Financial Update – Special Issue

March 2009

Tax

Income Tax

Thin capitalisation

The amendment modifies the rules concerning tax deductibility of financial expenses arising from loans and credits received. The new rules can be summarised as follows:

• Financial expenses arising from loans and credits received from related parties in excess of four times (six times for banks and insurance companies) the borrower’s equity shall not be tax deductible.
• Loans and credits received from unrelated parties, or those secured by a related party, shall no longer be subject to thin capitalisation testing, except for “back-to-back” structures (i.e. where a related party provides a loan, a credit or a deposit to an unrelated party, which then provides the funds to the borrower).
• Financial expenses arising from the borrower’s subordinated liabilities shall no longer automatically be tax non-tax deductible.
• Where the interest or other revenue is derived from the borrower’s profit, financial expenses arising from loans and credits received shall remain non-tax deductible.

The new rules can be applied to taxation periods (or periods for which a tax return is filed) starting in 2008. The amendment also enables application in 2008 of the provisions of Section 24(2)(zc) of the Act. This means that financial expenses that would have been excluded from tax deductible expenses due to thin capitalisation rules can be recognised as tax deductible, up to the amount or income (revenues) directly attributable to the financial expenses.

Loan or credit contracts concluded before the end of 2007 will be subject to a transitory provision in 2008 and 2009, allowing the rules effective when the contract was concluded to remain in force, provided that certain conditions are met. The new rules outlined above shall thus only apply to these contracts in the 2010 taxation period.

Tax deductibility of finance lease expenses

The bill passed by the Chamber of Deputies regulates the conditions of tax deductibility of finance lease payments for assets classified under depreciation categories 2 and 3. It ensures that this method of acquiring assets is not made less advantageous than the acquisition of assets through purchase.

Value Added Tax

VAT deduction for cars used for business

The option of deducting/reclaiming VAT will apply to cars used for business and supplied (or under a finance lease delivered for use) after the effective date of the amendment (likely to be at the beginning of April 2009). The amendment also abolishes the duty to pay VAT if a delivery vehicle is converted to a passenger car (by removing the partition). Cars supplied before the effective date of the amendment, including those provided under a finance lease, will be subject to the existing legal regulation. If a car is used for private purposes (e.g. cars provided to employees for their personal/private use) for which input VAT was reclaimed under the new regulation, the taxpayer shall be obligated to pay output VAT, or will have a reduced entitlement to deduct input VAT.

Determining the VAT base for free-of-charge supplies that are subject to VAT

The amendment regulates the VAT base for supplies delivered free of charge where the supply is subject to VAT. For goods supplied free of charge, where the supply is subject to VAT, the tax base shall now be equal to the arm’s length price; in circumstances where the price cannot be determined, the total costs incurred on the supply would be regarded as the VAT base. For services rendered free of charge, the tax base shall be the total amount of expenses incurred. This applies also to private use of cars for which input VAT was claimed (including cars provided to employees for their personal/private use).

Change in the VAT rate

The amendment also specifies the classification of plants and seeds in Annex No. 1 of the VAT Act, i.e. application of the reduced VAT rate to these goods. A specific classification has also been stipulated for the collection, removal and liquidation of communal waste.

The VAT rates stay unchanged.

 

Exemption of goods brought into the country in travellers’ personal luggage

Certain provisions regarding VAT exemption of goods brought into the country in travellers’ personal luggage are introduced into the VAT Act by the amendment. The provisions are contained in the EU Council Directive of December 2007, which is binding upon the Czech Republic. In its current form, the VAT Act does not explicitly stipulate whether goods brought into the Czech Republic from “third countries” (countries outside the EU) in travellers’ personal luggage are tax exempt; generally, such imports are only exempt if duty-free. The amendment defines specific limits for goods imports. For travellers arriving in the Czech Republic, the limits concerning air transport will apply, as the Czech Republic does not share any borders with a third country.

The authors of the article:

Petr Toman, mailto:%20ptoman@kpmg.cz, Tel.:222 123 602
Lucie Tošnarová, mailto:%20ltosnarova@kpmg.cz, Tel.:222 123 524
Ladislav Malůšek, mailto:%20lmalusek@kpmg.cz, Tel.:222 123 521

Tax

• Income Tax
• Value Added Tax