Summary of legislative changes
April 2010
Jan Linhart
Partner
Introduction by Jan Linhart
Welcome to the April edition of Financial Update, a monthly bulletin focusing primarily on Czech and European tax and accounting legislation news, published by KPMG Czech Republic. In view of the forthcoming parliamentary elections, new laws are thin on the ground, but this month has brought some interesting news. The media paid special attention to the Chamber of Deputies’ defeat of President Klaus’s veto of the VAT Act amendment, which should have abolished VAT on employee benefits. On the other hand, the media almost ignored a new EU regulation on a social security scheme that will come into effect on 1 May. We will therefore provide you with some practical information on this issue. In this edition you will also find a comment on the Supreme Administrative Court ruling on the lapse period in relation to remedial measures and additional tax returns.
We believe the information contained in this issue of Financial Update will be useful to you in your work.
TAX
Employment benefits and VAT – the approval marathon has reached the finishing line
The Chamber of Deputies approved an amendment to the VAT Act, which had been returned by the President and which repeals the obligation to apply Section 36a of the VAT Act to transactions between the employer and its employees, i.e. the duty to set the VAT base using arm’s length prices. The amendment affects the taxation of certain employment benefits (such as travel fares paid for by the employer, company meal provision, products purchased at reduced prices, advantageous prices at company accommodation facilities, etc.). As a result of the repeal of this provision, the VAT base in respect of these transactions (if carried out for a consideration) will be determined using the method effective before 1 January 2010, i.e. based on the amount of the payment made for this kind of performance.
The amendment can be applied retrospectively, effective from the date on which the original Section 36a of the VAT Act came into force (i.e. 1 January 2010). If the taxpayer applied VAT to these transactions based on arm’s length prices in previous taxable periods, it may file additional tax returns and apply for a VAT refund.
After approving the Act returned by the President, the legislative process has come to a finish. The amendment will take effect on the date it is published in the Collection of Laws. We expect that this may happen during next week.
In connection with this, we draw attention to the fact that the amendment affects only the transactions between the employer and its employees during which the goods or services are delivered for a consideration. If employment benefits are provided for free, Section 36(6) of the VAT Act shall continue to apply.
The author of the article:
Petr Toman, ptoman@kpmg.cz, Tel.: +420 222 123 602
Tax assessment period: a three-year breakthrough?
In its recent ruling, the extended Senate of the Supreme Administrative Court resolved the time limit during which tax can be assessed (Ruling 7 Afs 20/2007-73 of 23 February 2010). The Supreme Administrative Court ruling is to some extent a breakthrough in the existing practice of determining such a period.
In addition to the time for carrying out review proceedings and renewing them, the Supreme Administrative Court also ruled on the calculation of time limits for filing additional tax returns.
With regard to current tax administration practice, additional tax returns for lower tax (or a higher tax loss) cannot be filed towards the end of the three-year time limit because the tax administrator cannot properly assess the tax due based on a tax return filed this way. However, according to the comments of the Supreme Administrative Court ruling, it is sufficient if an additional tax return for lower tax is filed prior to the end of the three-year time limit because the tax administrator has a 10-year time limit for accomplishment of tax procedure on such additional tax return (the tax assessment based on it). The three-year time limit rule might therefore be broken, based on the submission of an additional tax return.
In its ruling the Supreme Administrative Court has not, however, considered what steps the tax administrator may carry out as part of the assessment, and whether the administrator can do so, after the three-year time limit. Administrative practice will show the scope of the measures taken. However, we can expect that in the period in question the tax administrators will apply a broad interpretation, enabling them to carry out all the steps to assess the tax. If such an interpretation is applied, the three-year time limit may be actually extended up to 10 years, by filing an additional tax return. The extended Senate of the Supreme Administrative Court will decide on this issue in the near future, and its ruling should describe it in more detail. Another controversial question is tax administration procedures as of 2011, when new tax administration rules will come into force. We will keep you informed about possible developments regarding this matter.
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
Amendment to the Real Estate Tax Act submitted for comments
The Ministry of Finance has submitted a draft amendment to the Real Estate Tax Act to the Government, in which it suggests removing the alleged ambiguity in the interpretation of taxing “hard surface areas” of land, with effect from 1 January 2011.
