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Proposed Changes in Income Taxes in 2016

We would like to inform you about the proposed changes in the Income Taxes Act effective from 2016. An amendment to the Income Taxes Act is included in the draft of the act (currently in the legislative process), which amends and cancels some other acts relating to international cooperation in tax administration.

The amendment is (so far) rather brief and contains the following changes or adjustments:

• One of the proposed modifications is the result of an amendment to the so-called “Dividend Directive” (Council Directive 2011/96/EU of 30 November 2011 on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States), which needs to be implemented in the Czech law. This modification relates to the limitation of the exemption for so-called hybrid loans, ie the different qualification of financial credit instruments when one country treats such instrument as a loan and another one as a contribution to the company. The draft amendment to the Income Taxes Act adds that shares in profit received in one member state could be subject to exemption only if they were not an item decreasing the tax base in another member state. Such a situation could only occur if the payment of the share in profit from abroad is made in the Czech Republic; the payment of the share in profit to a Czech company cannot result in the above situation as the Czech tax legislation does not allow it.

• With respect to the payment of profit of a business corporation to persons that are not members of such business corporation (based on the relevant provisions of the Act on Business Corporations), it has been proposed to unify the regime for personal and corporate income taxes so that this income will always be subject to withholding tax. Concurrently, the Income Taxes Act should specify that such income will be treated as income from sources in the Czech Republic.

• The draft amendment also contains a provision related to gratuitous income, which should prevent double deduction of identical costs. Pursuant to Section 23 (3) c) (8) of the Income Taxes Act, it will be possible to decrease the operational results or the difference between income and expenses only if the operational results or the difference between income and expenses pursuant to Section 23 (3) a) (16) were increased by the related value and, concurrently, such value was not reflected in the tax base in another manner, eg due to future recognition through expenses or in line with other provisions of the Income Taxes Act, usually by means of tax depreciation.

• Based on the Government Policy Statement, it has been proposed to increase the tax benefits for second and third children and other dependants. For a second child, the monthly tax benefit should be CZK 300 higher (ie CZK 3,600 annually), and the monthly tax benefit for a third child and every additional child should increase by CZK 600 (ie CZK 7,200 annually), in comparison with the tax benefits provided for one child.

• It has been proposed to cancel Section 38fa of the Income taxes Act, which stipulates the obligation of automated information exchange for payment agents. This provision was created in response to adopting Directive 2003/48/EC on the taxation of savings income in the form of interest payments, which will be cancelled with effect from 1 January 2016. This issue will no longer be part of the Income Taxes Act but will be governed by the Act on international cooperation in tax administration from 1 January 2016.

• Under certain conditions, individuals (non-business entities) should tax their income from the operation of facilitates generating electricity for own consumption as other income and not as income from business activities (thus far, it was always necessary to obtain a business licence and authorisation; therefore, the above-specified income was also taxed as business income).