Summary of legislative changes

January 2009

Taxation and accounting

Amendment to the Income Tax Act

The Amendment to the Income Tax Act, which we informed you about in the special December issue of Financial Update, was published in the Collection of Laws on 1 January 2009, under number 2/2009, and came into effect on 1 January 2009.

The author of the article:

Petr Toman, ptoman@kpmg.cz, Tel.: 222 123 602

Changes in real estate tax from 1 January 2009

The Ministry of Finance issued an information leaflet about changes to real estate tax in 2009. These include:

• Since 1 January 2008 municipalities have been able to stipulate, in a mandatory decree, that certain land is tax exempt, and this arrangement will be applied for the first time in the 2009 taxation year. Information about land which is tax-exempt can be obtained at the municipal office of the local authority. The exemption will not apply to land plots recorded in the Land Register as gardens.
• Since 1 January 2008 municipalities have also been able to determine a local coefficient to be applied to all real estate within the boundaries of the municipality (village or town). As of 1 January 2009 the coefficient will not apply to arable land, hop fields, vineyards, gardens, orchards and permanent grassland.
• The exemption of newly constructed buildings from real estate property tax, which used to be granted for a 15-year period, has been cancelled. Entitlement already granted to the taxpayer in previous taxation periods will be recognised for the last time in 2009. As of 2010, tax exemption will no longer be granted, even in cases where the 15-year exemption period has not been used up. No tax exemption will be granted in 2009 for new buildings completed in 2008.
• Tax breaks for insulating buildings against heat loss, which were granted for a five-year period have, been abolished. Entitlement already granted in previous periods will be recognised until 2012. If the insulation work was completed in 2008 tax exemption will not be granted in 2009.

The authors of the article:

Petr Toman, ptoman@kpmg.cz, Tel.:222 123 602
Lenka Fialková, lfialkova@kpmg.cz, Tel.: 222 123 536

Changes to taxation of employee income from 1 January 2009

As we already informed you in the special December issue of Financial Update, the amendment to the Income Tax Act (2/2009 Coll.) has introduced a number of changes for employers, in terms of tax and social security premiums. In addition, on 1 January 2009 the new Sickness Insurance Act came into effect.

The following changes should be noted:

