Under number D-59 the General Financial Directorate (“GFD”) issued a guidance on certain provisions of Act No. 586/1992 Coll., on Income Taxes (“ITA”). Guidance D-59 is effective as of January 1, 2023, and thus becomes an update of Guidance D-22, which applied to taxable periods beginning from 2014.

Guidance D-59 responds to changes in the ITA. It newly discusses time tests for income from the sale of real estate or the use of interest on loans for housing needs acquired from 1 January 2021. The maximum limit for using interest on loans has been changed from CZK 300,000 to CZK 150,000, and this limit applies only to housing needs acquired after 1 January 2021. Where old and new loans are combined, the guidance sets out how the total amount of interest is calculated.

Guidance D-59 also stipulates that in the case of a plot of land with a building forming part of it under the Civil Code, the date of acquisition of the land, not the building on the land, is decisive for the exemption of income from the sale of immovable property.

Furthermore, the guidance removes doubts around deductible entries. In order to claim a deduction for interest on a loan that is used for the maintenance and alteration of a house, of which the taxpayer is not the owner, even though he is a party to the loan agreement and is unable to prove his entitlement to deduct interest on the loan by means of an extract from the title deed under article 38l(1)(e) of the ITA, it must be proven that the taxpayer uses the family house for permanent residence, otherwise the claim for interest on the loan will not be recognised.

The Guidance now explicitly states that income from short-term rentals of immovable property for recreational purposes (such as Airbnb) is considered to be income from self-employment and not rental income, which puts an end to long-standing discussions on the subject and confirms the approach of the tax administration and existing administrative practice. Another confirmed administrative practice is the valuation of immovable property at the established price, not the normal price.

The new guidance also refers to article 6 of the ITA, specifically to paragraph 9(d)(1), where the necessity to provide goods and services of a medical, therapeutic, hygienic and similar nature only from medical institutions, i.e. registered in the National Register of Health Service Providers, is emphasised. If this condition is not met, the employee’s income is subject to taxation and enters the assessment base for social security and health insurance.

In relation to employees, the guidance also regulates meal vouchers and flat-rate contributions to meals. For a flat-rate contribution to meals and shifts longer than 11 hours, the flat-rate contribution can be exempted up to 70% of the upper limit of the subsistence expenses that can be provided to employees for a business trip lasting between 5 and 12 hours, i.e. CZK 107.1 as of 1 January 2023. Employees working on the basis of a work performance agreement and managing directors may also be granted a meal allowance, but only if they work in fixed shifts. If the employee has two employment relationships with the employer at the same time and shifts are set for both relationships, the entitlement to meals for each shift can be assessed separately.

In the area of corporate income, the GFD describes the importance of contractual arrangements in the provision of deductible gratuitous benefits. For the condition of the minimum amount of an individually deductible gift of CZK 2,000, there is the difference between giving 12 gifts reaching CZK 200 each to one person and gradually repaying a gift of CZK 2,400 to the same person.

The new change also includes an interpretation of article 38s of the ITA, i.e. that profit shares arising from the detected difference between the agreed price and the normal market price are not subject to application of this provision. An equally important change is the interpretation of article 29(10) of the ITA, which allows the acquirer of a non-cash contribution, who continues the depreciation begun by the owner, to increase the entry price, from which the original owner depreciated, by the difference between the valuation of the non-cash contribution and the amount of the contribution paid to the shareholder of the corporation under article 144(2) or article 249 of the Business Corporations Act.

Last but not least, the procedure for claiming loss for a taxable period has been extended to its retroactive application. Parts of periods and the periods, for which tax returns are submitted in specified cases, if they are between the five taxable periods following the period, for which the tax loss was finally determined, or between the two taxable periods preceding the period, for which the tax loss was finally determined, shall not be taken into account in the application of the time limitation on the transferability of the tax loss. In such tax returns, the tax loss may also be deducted without affecting the total number of taxable periods, for which the tax loss may be claimed.

In general, Guidance D-59 is a clarification of existing legislation and administrative practice, which is binding for the tax administrator. If the taxpayer follows this guidance, its actions will comply with the legal provisions and will probably not be challenged by the tax authorities.

Author: Roman Burnus, Anna Beránková