategic services. Under the Real Estate Programme, support of CZK 1-500 million can be granted (CZK 1-50 million for projects involving project documentation preparation). The total allocation for the Call is CZK 4 billion; the maximum amount of public support ranges from 36 to 40 percent of eligible project costs. Registration of electronic application for support will start on 1 September 2009 and should close on 31 March 2010. For more information, see: http://www.czechinvest.org Other EU funding possibilities open to large businesses under the OPEI Programme Apart from the Real Estate Programme, the following Calls for Proposals are now open to large enterprises as part of the OPEI programme:
EU funding possibilities for large companies under the OPHRE Programme (Operational Programme Human Resources and Employment) Regardless of size, businesses may apply for support for employee training under the following Calls within the OPHRE Programme:
The authors of the article: Jan Linhart, jlinhart@kpmg.cz, Tel.: 222 123 617 European UnionECJ Damseaux ruling (C-128/08)The ruling in the case of Mr. Damseaux versus the Belgian tax authorities, issued by the European Court of Justice in July 2009, concerns bilateral tax treaties between EU member countries. Mr. Damseaux, a Belgium tax resident, received dividends from a French company that was subject to withholding tax in France at a rate of 25%. The tax treaty between Belgium and France allows withholding a tax in the country of source, at a maximum of 15%; therefore, Mr. Damseaux received a tax refund from the French party, in the appropriate amount. Although the treaty contains provisions on eliminating double taxation by crediting the tax paid, because of a change in Belgian law, it was not possible for Mr. Damseaux to credit the tax in Belgium. Instead, the Belgian authorities taxed the dividend again, at 15% (of the tax base after deducting the tax paid in France). Mr. Damseaux has contested the procedure as discriminatory, as national (Belgium) dividends are taxed only once, through a final withholding tax of 15%. The European Court of Justice stated that it is not competent to interpret tax treaties between EU member states, nor can it rule on a possible infringement of such arrangements. It also emphasised that any disadvantages for the taxpayers that may arise from the parallel exercise of tax competence by two different member states do not constitute the violation of free movement of capital or other freedoms set out in the EC Treaty. The ECJ stated that the European law does not presently contain any criteria regarding the distribution of competences between member states in eliminating double taxation within the EU. The ECJ ruling implies that member states not allowing effective elimination of double taxation under their bilateral treaties are under no obligation to amend such treaties. The authors of the article: Martin Houska, mhouska@kpmg.cz, Tel.: 222 123 843 News in briefNews in brief
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