• When determining the employee’s income tax base, the employer will increase the employee’s gross income by a fictitious amount equal to 34% of the assessment base. This applies even to cases where the employee is subject to the social security system of another country, irrespective of the social security and health insurance premium rates that apply there. The new wording of the Income Tax Act is of such a general nature that concerns arise over whether the increase by the fictitious amount should also be applied to income that is not subject to social security and health insurance premium payments – such as income from work not carried out on the basis of an employment contract, for example under an Agreement on Work Performance (“Dohoda o provedení práce”), or income in excess of the cap premium payments. As the Ministry confirmed, and as implied in the explanatory report to the amendment, this obviously was not the intention of the legislators. The increase by the fictitious amount equal to the Czech insurance premium, to arrive at the “super-gross” salary, will only be applied to income that is subject to obligatory insurance contributions in another country. To determine the super-gross salary for the purpose of calculating personal income tax advances, the social security and health insurance premium will now be rounded up to the nearest crown (so far this has not been regulated and was causing problems in practice).
• Employers will deduct insurance premiums from employees’ salaries at a rate of 11% (1.5% less than last year).
• The tax rate remains the same as in 2008, at 15%. Tax allowances and credits for dependent children remain; the tax credit for a spouse may be applied if she/he earns less than CZK 68 000 a year (CZK 38 040 previously).
• The rule stipulating whether expenses incurred by the employer on employee training will or will not be exempt from the employee’s personal income tax, which distinguished between improving (the existing) qualification and increasing (obtaining an additional) qualification, has been replaced by a new rule: now the decisive factor is whether the training relates to the employee’s job and whether agreement has been reached with the employer that it constitutes work, or is an impediment to work on the employer’s part.
• For 2009, the maximum assessment base for social security and health insurance premium payments has been set at CZK 1 130 640. Above this cap, the employer will stop paying the premium, for the employee and for the employer, and will no longer increase the tax base to the “super-gross” salary.
• As of 1 January 2009, there will no longer be a distinction between employers as “organisations” and “small organisations”; instead, a register of employers has been established, in which all employers with at least one employee participating in the sickness insurance scheme must register within eight calendar days after incorporation (except for employers that were recorded in the register of organisations or small organisations as at the end of 2008). The Czech Social Security Administration (“CSSA”) will send each employer a new 10-digit code, instead of the eight-digit code that they have been using so far. Employers will now retain the same code for the entire registration term, even if they change their registered address. Each employer will be notified of the new code by a letter sent by the CSSA in January.
• Under the new legislation, the insurance premium is payable between the first and the 20th day of the subsequent calendar months. An overview of the sickness insurance premiums and benefit amounts is available to payers at www.cssz.cz, or at Social Security Administration customer centres.
• For the first 14 days of illness, the employer will pay wage compensation to the employees (as of the fourth day of sickness, for working days only). The compensation up to the amount stated in the Labour Code will be not be subject to income tax nor to insurance premiums. Half of the amount attributed to the employee will then be deducted by the employer from the total amount of premium paid in the given month to the Social Security Administration.
• From the 15th day of illness, the sickness benefits will be paid by the Social Security Administration directly to the employee; he/she will apply for such sickness benefits to the Czech Social Security Administration, through his/her employer.
• As of 1 January 2009, shareholders and statutory representatives (“jednatel”) of limited liability companies, and limited partners in limited partnerships, which do not carry out work for the company on the basis of an employment contract, and members of cooperatives where an employment contract is not a condition of membership, will no longer take part in the sickness insurance scheme. Employers must remove them from the register by 31 January 2009 and report whether their activity constitutes participation in the pension insurance scheme (if their income exceeds CZK 5 889 per month).
• Employers are obliged to notify the CSSA by 31 January 2009 that they are employing contractual employees to the Social Security Administration. Contractual employees are non-Czech employees of a foreign-based employer from a state with which the Czech Republic has not concluded an international treaty on social security and who are performing work in the Czech Republic for an employer which has its registered address in the Czech Republic. By the same date the employer must also notify the Social Security Administration about employees who carry out “small-scale” work, meaning up to CZK 2 000 per month.
• Remuneration paid to members of statutory bodies that are tax non-residents are subject to final withholding tax of 15%. In 2008 a discussion took place between tax professionals and the Ministry of Finance about whether the tax base for such withholding tax should be increased by health insurance premiums paid on the part of the employer (i.e. 9%, if the statutory body member was participating in the Czech insurance system). The Ministry of Finance has issued an official statement that the tax base should not be increased in 2008. If such an income of tax non-residents had been increased to the “super-gross” salary in some calendar months, the taxpayer could apply to the respective tax office for a refund of the tax overpayment. In 2009 the 9% increase should be applied to this income, under a change to the Income Tax Act. For members of statutory bodies that are covered by an insurance system of another EU/EEA member state, whether such income is subject to premium payments under the legislation of such a state should be considered.

The authors of the article:

Iva Krákorová, ikrakorova@kpmg.cz, Tel.: 222 123 837
Lenka Fialková, lfialkova@kpmg.cz, Tel.: 222 123 536

Amendment to Accounting Decrees

On 1 January 2009, Decree No. 469/2008 Coll., came into force, amending Decree No. 500/2002 Coll. which implements certain provisions of the Accounting Act. Major changes and new provisions introduced by the amendment include:

Business combinations

The newly inserted Section 14a regulates reporting in the balance sheet line “A.II.4 Revaluation reserve on business combination“. In the opening balance sheet, the successor entity may divide the valuation difference or a part thereof into individual components of equity, in line with the combination project and legal regulations.

The balance sheet line A.II.5 Differences on business combinations” has been newly defined. The line will contain for instance differences resulting from the elimination of mutual receivables and payables of the entities participating in the combination, or from exclusion of assets and liabilities that are not recognised under the Decree and the Accounting Act – this may be the case in cross-border mergers, where differences may exist in the recognition criteria of assets and liabilities under Czech and foreign accounting regulations.

