The Chamber of Deputies and subsequently the Senate agreed on an amendment of Act No. 586/1992 Coll., on Income Taxes, as amended (hereinafter the “ITA”) regarding the support of voluntary donations by taxpayers aimed at assisting the State of Ukraine and its inhabitants in the war conflict on its territory. On 13 May 2022, the law was sent to the President of the Republic for signature.

The current situation allows natural persons or legal entities to deduct the value of a donation from the tax base in the tax return only if the donation was made for listed purposes (e.g. humanitarian, charitable or medical purposes) and only on condition that the recipient of the donation is based in the Czech Republic or an EU or EEA Member State. However, the change in the law extends tax benefits for donors.

The new law expands the group of subjects to whom a donation can be made, namely:

• directly to the state of Ukraine
• to a territorial-administrative unit of the state of Ukraine
• to a legal entity with registered office on the territory of Ukraine
• to a natural person residing in Ukraine.

It will be possible to use gifts made to individuals only if certain conditions are met, same as before. For example, there is already a condition that a gratuitous transaction can only be applied if the recipient of the gift is a recipient of invalidity pension. In other words, gifts made to any individual will remain not tax deductible. 

Extension of the range of purposes, for which a donation can be provided:

Currently, it was only possible to deduct donations made primarily for charitable, humanitarian, health or educational purposes. However, the new wording of the law introduces the possibility to deduct the value of the gift from the tax base in the case, where the gift was provided to support the defence efforts of the State of Ukraine. Support for defence efforts means anything that can assist the State of Ukraine in a war conflict e.g. military material, weapons, ammunition, military equipment etc. 

The amendment also takes into account tax residents of Ukraine, who will be entitled to apply the value of a provided donation from the tax base, if they prove that the total income from sources in the Czech Republic constitutes 90% of their taxable income. 

Maximum value of the gift that can be deducted from the tax base

Before the amendment, it was possible to deduct the value of the donation only up to:

• 15% of the tax base (for an individual)
• 10% of the tax base (for a legal entity)

Following the adoption of the new legislation, the threshold for the maximum deductibility of the value of the donation will be increased to 30%, where in effect this threshold set in 2020 and 2021 in the context of the Covid-19 pandemic has only been renewed. The increase in the threshold to 30% will be available to an individual for the taxable period of 2022 or a legal entity for the tax year ending between 1 March 2022 and 28 February 2023. 

Donation made through cryptocurrencies 

Under current legislation, cryptocurrencies are viewed as intangibles, not money. Such a gift is therefore treated as a gift in kind. The taxpayer is entitled to deduct the provision of a gift, for example in the form of bitcoin, from the tax base in the amount of the value of the cryptocurrency at the time of the gift.

Valuation of the value of the donation  

• If the donor is an accounting entity, the value of the gift can be determined as its book value.
• The taxpayer shall determine the value of the given cryptocurrency in accordance with General Financial Directorate Guidance D-22 as a normal price – it is recommended to value the cryptocurrency as an average of prices found on cryptocurrency exchanges that announce the value of the cryptocurrency against one of the official currencies.

Beneficiary of a gratuitous transaction – examples 

If an employer provides an employee with accommodation with discounted rent in a standard situation, this is taxable income from dependent activity on the part of the employee under article 6 paragraph 3 of the ITA. However, if the employer provides accommodation to an employee (as well as his/her family members) who left Ukraine due to the war conflict, this income from the employee’s employment will be exempt from tax under the new legislation. 

Another case could be a situation, where an employee uses accommodation with preferential rent, the tax on the income generated is withheld from the employee’s wages and a situation arises where, as a result of the war in Ukraine, the family of the employee leaves Ukraine and comes to the Czech Republic, where they intend to share accommodation with the employee. The employer will provide the employee with more spacious and more expensive accommodation. This move should generally result in a higher tax being withheld as part of the monthly advance payment of employment tax. However, after the adoption of the new legislation, the preferential rent will be exempt from employment income tax. If the advance tax has already been withheld from the employee’s wages (non-cash income), it will be refunded by the employer in the course of the taxable period.

Author: Marek Toráč, Vladimír Toráč