In August, the government presented a draft bill to the Chamber of Deputies, which fundamentally changes some tax laws (sent out as Parliamentary print no. 873/0). It is planned to be discussed on October 18. It is planned to take effect as of January 1, 2017, and selected stipulations would be applied for the taxable period of the year 2016 already. 

We have summarised some of the most significant changes for you, relating to the income tax act. With regard to the scope of the proposed changes, we have divided the topic into several articles.  In the previous three issues, we focussed on changes in the taxation of person first, and then of legal entities. In this issue, we are bringing the changes in common stipulations.

Depreciation in case of increasing co-ownership stake 

The draft amendment includes a completely new stipulation, too, which deals with depreciation in case of increasing co-ownership stake, which was previously not adjusted by law. 

According to the proposed text, in case of acquiring another co-ownership stake for the same assets, the taxpayer will merge these stakes, so they will still represent one tangible property item. The form of depreciation of this property will not change, that is depreciation will continue in the current form from a changed input price.

The new stipulation also deals with the cases, when a taxpayer has a duty to depreciate from the input price of the original co-owner (transformations, deposits, inheritance etc.). Here, the current form of depreciation will again be preserve in the case of an acquirer of further co-ownership stakes, but it will only be possible to depreciate sums, which have not been depreciated previously. The total of residual values will not include residual value of assets for a co-ownership stake, which has been excluded from depreciation (for example an original stake acquired by donation).

In case it is not possible to determine, which of the co-ownership stakes is the original one (merger of legal entities), it will be possible to choose, while maintaining restrictive conditions.

Depreciation of intangible assets 

According to the current version of the act, intangible assets are depreciated for a period of time determined here. 

The draft amendment newly enables depreciation of intangible assets for a period that is even longer than that set by the law. The taxpayer will thus be able to decide when filing intangible assets procured after January 1, 2017 – see transitional provisions of the amendment.

It will still not be possible to interrupt depreciation of intangible assets.

Depreciation of technical improvement by a sublessee 

The draft amendment also includes a completely new stipulation regarding depreciation of technical improvement: “For a taxpayer, who is neither a lessee nor user and to whom tangible assets were leased for use, the process is analogical to that of technical improvement paid by a lessee. Upon termination of such use or cancellation of the agreement with depreciation, the process is analogical to termination of lease or cancellation of agreement with depreciation by a lessee made by the depreciator. For the purposes of this stipulation, a taxpayer, to whom tangible assets were leased for use, is in the position of a lessee, and the taxpayer, who leased these assets is in the position of a depreciator of tangible assets.”

This stipulation thus basically means that technical improvement carried out on “other people’s” property can be depreciated even by sublessees or new lessees upon assignment of a contract of lease, and the conditions are the same as previously only in case of a lessee, that is 

- technical improvement is carried out by the taxpayer, who has a right of use to tangible assets, 

- technical improvement does not increase the valuation of property at the owner, 

- depreciation of technical improvement has always been carried out only with written approval of the owner and

- technical improvement is included in the same depreciation group as the improved assets. 

The current conditions valid when terminating lease will also be applied to these relations, when the lessee enters into the role of the owner and the sublessee enters into the role of a lessee, or an old and new lessee in case of assignment. This is for example a stipulation for valuation of technical improvement being taken over, when in article 29 paragraph 6, for the case when a lessee does not have his own assets and is taking over technical improvement from a sublessee, it is added that new assets arise for him in the value that would otherwise increase the input price.

These new stipulations should relate only to technical improvements put into use after the amendment has taken effect.

Tax loss 

In this stipulation, the draft amendment confirms that in case of cancellation of tax loss based on an additional tax declaration (or tax audit), the original deadline for determining the tax remains preserved, that is the valid deadline  - the year on assessment + five years.

Request for the return of overpayment 

The amendment also corrects the somewhat illogical assessment of requests for return of tax overpayment.