These reporting issues are connected, among other things, with the amended Section 54 and the new Section 54a, which regulates cross-border mergers. If, in a cross-border merger, a foreign entity follows a different procedure in accounting for valuation differences than prescribed by the Decree the Czech successor company will report in the opening balance sheet the valuation in line with the Decree. In cross-border mergers, both fair value and net book value can be used for revaluation on business combination.

Disclosure of material transactions in the Notes

The duty to disclose in the Notes to the Financial Statements the nature and business purpose of transactions that are material in terms of risk or benefit applies newly only to legal entities – corporations. The information on the financial effect of these transactions must be disclosed only by entities which, in the accounting period covered by the Financial Statements, exceeded two of the three criteria defined by the Decree (assets over MCZK 350; net turnover over MCZK 700; and average employee number over 250). Such information must also be disclosed if the transactions were carried out with a related party.

Material information has to be disclosed also in cases where a joint-stock company would not be under obligation to disclose (i.e. does not meet the criteria mentioned above), but the transactions were carried out with its majority shareholders or members of its management or supervisory boards. These changes in disclosure requirements will only apply to financial statements prepared after 1 January 2009.

Depreciation

Under Section 56(3), depreciation schedules should be prepared and updated to reflect the use and the changes in the use of the asset by the entity. In addition, it is admissible, in view of materiality and true and fair view of accounting, to reflect in the depreciation schedules the expected residual value of the asset, meaning the estimated amount which the entity may recover upon the expected disposal of the asset.

Depreciation is addressed also by the newly added Section 56a, which introduces “component depreciation” in Czech accounting. Under this method, components are depreciated separately over the term of use. Component depreciation is only possible in accounting periods starting on 1 January 2010 and later.

The author of the article:

Milan Flosman, mflosman@kpmg.cz, Tel.:222 123 602

Legislation

Green cards

Last year, a “green card” project was initiated, through the amendment to the Employment Act and the Act on Foreigners’ Stay and Residence in the Czech Republic. It introduces a new type of long-term residence permit for a foreign national, for the purpose of employment. The green card combines two types of permits – an employment permit, and a foreign national’s residence permit. The introduction of green cards gives foreign nationals more flexible access to the Czech labour market. They can apply for positions that have not been filled by a Czech citizen, an EU member state citizen or his/her family members within 30 days after the vacancy was reported to the labour office. From 1 February 2009 jobs for green card holders will be offered through a central register maintained by the Ministry Labour and Social Affairs. Green cards will be issued in three categories: “A” for university graduates, issued for a maximum of three years, “B” for skilled workers and secondary school graduates, issued for a maximum of two years, and “C”, for other workers, issued for a maximum of two years. At the same time, the arrangements for employment permits issued by labour offices remains in force.

Foreign nationals from Australia, Montenegro, Croatia, Japan, Canada, South Korea, New Zealand, Bosnia and Herzegovina, Macedonia, USA, Serbia and Ukraine may apply for a green card.

A foreign national who is interested in obtaining the green card can find a suitable job in the list of posts, which is available on the Internet, and apply for the green card to the Czech embassy. Together with the application, he/she will submit documents proving that he/she meets the job requirements. The application will be processed by the Ministry of Internal Affairs within 30 days. The foreign national will then receive an entry visa to travel to the Czech Republic, where he/she will be issued with the green card.

The authors of the article:

Jana Bartyzalová, mailto:%20jbartyzalova@kpmg.cz, Tel.: 222 123 437
Lenka Fialková, lfialkova@kpmg.cz, Tel.: 222 123 536

European Union

New rulings of the European Court of Justice

Truck Center (C-282/07)

On 22 December the European Court of Justice (“ECJ”) ruled in the Belgian case of Truck Center. In effect, a situation when withholding tax on interest payments is only applied to payments to abroad, while not applied to interest payments to residents (i.e. a similar system of taxation as in the Czech Republic), does not constitute a breach of a freedom of establishment in the EU.

While withholding tax is levied on interest payment to non-residents, standard income tax is levied on interest income payments to residents. Imposing a withholding tax on non-residents only is not discriminatory, as, according to the ECJ, it does not involve comparable situations. The ECJ did not deal with the fact that withholding tax is applied to gross income (i.e. without the option of deducting related expenses). Unfortunately, this was not a part of the question submitted, and the ECJ has not mentioned this issue.

