Summary of legislative changes

February 2010

TAXATION

Latest news regarding social security contributions for the first half of 2007

As we already informed you in the previous issue, the Supreme Administrative Court is currently considering a cassation complaint lodged by the Social Security Administration against a ruling of the Liberec Branch of the Regional Court of Ústí nad Labem, concerning social security contributions for the first half of 2007. According to available information, the Supreme Administrative Court’s decision cannot be expected until March.

In January the Ministry of Finance stated that until the Supreme Administrative Court issues its final decision, employers need not submit additional tax returns. The statement does not specify which court decision this refers to. Nevertheless, in the context of current events, we can assume that the ruling of the Supreme Administrative Court will be considered definitive by the Ministry of Finance. The Ministry of Finance also declared that due to the exceptional circumstances, no penalties for a late submission of the additional tax return will be charged and that the tax authorities will summon individual organisations with an obligation to submit an additional tax return to do so. In connection with this, it should be pointed out that there were concerns that tax administrators would summon all taxable entities to file additional tax returns in order to prolong the time limit for assessing 2007 income tax. However, a previous ruling of the Supreme Administrative Court (7 Afs 36/2008) stated that an “act solely and deliberately carried out in an attempt to prolong the time limits” cannot have such effects.

The entire press release is available on the Ministry Finance website, www.mfcr.cz, in the Taxes and Customs section.

The authors of the article:

Eva Doložílková, edolozilkova@kpmg.cz, Tel.: +420 222 123 696
Václav Baňka, vbanka@kpmg.cz, Tel.: +420 222 123 505

Income Tax Act: changes with an international element

Clearance of withholding tax in a tax return

In June 2009 an amendment to the Income Tax Act came into effect, allowing tax residents of EU and EEA countries to apply related expenses against certain types of income if they submit a tax return in the Czech Republic. This recent change concerns income subject to withholding tax (e.g. interest, royalties, rental or income from independent activity). The tax withheld by Czech taxpayers is then deducted from the tax liability in the tax return. Such a choice could be a tax-effective solution, especially when a foreign entity does not report large profits generated from activities in the Czech Republic or even reports a loss, or if, as the case may be, it cannot include the tax paid in the Czech Republic in its tax liability abroad. The tax statement can be submitted by the same deadlines that apply for Czech taxpayers. Foreign entities naturally have the option not to submit a tax return. In such cases, the tax administrator will consider the withheld tax as their final tax liability in the Czech Republic.

Cancellation of re-classification of interest on dividends

The same amendment changed the provisions of the Income Tax Act that allow the tax administrator to reclassify certain types of payments, in particular interest that does not satisfy thin capitalisation rule or the difference between the price agreed between related parties and the standard market price, to dividends, and subsequently tax them. This rule was previously applied to all payments to foreign countries (including the EU) but not to payments to Czech tax residents, which was viewed as discrimination from the perspective of EU law. As of 1 January, 2010 the provision on re-classification will therefore not apply to payments to tax residents from EU or EEA member states. However, this amendment does not apply to reclassified amounts paid in 2009, and the obligation to levy withholding tax on them as dividends under Czech law remains. The tax must be paid and the appropriate forms submitted by the month following the end of the tax period, i.e. usually by the end of January. In individual cases there should be a consideration of whether and when withholding tax should be levied.

Tax exemption of royalties in compliance with EU Directive

On 1 January 2011 the Amendment to the Income Tax will take effect. The Amendment allows tax exemption of royalties paid from the Czech Republic to a member of group companies that is resident in EU countries (and in Switzerland, Norway and Iceland). The tax administrator’s decision must first be obtained in order to claim the exemption. This procedure can take up to several months, and we therefore recommend submitting a request for issue of the administrator’s decision sufficiently in advance.

The author of the article:

Martin Houska, mhouska@kpmg.cz, Tel.: +420 222 123 843

VAT – credit notes no longer subject to VAT?

