The floods that hit some areas of the Czech Republic and other countries in recent days have receded. But as the waters recede, the extent of the damage they have left behind is coming to light, and many people are now faced with the task of rebuilding their homes and property. In this situation, any help is valuable, whether in the form of physical support or a financial donation. Are you considering helping flood victims? Are you interested in the tax implications of such support for your company? That is the subject of this article. 

Do you want to help an employee affected by the floods?

If you choose to support employees affected by the flood, it will be exempt income on the employee’s side. Donations made for humanitarian or charitable purposes are exempt from personal income tax. There is no value restriction attached to the exemption, so it does not matter what the amount of the gift is, nor whether it is in monetary or non-monetary form. If the conditions for exemption are met, the individual does not have to declare the income in the tax return. The only thing that needs to be taken care of on the part of the employee is if the value of the gift exceeds CZK 5,000,000, then the exempt income must be reported to the tax administrator by the end of the deadline for filing the tax return.

From the employer’s point of view, such expenses may be claimed as tax deductible under the provisions of Section 24(2)(zp) of the Income Tax Act, but only if the gift is made in a non-monetary form. This allows an employer to effectively support its flood-affected employees without negatively impacting their taxable income. However, when making a donation, it is important to provide adequate documentation to prove the purpose and value of the donation so that the aid can be properly accounted for. Gifts in monetary form are addressed below.

Gifts not only to employees

Donations can be made not only to individuals, but also, for example, to municipalities or non-profit organizations involved in flood relief. Such gifts can be claimed as a deductible item from the income tax base if they meet the specified conditions. Pursuant to the provisions of the Income Tax Act, it is possible to deduct from the tax base the value of gratuitous performance provided to municipalities, regions, organisational units of the state, legal entities established in the territory of the Czech Republic, as well as legal entities who are organisers of public collections pursuant to a special law, for exhaustively specified purposes, which also include the financing of the elimination of the consequences of natural disasters (Section 15(1) of the Income Tax Act – natural persons and Section 20(8) of the Income Tax Act – legal entities).

In order to claim a deductible item, it is also necessary not to forget the value condition, whereby in the case of legal entities the value of one donation must be at least CZK 2,000. The maximum amount of the deduction is 30% of the tax base (the proposal is still under discussion in the Chamber of Deputies; if not approved, the maximum amount of the deduction would be 10% of the tax base). In the case of a gift by an individual, similar rules apply – a minimum value of 2% of the tax base or at least CZK 1,000 for all gifts in total (maximum 15% of the tax base).

In addition to financial gifts, non-monetary gifts, such as the provision of services, can also be deducted as a deductible item. If a company decides to make a non-monetary donation, it can choose whether to include the donation in tax deductible costs under Section 24(2)(zp) of the Income Tax Act or to claim it as a deductible item against the tax base. It is not possible to apply both.

Documentation of donations and tax relief

Documentation of the donations is crucial for the successful application of tax relief. If you make a non-monetary gift you must have a receipt from the recipient of the gift that includes identification of both parties, the purpose of the gift, the value and the date of the gift. When making larger donations, especially if they exceed several million crowns, it is advisable to enter into a donation agreement that specifies the object of the donation and the purpose for which it will be used. The Financial Administration has not yet issued any information on the conditions for documenting donations made in connection with a flood, but earlier it shared information issued in connection with the 2021 tornado in South Moravia, so it can be assumed that the conditions are similar to those in the past. For monetary donations, a bank statement, a money order confirming the transfer of funds to the flood account is usually sufficient. This means that it would not be necessary to enter into a gift agreement in these cases. The special bank account number should be registered in the central register of public collections, information from the register is shared by the Ministry of the Interior on its website.

Employees will need the same documentation if they want to claim gifts made during the year as a deduction in their annual tax return. Employers can include these donations in the annual settlement of advances at the beginning of the following year.

Conclusion

Donating to help flood victims is not only an act of solidarity, but if the conditions of the Income Tax Act are met, the donations can be taken into account when reducing the tax base or as a tax deductible cost. Ensuring proper documentation is key, whether it is financial or in-kind donations. If you have any questions about specific situations and do not know what to do, please do not hesitate to contact us. We have outlined the situation with donations and VAT in here.