Les Vergers du Vieux Tauves (C-48/07)

On 22 December 2008, the ECJ ruled in the case of Belgian Les Vergers du Vieux Tauves. Under Belgian law, if a taxpayer has not gained a full ownership rights to shares in a company and only the right to receive dividends attached to such shares (“usufructus”), then he/she is not entitled to a tax exemption under the Council Directive on the Common System of Taxation Applicable to Parent Companies and Subsidiaries. In July 2008 Advocate General Sharpston concluded that the procedure is in breach of European law, and that the tax exemption under the mentioned Directive should apply also to holders of rights to dividend payment, although they may not be the legal owners of the shares. The ECJ did not agree the opinion of the Advocate General, and ruled that the right to usufructus does not constitute the status of a parent company and therefore the owner is not entitled to tax exemption under the mentioned Directive.

The authors of the article:

Martin Houska, mailto:%20mhouska@kpmg.cz, Tel.:222 123 843
Aleš Krempa, akrempa@kpmg.cz, Tel.: 222 123 551

News in brief

News in brief

• The Government approved the bill on the free movement of services.
• On 5 January 2009 the Czech Social Security Administration introduced a new e-filing service “Notification of Starting a Job”, replacing the Registration/ Deregistration for Sickness Insurance.
• On the Ministry of Labour and Social Affairs website, online calculators are available to determine the amount of wage compensation for the first 14 days of illness and the amount of subsequent sickness benefits in 2009. The compensation will be paid by the employer
• Issued in the Collection of Laws:

• Decree changing the rate of the basic allowance for using motor vehicles and the meal allowance for the purpose of travel expense reimbursement, and stipulates the average price of fuel (No. 451/2008 Coll.), which reduces the basic rate for using a motor vehicle from CZK 4.10 Kc to CZK 3.90, and slightly increases the meal allowance for domestic business trips of employees.
• Amendment to the Valuation Decree (No. 456/2008 Coll.)
• Amendment to the Insolvency Act (No. 458/2008 Coll.)
• Decree stipulating the list of countries whose citizens are entitled to apply for a green card (No. 461/2008 Coll.)
• Decree stipulating the list of countries whose citizens are entitled to apply for a visa, a long-term residence permit or a permanent residence permit only at the embassy in the state where the foreign national is a citizen or which issued the travel document which the foreign national holds, or in the state where the citizen has long-term or permanent residence permit (No. 462/2008 Coll.)
• Amendments to accounting decrees:

• under No. 469/2008, amendment to Decree No. 500/2002 Coll.
• under No. 470/2008, amendment to Decree No. 501/2002 Coll.
• under No. 471/2008, amendment to Decree No. 504/2002 Coll.
• under No. 472/2008, amendment to Decree No. 505/2002 Coll.

• Amendment to the Inheritance Tax, Gift Tax and Real Estate Transfer Tax Act (No. 476/2008 Coll.)
• Amendment to the Act on the Organisation and Implementation of the Social Security and the Employment Act (No. 479/2008 Coll.)
• Amendment to the Income Tax Act (No. 482/2008 Coll.)
• Amendment to the Rules of Civil Procedure (No. 7/2009 Coll.), introducing changes for instance in delivering of notices, reporting, European Order to Pay, etc. The amendment includes also changes in the code of notarial practice, introducing, e.g. a central register marriage contracts.

• In the Ministry of Finance Financial Bulletin No. 11-12/2008, changes to the Czech Accounting Standards for entities maintaining their accounts under Decree No. 500//2002 Coll. (ČÚS 008 and ČÚS 011) and No. 501//2002 Coll. (ČÚS 108 and 110) were published.
• The Ministry of Finance published on its website

• Practical information to assist taxpayers in completing the 2008 tax return for road tax
• Information on VAT application for local authorities
• Updated information for VAT payers on selected provisions of the VAT Act.

TAXATION
AND ACCOUNTING

• Amendment to the Income Tax Act
• Changes in real estate tax from 1 January 2009
• Changes to taxation of employee income from 1 January 2009
• Amendment to Accounting Decree

LEGISLATION

• Green cards

EVROPEAN UNION

• New rulings of the European Court of Justice

NEWS IN BRIEF

• News in brief