Over the last few months the matter of adjusting the VAT tax base where a price is changed (lowered) after the taxable supply is made or even returned, was resolved by the Coordination Committee of the Chamber of Tax Advisors and the Ministry of Finance.

At present, suppliers generally issue a credit note in respect of the supply in such a situation. Under Section 42 of the VAT Act, this can be a credit note that reduces the VAT tax base of the original taxable supply or, as the case may be, the supplier can decide not to adjust the tax base of the original taxable supply and issue a credit note excluding VAT. The option to issue a credit note excluding VAT was the subject of the Coordination Committee meeting.

The Ministry of Finance confirmed that when reducing a price the supplier can decide whether to adjust the VAT base and issue a credit note pursuant to Sections 42 and 43 of the VAT Act, or only issue a “financial credit note” and not adjust the tax base.

However, the Ministry of Finance believes that if the original supply or part of it is returned and the supplier also does not adjust the original tax base, the right of the customer (VAT payer) to deduct VAT does not have to be retained. According to Ministry of Finance representatives, the justification for this is that the customer did not use the supply for business purposes, since it returned the supply or part of it to the supplier.

In practice, this interpretation would mean that in cases in which the supply or part of it is returned, the supplier is virtually always forced to adjust the tax base and issue a “tax” credit note. In the opposite case, the customer will lose its right to deduct VAT on the original supply, and therefore faces the risk of a retrospective VAT assessment with the corresponding penalties. Therefore, in such a case, issuing only a financial credit note without adjusting the VAT base is only theoretically possible.

As the opinion of the Ministry of Finance could have a significant impact on current practice, the discussions are expected to continue. Nevertheless, regarding the “surprising” view of the Ministry of Finance, a recommended approach in cases where goods are returned and a tax credit note is not issued, is to take into consideration the new approach, where a credit note is issued by the supplier in accordance with Sections 42 and 43 of the VAT Act.

The authors of the article:

Petr Toman, ptoman@kpmg.cz, Tel.: +420 222 123 602
Petr Potomský, ppotomsky@kpmg.cz, Tel.: +420 541 421 374

Real estate tax in 2010

Real estate tax rates for 2010 were increased by 100%, although not in all cases. Rates remained at the 2009 level for arable land, hop fields, vineyards, gardens and orchards, as well as for permanent grassland, commercial forests and commercial fish ponds. The unchanged rates also apply to structures used for business activities other than agricultural primary production, forestry and water management, industry, construction, transportation, and other agricultural production. The tax rate for a residential dwelling for instance is CZK 2/m2; CZK 6/m2 for structures used for private recreational purposes, and houses; and CZK 10/m2 for industrial buildings.

For the 2010, property owners with a right to exemption for new building projects started in the past will pay tax for the first time. This applies to new residential dwellings or flats that were approved before the end of 2007.

A real estate tax return does not need to be submitted if the tax rates are increased or tax exemption is cancelled. The tax authority will assess the tax itself and notify the taxpayer of the payment assessment, or simply send a postal order.

Further information can also be found on the Czech Tax Administration website:

• Real estate tax rates from 1 January 2010
• Information for sending tax payment orders for real estate tax from 2008
• Cancellation of exemption of new residential dwellings and flats in new residential buildings from real estate tax – from 1 January 2010
• Overview of real estate tax coefficients

The authors of the article:

Ladislav Malůšek, lmalusek@kpmg.cz, Tel.: +420 222 123 521
Lenka Fialková, lfialkova@kpmg.cz, Tel.: +420 222 123 536

Inclusion in the Czech social security system of Japanese managing directors of Czech companies

Under the social security agreement (Agreement) concluded between the Czech Republic and Japan, which came into effect on 1 June 2009, an employee is subject to the insurance system (social security and health insurance) of the contracting country where the work is performed.

