Tax deductibility of annual bonuses
9.08.2011Company: Amcham
Ruling of the Supreme Administrative Court on the tax deductibility of annual bonuses
In its ruling dated 31 March 2011 the Supreme
Administrative Court delivered a judgment
on the tax deductibility of employees’ annual
bonuses booked as estimated liabilities. No legal
remedies may be lodged against this decision.
The rationale of the decision states that when
assessing each case it is necessary to consider
how the conditions for the entitlement to
facultative remuneration were modified.
These annual bonuses (thirteen month salaries,
bonuses etc.), paid in the following accounting
period may be divided into 3 basic groups:
1) entitlement to bonus is stipulated explicitly
in the employment contract (e.g. 1 monthly
salary) and is not conditioned
- it is booked through estimated
payables and the payroll costs are
treated as tax deductible (social
security and public health insurance
is tax deductible only if they were paid
before the end of month following
after the end of taxation period,
i.e. in this case before 31 January
of the subsequent year)
2) entitlement to bonus is stipulated in the
employment contract but conditioned
(e.g. by approval of an executive, amount
of profit, approval of profit by the General
Meeting, review of the financial
statements by an auditor, etc.)
In this case the payroll costs associated
with this bonus are claimable only in the
period in which all conditions, which were
laid down for the entitlement to this
bonus, were met.
- if all conditions have been met,
then they may be booked as estimated
payables and the costs are tax
deductible
- if all conditions have not been met,
they should be booked through
reserves in order to comply with the
accrual accounting principle
Example 1:
Annual bonus is conditioned
by the approval of managing director.
Managing director approves the bonuses
in December of the particular reporting
period.
It is possible to book the bonus as
estimated payables and treat it as taxdeductible
payroll costs in the particular
reporting period.
Example 2:
Annual bonus is conditioned by the profit
and its approval. This condition can always
be fulfilled only in the subsequent period
and therefore a tax non-deductible reserve
(principle of periodicity) is created for
these expenses. The bonus becomes tax
deductible in the subsequent reporting
period in which it is approved.
3) entitlement to bonus is not stipulated
in the employment contract
- entitlement approved in the particular
reporting period: recognized
as estimated payables
- entitlement approved in the
subsequent period: recognized through
reserves
Ing. Hana Tomcová
IB Grant Thornton
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