In August, the government presented a draft bill to the Chamber of Deputies, which fundamentally changes some tax acts (sent out as Chamber of Deputies Print no. 873/0). It is to be discussed in the 36^th week. The bill is planned to come in operation as of January 1, 2017, and selected stipulations would be applied to the taxable period of the year 2016 already.

We have summarised the most significant changes relating to the income tax act for you. With regard to the extensiveness of the proposed changes, we only bring you the first part of the changes in the realm of personal income taxes in this issue. In subsequent issues, we will continue with the corporate income taxes and common provisions.

Valuation of interests in the case of interest-free loans or interest-free loans to employees

The amendment specifies the form of valuation of one-time taxation of other economic benefits in the case of transactions, which last for a longer period of time based on one legal act, for example interests from interest-free financial lending for more years, which will be valuated in the same way as repeated transactions as of the moment of their establishment. According to the proposed amendment, economic benefit will arise in the year of provision of financial means, and will be valuated as a quintuple of the value of annual transactions. The respective income is taxed upon its establishment and this income is not taxed in subsequent years anymore.

It needs to be noted in this context that the limit on exemption for other economic benefits in the case of interest-free lending up to CZK 100,000 will remain in operation.

The situation will be different in the case of interest-free loans to employees, for which interest will be calculated monthly and will be included in the tax base once a year at minimum, and this only in case of outstanding principal exceeding a limit of CZK 300,000.

Exemption of income in connection with procurement of housing needs

The term “housing needs” is always accompanied by the attribute “own” in the act, which is especially important in connection with possible exemption of income from the sale of a house or apartment or exemption of income from received compensation for vacating an apartment, which is bound to the procurement of new housing.

It will newly not be possible to apply exemption from taxes in case the “new housing” will not serve the needs of the owner but only the needs of his family or other persons.

Exemption of income in case of settlement of co-ownership of an immovable item

Income from the sale of an immovable item is exempted from taxes in case that more than five years have elapsed between acquiring the ownership right and the sale of the immovable item. Exemption does not currently relate to the settlement of co-ownership of an immovable item in any other way than by dividing this item according to the size of co-owner stakes (for example by transfer to one co-owner and paying off the others, or division in a different proportion with supplementary payment).

The new amendment rectifies the conditions for exemption from income taxes for all forms of settlement of co-ownership for immovable items, so that the five-year time test is applied not only in case of sale of an immovable item, but also in the case of settlement of co-ownership of an immovable item in any way.

Changes in exemption of income from sale of stakes in trade corporations

From the year 2014, exemption of income from the sale of stakes in trade corporations is limited by a condition, according to which exemption does not apply to income from the sale of a stake corresponding to a partner’s investment in favour of own equity made up to five years prior to sale. While the original intention of this stipulation, when it was incorporated in the act, was to cover property investments in a trade corporation aimed at circumventing the time test for exemption in case of transfer of immovable items, it has also affected monetary deposits, that is cases, when disruption of the time test evidently does not occur.

The amendment moderates the above-mentioned stipulation and the five-year time limit will newly only relate to non-monetary investments (that is for example immovable items). This change will probably be applicable to the taxable period beginning in the year 2016 already, and the moment of transfer against remuneration should become the reference date for calculation of the time test.

Another change in this area is that the time test for exemption will be shortened in case of income from transfer against remuneration of a stake in a trade corporation, which was acquired by means of inheritance from a testator, who was a next-of-kin. The time test is thus shortened in case of acquisition through inheritance, same as in the case of immovable items. This change also relates to transfer of securities and participating certificates. According to transitional provisions, the moment of transfer against remuneration, which occurred after the date of the amendment coming in operation, should be the reference date for using a shortening of the time test.

Taxation of “minor” income from employment

A simplification will probably occur in the system of taxation of minor income from employment directly by means of withholding tax at the employer. At present, if an employee receives income from employment from two or more payers (with the exception of a contract of services with a monthly limit of CZK 10,000), a duty arises for him to submit tax return. This also applies in case such a second income is any “minor income”, for example witness’ fee for an employee, remuneration for serving as a member of an electoral commission, etc. In practice, this leads to employees not being sufficiently motivated to achieve such income, because it is administratively demanding for them to draw up a tax declaration.

For this reason, the amendment proposes setting up a similar regime for employment of small extent (up to a sum of CZK 2,500/ month for the same payer) as that for contracts of services up to CZK 10,000/ month, that is the application of 15% withholding tax.

The limit of CZK 2,500 has been chosen with regard to regulations governing social insurance, according to which (with some exceptions), sums up to this limit are not subject to payment of social insurance (in some cases they are only subject to health insurance).

The taxpayer, who receives this income, would thus newly but be obliged to submit tax return, because the tax would be withheld and returned by his employer as the payer of the tax. The employee will of course still have the option of submitting tax return, in which he will include the withheld tax in the total tax liability.

Some partial changes in the amendment can be expected to occur in the course of the legislative process. We will therefore keep you informed about the development of the amendment. In case of any questions on the topic, do not hesitate to contact us.