There is an exception to this basic rule: Japanese employees sent by their Japanese employers to work in the Czech Republic can remain in the Japanese insurance system, but only for a maximum period of five years from the date when they are sent to the Czech Republic.

A J/CZ 101 form issued by the Japanese social security administration is submitted to the relevant Czech social security administration by a Japanese employee as proof that he or she remains subject to the Japanese insurance system. If Japanese employees submit the form, the Czech employer will not pay contributions for them to the Czech social security system.

If an employee sent from Japan acts as a managing director of a Czech company, a member of the company statutory body, or a head of a branch recorded in the Czech Commercial Register, the Czech Social Security Administration does not permit such exceptions. It argues that this is not a case of an employee secondment and therefore a contribution to the Czech insurance system must be made from the remuneration paid by a Czech company/branch.

According to the information from the Czech Social Security Administration, the Japanese side has, on the basis of the Agreement, applied for a group exemption for approximately 470 employees sent from Japan, who were issued a J/CZ 101 form and who act in the Czech Republic as statutory representatives of limited liability companies, heads of branches or members of statutory bodies, based on a mandate agreement or employment contracts. The Czech Social Security Administration and the Centre for International Reimbursement representing Czech health insurance companies have allegedly not reached an agreement. The final decision will now have to taken by the Ministry of Labour and Social Affairs and the Ministry of Health If the ministries grant the exception, the Japanese employees listed in the group request will not have to pay social and health insurance contributions to the Czech insurance system.

The Japanese side allegedly referred to the Czech Social Security Administration with a request for similar treatment in relation to Japanese employees seconded to the Czech Republic in the future. That would mean that the general exemption from the Czech insurance system would apply, pursuant to the Article 10 of the Agreement, for Japanese employees working in the Czech Republic as managing directors, heads of branches or members of statutory bodies.

We will inform you about further developments in this area.

The authors of the article:

Iva Krákorová, ikrakorova@kpmg.cz, Tel.: +420 222 123 837
Maria Marhefková, mmarhefkova@kpmg.cz, Tel.: +420 222 123 498

Clarification of accounting for unpaid dividends

On 14 December 2009 the National Accounting Board (NÚR) published an interpretation I-15 Accounting for Unpaid Claims of Shares on Profit (http://www.nur.cz).

The NÚR interpretation deals with the terms and methods of booking declared dividends, (or a profit share) if the dividends were not paid out or the shareholder did not collect it. The tax regulations do not contain a special treatment of unpaid dividends, thus the interpretation provides a clearer view of the tax impacts of this matter as well.

When can a liability resulting from unpaid dividend by the company be written off?

According to the interpretation, if the shareholder does not apply within the time-bar of the liability according to the Commercial Code (four years from the date the dividend becomes payable), the liability should be written off from the company’s balance sheet, in compliance with the general rules of true and fair view of the accounting. It should be pointed out that by removing the liability from a company’s balance sheet, the shareholder’s right to the dividend does not extinct and should still be recorded as an off-balance sheet item. The company should also publish the write-off of the liability in its final accounts.

What is the proper way to account for the write-off of a time-barred liability arising from an unpaid dividend?

The write-off of a time-barred liability is addressed in the Czech Accounting Standard number 19, section 4.1.3, under which the liability should be recorded in the relevant Other revenues account. In its interpretation the NÚR argues against the use of this standard because the general definition of revenues is not met in such a case. Essentially, the write-off of unpaid dividends does not satisfy the general economic definition of revenues as a “gross increase in economic benefits that are created through ordinary activities of the accounting entity, if these accruals lead to the increase in shareholders’ equity which is separate from equity increase resulting from contributions of the owners”.

Accounting for a liability resulting from an unpaid dividend should therefore be analogical to accounting for its creation. Since payment of the dividend is accounted against the company’s equity, against its undivided profits, the write-off of a time-barred liability should be posted to equity, based on the decision of the company management.

What are the tax implications of writing off a liability resulting from an unpaid dividend?