The Ministry of Finance is of the opinion that the existing regulation is so general that it is not possible to clearly determine whether such hard surface areas should be taxed as buildings or as land. In the past, the administrative courts decided that hard surface areas are not categorised as buildings but part of land and therefore cannot be subject to building tax. In 2010, most taxpayers apply a land tax rate amounting to CZK 0.2 per square metre to hard surface areas, which is more advantageous than a building tax rate applied to structures.
When drafting the amendment, the Ministry took these judicial decisions and specific features of such land into consideration. It categorised hard surface areas not under structures but under land. It also introduced a special tax rate according to the type of business activity: CZK 1 per square metre of the hard surface area used for agricultural primary production and forest and water management, and a rate of CZK 5 per square metre for hard surface areas used for industry, construction, transportation, energy, other agricultural production, and other business activity.
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
Amendment to the Accounting Act submitted for comments
The Ministry of Finance has drafted an amendment to the Accounting Act, to come into force on 1 January 2011. Its most significant changes and new provisions include:
Exemption from the duty to compile consolidated accounts
The amendment proposes that a consolidating accounting unit is not obliged to consolidate accounts provided that the units to be consolidated were insignificant individually or as a group, and provided that the individual accounts of the consolidating accounting unit present a sufficiently true and fair view of the accounting. This provision is proposed under the already approved amendment to Directive 83/349/EC, for cases where a company is not obliged to apply international accounting standards.
The amendment also proposes an exemption from the duty to consolidate when an accounting unit only has a significant influence over one or more companies and does not have a decisive influence over any company.
Application of international accounting standards
In principle, the duty of the issuers of securities to keep accounting records and compile financial statements under international accounting standards does not change in the amendment. New provisions would regulate the following areas:
If securities are traded on regulated markets or are withdrawn from sale during the accounting period, an issuer can decide to which accounting period it will apply international accounting standards, in cases where securities are traded on the market, and when it will compile financial statements in accordance with Czech regulations, in cases where securities are withdrawn from sale.
If securities cease to be traded on the regulated market during an accounting period and the company’s supreme body decides by the end of such a period that new securities will be issued within three years and traded on the regulated market, the accounting unit may continue applying international accounting standards, i.e. it need not apply Czech regulations for a temporary period.
A consolidated accounting unit may decide to keep accounts and compile financial statements under international standards if the consolidating accounting unit, be it Czech or international, applies international accounting standards when compiling financial statements. Such decisions must be approved by the accounting unit’s supreme body. However, for the purposes of determining the tax base, the financial results must be determined under Czech accounting regulations.
A consolidating accounting unit may also decide to keep accounts and compile individual financial statements under international accounting standards if it applies them to the compilation of consolidated accounts. This decision must be also approved by the accounting unit’s supreme body.
Sanctions for breach of the Accounting Act
Sanctions are not changed in the amendment; however, the method of determining the base for calculating them is changed in some specific cases.
The author of the article:
Milan Flosman, mflosman@kpmg.cz, Tel.: +420 222 123 547
LEGISLATION
Simplified administration for entrepreneurs
In March, the Chamber of Deputies passed a bill on reducing the administrative burden on entrepreneurs. The bill will be considered by the Senate in April.
The bill contains eight partial changes in various regulations. In the Trade Act the entrepreneur’s duty to submit a copy of an entry in the Commercial Register to the Trade Licence Office is abolished, as is the duty to report changes to information in the register of citizens to the Trade Licence Office. In addition, entrepreneurs would not have to inform the Trade Licence Office if they cease their activities. The bill also stipulates that carrying out a trade in a flat without the owner’s approval should not constitute an administrative violation.
The bill specifies, as part of the amendment to the Commercial Code, that provisions in consumer contracts that cause damage to the consumer would be void. It also repeals the duty of the Czech Trade Inspection Authority to verify adherence to hygiene regulations in shops and restaurants because the environmental health agency exercises this power. In compliance with current European Law, the bill defines consumers as individuals carrying out duties for purposes unrelated to their business activities or occupations.
The law will come into effect on the first day of the third calendar month following the date of enactment.
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
New subsidies for research and development
Programme for Support of Applied Research and Experimental Development – ALFA
On 24 March 2010, the Technological Agency of the Czech Republic launched the 1st Call for Proposals under the Programme for Support for Applied Research and Experimental Development ALFA.
The Programme will last six years, from 2011 to 2016, and CZK 7.45 billion will be allocated to it.