According to the respective stipulations of the code of tax procedures, the tax administrator now proceeds so that the tax is not return based on a request submitted earlier than 60 days prior to the date for submitting the tax declaration and the taxpayer must submit a new request. 

With regard to the fact that the tax declaration form directly contains this request, this procedure appears somewhat absurd in case of submitting the declaration for example in January already (that is more than 60 days before the deadline).

A new stipulation should thus be added to the law, according to which a request submitted along with the tax declaration would be viewed as a request submitted on the last day of the deadline for submitting the tax declaration, because this is the due date for payment of tax, that is also the moment for a potential option of returnable overpayment arising.

The proposed rule will be applied both in relation to income taxpayers among the persons and in relation to income taxpayers among legal entities.

Financial lease and similar contracts 

The amendment is intended to specify or define financial lease more clearly, especially in terms of the object of financial lease.

According to the explanatory memorandum, the aim is for the tax treatment, which the taxpayer applies in the tax base in connection with financial lease, to be similar to the tax treatment applied in tax depreciation of tangible assets, so that no differences would arise in the application of expenditure according to the way of procuring assets.

The stipulation relating to financial lease thus from the perspective of the income tax relates only to tangible depreciated assets, that is not to tangible assets excluded from depreciation or to intangible assets.

The amendment also clearly confirms the interpretation that financial lease is the case, even when financial lease is terminated prematurely but the minimum time set for financial lease by law is fulfilled.

In case a contract is formed, the object of which is the lease of other assets than tangible assets depreciated according to the income tax act, this contract will not be viewed as a contract of financial lease and the potential expenditure ensuing from such a contract can be applied in the income tax base depending on what property this is (a plot, intangible assets – right to build etc.).

In case of acquiring any assets for consideration, which were being used for consideration prior to acquisition (any other title than the newly defined financial lease), it will be necessary for tax eligibility of the payment for use (formerly rent) to fulfil not only the conditions regarding the height of the purchase price, but newly also the conditions for including assets among business assets.

All changes will probably only have effect on contract, where the object of lease was handed over after the amendment has taken effect.

Transfer of immovables and business establishments between non-residents for no consideration

According to these stipulations, the scope of the stipulation of article 22 paragraph 1 letter d) and letter i) of the income tax act will probably be expended so as to newly cover also transfer of immovable and business establishments located on the territory of the Czech Republic between tax non-residents for no consideration. 

This was previously only adjusted for local residents and permanents establishments.

The mentioned income will be taxed by withholding tax of 15 %.

Ensuring tax neutrality of taxation of income from profit-sharing in the case of a trust fund and family foundation compared to income from non-excluded assets 

Because trust funds and family foundations are the payers of income tax for legal entities according to the law, and they did not previously have a comparable position among other taxpayers, taxation of these entities is adjusted so as to prevent “unjust” or double taxation of respective income.

Family foundations and mutual funds are basically foundations or funds founded to support the founder or persons close to the founder, but they have a somewhat specific nature, because they were viewed as legal entities, which while they cannot be public benefit persons (as other foundations), did not fulfil the definition of parent companies when stakes in business corporations were assigned to them.

The first of the changes consists in the fact that in case of payment of gratuitous income in the form of support of a contribution from the means of a family foundation, this income, unlike similar income paid by other types of foundations, will not generally be exempted (because it may basically represent payment of profit-sharing).

According to article 10 paragraph 3 letter c) point 4 of the act, on the contrary, gratuitous income of a taxpayer ensuing from property, which he deposited into a family foundation or from property, which was deposited into the family foundation by a close person, will newly be exempted.

The last of the significant adjustments consists in the fact that family foundations and trust funds were added into the definition of parent companies (article 19), and thus the situation was prevented that in case a stake in a business corporation is assigned unto a trust fund or family foundation, the income from dividends or profit-sharing would be taxed both on payment from the trade corporation to the trust fund and a second time when paying a share in profit from the trust fund to the beneficiary. 

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