The Income Tax Act does not contain a special arrangement for this area. Generally, a taxpayer must increase his tax base by the amount of the unpaid liability which corresponds to a receivable recorded in the debtor’s accounting, which is 36 months overdue or time-barred, and if it was not accounted as revenues in accordance with the accounting regulations. One of the exceptions to this rule is when the liability is written off against equity. For accounting as approved by the NÚR, a liability write-off resulting from an unpaid dividend could also, in our view, be included under this exception.

Tax matters concerning the write-off of unpaid dividends are very likely to be discussed in the near future by the Coordination Committee of the Chamber of Tax Advisors and the Ministry of Finance. We will inform you about its conclusions.

The authors of the article:

Tomáš Kroupa, tkroupa@kpmg.cz, Tel.: +420 222 123 623
Jitka Králová, jkralova@kpmg.cz, Tel.: +420 222 123 345

Supreme Administrative Court: interest on VAT overpayment due to an error of the tax administrator and direct effect of the EU directive

In one of its recent rulings (5 Afs 53/2009-63 from 13 November 2009), the Supreme Administrative Court addressed the interpretation of the term “wrongful act by the tax administrator”, which we are familiar with in relation to Section 64(6) of Act No. 337/1992 Coll. on Tax and Fee Administration. If the tax administrator caused a tax overpayment and it was not returned by the stipulated deadline, it is obliged to pay the taxpayer interest on the tax overpayment. The court referred to its earlier ruling (Judgement 7 Afs 140/2005-55 of 31 Jan 2007), in which it interpreted the term “wrongful act” as a mistake of the tax administrator. Such an error is usually conceded if an incorrect or unlawful decision of the tax administrator is subsequently annulled or changed to the benefit of the taxpayer, in an appeal or court proceedings.

In this case the court had to resolve the issue of whether the situation can be regarded as a wrongful act of the tax administrator when the court annulled the tax administrator’s decision, not because it was not in compliance with the law (in particular the VAT Act), but because it failed to comply with EU law (the Directive on the Common System of VAT: the “VAT Directive”). Although the court did agree with the tax administrators that they are not directly responsible for the inaccurate transposition of the directive into the VAT Act, it did, however, point out that from the moment the Czech Republic entered the EU, all public administration bodies, including tax administrators, are obliged to give EU law priority over Czech legislation. The court therefore ruled that the tax administrator committed a wrongful act and should pay the taxpayer interest on the tax overpayment.

The authors of the article:

Petr Toman, ptoman@kpmg.cz, Tel.: +420 222 123 602
Eva Doložílková, edolozilkova@kpmg.cz, Tel.: +420 222 123 696

LEGISLATION

EU structural funds

Programme Potenciál

The Ministry of Industry and Trade announced the 3rd Call for Proposals for the Programme Potenciál as part of the Operation Programme Enterprise and Innovation (OPEI).

Businesses can take advantage of this call to apply for a subsidy for establishing or expanding a development centre (department) aimed at research, development and innovation of products or technology. The call is also open to large companies, but only projects implemented in the Czech Republic and excluding Prague will be supported.

A subsidy ranging from CZK 1–100 million can be provided per project. The total allocation for this call is CZK 3 billion. In regions receiving substantial state support and in regions with a high unemployment rate the subsidy provided may range from CZK 1–200 million. The maximum amount of state support is 36-40% of the eligible project costs, which can be expenses for acquiring tangible fixed assets (machines and equipment, and buildings and land), intangible assets (intellectual property rights and software) and publicity expenses related to the project.

Electronic registration requests for a subsidy can be submitted in response to this Call from 26 February 2010 until 30 September 2011. More information is available at http://www.czechinvest.org.