One of the Programme targets is support for co-operation between the private sector and research organisations. Projects in which both private companies and research organisations take part can therefore obtain more advantageous conditions.
Projects will be considered in the form of public tenders. Proposals under the public tender can be submitted by 24 May 2010. The first public tender will receive CZK 817 million. No more than EUR 3 million (CZK 76.35 million) can be drawn for one project. The project duration ranges from 24 months to a maximum of 72 months.
Support will be granted in the form of subsidies for eligible costs. The maximum support rate for large businesses is up to 65% of the total recognised costs (e.g. wages, acquisition of assets, costs of acquiring and recognising rights to industrial property), subject to documentation proving co-operation with a research organisation.
In relation to achieving the determined objectives, the Programme is divided into three sub-programmes:
- Progressive technologies, materials and systems;
- Energy resources and environmental protection;
- Sustainable development in transport.
For more information, see http://www.tacr.cz.
The authors of the article:
Jan Linhart, jlinhart@kpmg.cz, Tel.: +420 222 123 617
Karin Tomanová, ktomanova@kpmg.cz, Tel.: +420 222 123 461
Subsidies from EU structural funds – latest news
ICT and strategic services programme
The Ministry of Industry and Trade has launched the 3rd Call for Proposals for projects under the ICT and Strategic Services programme, as part of the Operational Programme Enterprise and Innovation (OPEI).
Under this programme, enterprises may apply for financing for the following types of activities:
- Creation and development of IS/ICT solutions and applications;
- Establishment and development of shared services centres with a significant; international focus;
- Establishment and development of high-tech repair centres.
Under the 3rd Call for Proposals under the ICT and Strategic Services Programme, a subsidy of CZK 1.5–100 million for one project can be granted, and the total amount allocated for this Call is CZK 1.5 billion. The Call requires the creation of 10/25/40 new positions, depending on the type of supporting activity, and a minimum fixed assets investment of CZK 3 million for large businesses.
Electronic registrations will be accepted from 15 April 2010 until 15 October 2010, and full applications from 15 May 2010 until 1 February 2011. For more information, see:
http://www.czechinvest.org.
Further possible EU subsidies for large businesses
Apart from the above mentioned, the following Calls for Proposal are currently open to large businesses under the OPEI:
The authors of the article:
Jan Linhart, jlinhart@kpmg.cz, Tel.: +420 222 123 617
Karin Tomanová, ktomanova@kpmg.cz, Tel.: +420 222 123 461
EU a OECD
Amendment to the EU Regulation on Social Security will come into effect on 1 May 2010
As we informed you in Financial Update 11/2009, new Regulation (EC) No. 883/2004 will come into effect on 1 May 2010. It introduces amendments to the social security scheme for employees moving between EU countries, and will replace current Regulation No. 1408/71.
Employees sent to a member state prior to 1 May 2010 will, however, continue to be subject to the current Regulation. Nevertheless, if new rules are more advantageous for an employee sent abroad, it will be possible to apply for an exception and proceed under the new Regulation. The new Regulation modernises the rules for co-ordinating social security systems in the EU and should thus create greater legal certainty and transparency both for employees and employers.
The new Regulation also changes the procedures concerning the filing of applications for a certificate confirming that the sent employee is contributing to the insurance system of the country concerned. In addition, it changes the procedures concerning applications for exceptions to let sent employees continue to be subject to the insurance system of their home countries. In particular, this relates to the method of communication between respective institutions of individual countries, and between institutions and insured persons. The existing paper form will be replaced by an electronic version, and the current paper E101 certificates issued by respective social security institutions will be gradually phased out. Certificates should be issued in electronic format and will be renamed. For example, the current E101 certificate will become the A1 certificate.
As the application of a new electronic system is demanding, it will be implemented across the EU over two years. Despite the forthcoming date of effect of the new Regulation, the Czech Social Security Administration has not yet issued any official instructions for the public on procedures in the temporary period. Nevertheless, its representatives have informed us, at least unofficially, that no new forms or new certificates are available. Therefore, existing applications for the E101 certificate can be further used for employees sent abroad. These applications will be gradually replaced by new paper and electronic forms, after the end of the transitional period. The relevant social security bodies will continue to issue existing E101 certificates in paper form, but the certificate will indicate that it is being issued under the new Regulation.
