The Ministry of Finance has published a working version of an updated draft of the new Accounting Act and a draft bill amending other laws in this context. Although the draft of the new Accounting Act states that it will be effective from 1 January 2025, given the length of the legislative process we expect it to be effective only from 1 January 2026 and we cannot even rule out a postponement to 1 January 2027. 

However, some provisions came into force earlier due to the consolidation package or possible partial amendments to the existing Accounting Act.  Let us briefly recall them.

Possibility of using functional currency – valid from 1 January 2024 (Decree No. 443/2023)

Currently, it is possible to charge not only exclusively in CZK, but also in EUR, USD or GBP. The decision about change is up to the accounting entity and should be based on an assessment of the current situation as well as an assessment of future developments in the economic environment, in which the entity operates.

Unrealised exchange differences – already in effect since 1 January 2024

The new option is to tax only realised exchange rate differences, i.e. those arising from the settlement of a liability or receivable in a foreign currency. Unrealised exchange rate differences will not be included in the tax base in this case. However, the accounting unit must notify the tax administrator of its decision within 3 months of the taxable period in question. Even withdrawal from the scheme is subject to legal regulation.

Change in the determination of net turnover from 1 January 2024 (Decree No 443/2023)

Net turnover is newly defined as the amount of revenue from the sale of goods and services during the accounting period. Banks, credit unions and insurance and reinsurance companies have a special definition of turnover in the Accounting Act.  Furthermore, for entities, whose principal activity is not business, net turnover is the amount of revenue for the accounting period.

Decree No.500/2002 Coll. states in this context that for the purposes of determining net turnover, revenues from the sale of products and goods and from the provision of services are understood as revenues, on which the business model of the accounting unit is based. In determining such revenue, particular consideration is given to the industry and market, in which the entity operates, and the nature of the entity’s activities for its customers.  And further that, for the purpose of determining net turnover, it is not taken into account, in what item of the profit and loss account the income referred to in paragraph 1 is recognised.  For example, some sales of materials may meet the definition of turnover and it is therefore irrelevant that they are reported under other operating income.

However, to change the category of an accounting entity under the changed definition of turnover, the existing rules apply, so the earliest time of change in the category of an entity may not be until 2026.

Change in the categorisation of accounting units from 1 January 2024

On 21 December 2023, an amendment to Directive 2013/34/EU on the annual financial statements, consolidated financial statements and related reports of certain types of undertakings was published in the Official Journal of the European Union, which, in relation to inflation, increases by approximately 25% the value of turnover and assets for the categorisation of entities. This amendment entered into force on 24 December 2023.  The limit on the number of employees remains unchanged.

According to Directive 2013/34/EU, the change must apply from 1 January 2024 and we expect a change in the current Accounting Act in this context.

Change in the content of the Annual Report from 1 January 2024

The Annual Report includes a Sustainability Report (= information on intangible resources, on which the entity’s business model is fundamentally dependent). Currently, an accounting entity that is a corporation or a public interest entity, or would be a large entity even if it were not a public interest entity, and exceeds the criterion of an average number of 500 employees per accounting period at the balance sheet date is required to prepare this report.  The limits thus set are to be gradually lowered for 2025 and 2026. The law also provides for exemptions from the obligation to prepare a Sustainability Report.

Income tax report (section 32m of the Accounting Act 563/1991)

The obligation to prepare and publish an income tax report was implemented in the Accounting Act with effect from 1 January 2024. It only applies to separate accounting units or groups that have a foreign overlap and whose annual turnover exceeds CZK 19 billion or EUR 750 million, and only for accounting periods starting from 22 June 2024 (if the accounting period is a calendar year, then from 2025).  The achievement of the specified annual turnover limit is assessed for two consecutive accounting periods, with the income tax report being prepared for the first time for the second accounting period, in which the specified turnover is achieved. Purely Czech groups or Czech separate accounting units are not required to prepare and publish an income tax report.

At present, it is not possible to use a single form for the income tax report, which would have the same format throughout the European Union. However, the Accounting Act defines the mandatory essentials of the income tax report. In simple terms, the income tax report should contain the information previously reported in the Report on Relations between Related Parties (CbC Reporting). The purpose of preparing an income tax report is to provide information on the country, in which income taxes are paid, and the amount of income taxes paid.

In the case of consolidation in the EU, the obligation to compile and disclose is in the EU state of the consolidating entity. In the Czech Republic, a Czech consolidating entity or a non-EU consolidating entity is obliged to disclose. Publication is made through a publicly accessible register within 12 months of the balance sheet date for a period of at least 5 years.

If you would like to discuss any points in greater detail, please do not hesitate to contact us.