Other opportunities for EU subsidies for large companies as part of the Operation Programme Enterprise and Innovation

In addition to the Programme Potenciál, the following calls are currently open to large companies as part of the OPEI:

• Second Training Centre programme call (support for the construction and development of training centres) – electronic applications can be submitted from 31 May 2010; full applications from 1 January 2010
• more information is available at http://www.czechinvest.org.
• Second Real Estate programme call (support for projects for preparing business zones, renovation of buildings – with at least 500m2 of floorspace after the building is constructed or the project documentation is completed – electronic applications can be submitted from 31 March 2010 and full applications from 1 January 2010
• more information is available at http://www.czechinvest.org.

The authors of the article:

Tomáš Kubíček, tkubicek@kpmg.cz, Tel.: +420 222 123 556
Karin Tomanová, ktomanova@kpmg.cz, Tel.: +420 222 123 461

EU and OECD

OECD Report on Granting of Treaty Benefits with respect to the Income of Collective Investment Vehicles

On 9 December 2009 the Organization for European Cooperation and Development (OECD) released a draft report concerning granting treaty benefits with respect to the income of collective investment vehicles. This is only a draft for public discussion purposes, and comments and suggestions could be made until 31 January 2010.

The report only concerns those collective investment vehicles that are widely held, maintain a diversified portfolio of securities and are subject to regulation for the purpose of protecting investors in the country where they were established. The conclusions drawn from the discussion will thus have a limited impact or none at all, on other investment instruments, or on funds of qualified investors or real estate funds.

The report concerns matters that are decisive for assessing whether a specific collective investment vehicle has the right to benefit from double taxation treaties, and whether it can be considered a resident and the beneficial owner of the acquired income.

In relation to existing double taxation treaties, the report concludes that in a case where the benefits from the treaties at the level of the collective investment vehicle cannot be invoked, the investor using this vehicle should generally enjoy them. In connection with this, practical problems are described in the report (the administrative burden that does not allow these rights to be exercised in practice), and recommendations are made for countries on how to remove restrictions.

As far as the future double taxation treaties is concerned, the report recommends the extension of the OECD Model Agreement Commentary, mainly to modify the provisions of Article 1 (definition of individuals the agreement applies to) and Article 3 (general definitions) to make it clear in relation to the collective investment vehicles whether the agreement applies to them or not. The report prefers the approach in which these entities were explicitly regarded as residents of a contracting country and the beneficial owners of the income. As a consequence, the treaty benefits would apply to them.

The authors of the article:

Karel Engliš, karelenglis@kpmg.cz, Tel.: +420 222 123 508
Jana Švecová, jsvecova@kpmg.cz, Tel.: +420 222 123 180

European Commission publishes information explaining the VAT package

The European Commission’s VAT Committee published information explaining the VAT Package. It is not legally binding, but we can expect that this guidance will be taken into consideration when interpreting Czech VAT law in line with EU legislation.

The Committee report includes a commentary on food and catering services, the recent expanded definition of a means of transport, the terms “actual use or consumption” and on “uninterrupted possession or use”, which are important for determining the place of supply in a case involving the lease of a means of transport. The matter of providing a service through a supplier’s fixed establishment located in a country other than that of its registered office or place of business is discussed in the document. The committee members reached the almost unanimous decision that a fixed establishment is not involved in the supply of services unless, for the purpose of providing the services, use is made of the staff and equipment of the establishment, or if the establishment only assists in administrative support (e.g. accounting, invoicing and receivables administration). If, however, the service supplier provides a tax identification number of the establishment on the invoice, the Committee believes that the services were provided through this fixed establishment.

The committee expressed its opinion on the provision of services to a taxable person (which proves its taxable status through a VAT registration number or other evidence) that utilises the services for its own private purposes or that of its staff. If the nature of the services allows them to be used privately, the supplier should request a self-declaration form from the customer confirming the intended purpose of the services. If the supplier does so, it is deemed to have acted in good faith, and any ensuing changes in the purpose and use of the services should not influence the charged VAT. This should not, of course, concern an abuse of the law in a particular situation.