The authors of the article:
Iva Krákorová, ikrakorova@kpmg.cz, Tel.: +420 222 123 837
Zuzana Jasenovcová, zjasenovcová@kpmg.cz, Tel.: +420 222 123 607
Exchange of information in tax matters
An international exchange of information is traditionally a highly important tool in the fight against international tax evasion, and the Czech Tax Administration (CTA) is using this form of international co-operation to an ever-increasing extent.
The CTA fully applies all three forms of exchange of information: an exchange on request, spontaneous information exchange, and automatic exchange of information. For this purpose it has concluded Memoranda of Understanding, which specify rules of international co-operation between tax administrations. The Czech Tax Administration has concluded memoranda with 13 countries (Slovakia, Hungary, Estonia, Denmark, Sweden, Lithuania, Latvia, Belgium, Canada, the Netherlands, Germany and Australia) and is discussing memoranda with Spain, Portugal, the US, Japan and Poland.
The specific automatic exchange of information on individuals with interest income from abroad has been carried out since mid-2005, based on Council Directive 2003/48/EC on taxation of savings income in the form of interest payments.
The Ministry of Finance has also contacted some countries with low or zero tax rates (“tax havens”) to arrange agreements on the exchange of information in tax matters. In March, the Ministry submitted a Specimen Draft Directive for expert discussions on these agreements to the Government for approval. Agreements should also allow access to information about the bank accounts of taxpayers. The Ministry has contacted among others the Cayman Islands, the British Virgin Islands, the Bermudas, Guernsey, Jersey, the Isle of Man, and the Bahamas.
In March the Ministry of Finance published information on its website, stating that it would not grant tax amnesties in the future. The Ministry is of the opinion that taxpayers will be motivated to fulfil their tax duties voluntarily, through provisions in the new Tax Administration Code, which will come into effect on 1 January 2011. Tax administrators will be able to assess the tax even after the tax assessment time limits in connection with a tax crime. The new law will also allow tax errors to be admitted by taxpayers in order to fulfil the conditions for extinction of punishability due to voluntary remedy, even after the term expires. Such an arrangement is not permitted under the current Tax Administration Act.
However, it should be borne in mind that as a result of concealing income, taxpayers maybe liable not only to sanctions under tax legislation (late charges, fines and increased tax, etc.) but also penalties for tax evasion under criminal law. It is therefore in the interest of taxpayers themselves to take timely advantage of the possibility to fulfil their tax duties voluntarily (voluntary remedy and filing an additional tax return).
The authors of the article:
Martin Houska, mhouska@kpmg.cz, Tel.: +420 222 123 843
Lenka Fialková, lfialkova@kpmg.cz, Tel.: +420 222 123 536
IN BRIEF
IN BRIEF
- A Japanese party applied for an exemption from the Czech insurance system under an agreement concluded between the Czech Republic and Japan. The agreement was the basis for a request made by the party for group exemption for approximately 470 employees, to whom Japanese authorities issued a J/CZ 101 form. The employees were acting in the capacity of authorised representatives, branch managers and managers, based on mandate contracts or employment contracts concluded in the Czech Republic. Representatives of the Czech Ministry of Labour and Social Affairs stated that a final decision had not been made in this matter, although it is expected to be issued soon.
- The Government changed the system of support for requalification of disabled employees.
- The Budget Committee of the Chamber of Deputies recommended approval of a bill on the cancellation of materialised bearer shares.
- The Senate rejected a bill that would increase maternity benefits to the 2009 level. The Chamber of Deputies will discuss the benefits in mid-April.
- The President signed an amendment to the Act on Public Registers, based on which the full operation of public registers is postponed to 30 June 2012 and the issue of electronic identity cards to 1 January 2012.
- The Ministry of Agriculture is considering the extension of a ban on foreign ownership of agricultural land.
- The Committee on Economic and Monetary Affairs (ECON) of the European Parliament stated that the EU may introduce a separate financial transaction tax.
- The Czech Ministry of Finance published in Financial Bulletin No. 3/2010 a notice on the application of a treaty concluded between the Governments of the Czech Republic and Georgia on double taxation and tax evasion in the area of income and property taxes.
- The Senate approved the mitigation of conditions for allocating free emission allowances for electricity and now also for heating.
- The Czech Minister of Labour and Social Affairs and his Syrian counterpart signed an agreement on social security.
- Requests can be made to the Czech Social Security Administration can be for a personalised summary of pension insurance periods. For more information, see http://www.cssz.cz.