The authors of the article

Petr Toman, ptoman@kpmg.cz, Tel.: +420 222 123 602
Helena Pajskrová, hpajskrova@kpmg.cz, Tel.: +420 222 123 742

IN BRIEF

News in brief

• The Ministry of Finance announced that it will no longer forgive income tax prepayments in 2010.
• The Ministry of Finance published Instruction D-337 on determining the individual exchange rates for the 2009 tax period.
• The Ministry of Finance published on its website information for using current hand-to-hand envelopes in 2010.
• The Ministry of Finance published on its website examples for applying the transitional provisions of the latest amendment to the VAT Act
• An overview of valid double taxation treaties concluded by the Czech Republic on income tax, or income tax and property tax as of 1 January 2010 can be found at http://cds.mfcr.cz.
• Changes in Czech Accounting Standards for entities whose books are kept in accordance with Decree No. 502/2002 Coll., Decree No. 503/2002 Coll., Decree No. 505/2002 Coll., and Decree No. 410/2009 Coll. were published in Financial Bulletin 7/2009.
• Government Regulation No. 26/2010, which amends Government Regulation No. 484/2006 Coll., on time-limited fee amounts and toll rates for use of designated roads, was published in the Collection of Laws.
• Decree No. 14/2010 Coll., amending Decree No. 48/2008 Coll., on the method of calculating the refund of excise duty paid on the prices of mineral oils consumed in agricultural primary production was published in the Collection of Laws.
• As of 1 January 2010 Belgium was added to the list of countries that will automatically exchange information on savings income in the form of interest income based on Directive ES 2003/48/ES.
• The consolidated version (not legally binding) of the EU Vat Directive was published in the Official Journal of the European Union.
• The European Commission published a table of derogations from the basic rules in the VAT Directive according to the individual countries. It can be found at http://ec.europa.eu.
• A codified version of the Regulation establishing a system of exemption from customs duties, coming into effect on 1 January 2010, was published in the Official Journal of the European Union.
• The European Commission proposed a measure for implementation of the VAT package. The text can be found at http://ec.europa.eu.
• The Ministry of Industry and Trade informed that the Act on the free movement of services valid from 28 December 2009 does not apply to employees sent abroad. The transitional period for the free movement of Czech workers (applied by Austria and Germany) still applies in this area. Transitional periods allow a restriction on the free movement of work forces in selected sectors to be retained until 30 April 2011.
• The government approved guidance on the implementation of the directive on services on the domestic market in Czech law. The objective of the instructions was to provide all departments with guidance on carrying out their legislative activities so that all amended or future legal regulations comply with the directive on services.
• Frequently asked questions about the Act on the free movement of services were published by the Ministry of Industry and Trade at http://www.mpo.cz.
• The Ministry of Industry and Trade’s website also features information on cross-border services by self-employed individuals – see http://www.mpo.cz.
• The Ministry of Finance issued information regarding average fuel prices for companies for 2009 and 2010
• • As of 1 January 2010 a data box can be used for communication between private entities. The Czech Post Office has introduced a new service called Postal Data Message for this purpose. For more information see http://www.ceskaposta.cz.

TAXATION, INSURANCE CONTRIBUTIONS AND ACCOUNTING

• Latest news regarding social security contributions for the first half of 2007
• Income Tax Act: changes with an international element
• VAT – credit notes no longer subject to VAT?
• Real estate tax in 2010
• Inclusion in the Czech social security system of Japanese managing directors of Czech companies
• Clarification of accounting for unpaid dividends
• Supreme Administrative Court: interest on VAT overpayment due to an error of the tax administrator and direct effect of the EU directive

LEGISLATION

• News on EU structural funds

EU and OECD

• OECD Report on Granting of Treaty Benefits with respect to the Income of Collective Investment Vehicles
• European Commission publishes information explaining the VAT package

IN BRIEF

• News in brief