DRAFT AMENDMENT TO THE ITA

As a result of the negative effects of the war in Ukraine, the prices of gas, electricity and petroleum products have increased enormously, which in turn increases the prices of other products from the manufacturing and processing industries, and interest rates have risen. 

On Friday 21 October 2022, the long-awaited draft amendment to the Income Tax Act was published, which is to introduce taxation of extraordinary profits, the so-called windfall tax. The proposal was published as an amendment by Ing. Zbyněk Stanjura to the government draft bill amending the VAT Act (Parliamentary Print No. 254), which has so far passed its first reading in the Chamber of Deputies. We have summarised the main points of this proposal for you in detail below. A second reading at the Chamber of Deputies may take place from Tuesday 25 October 2022 and we will continue to monitor the situation and keep you informed about further development. The draft amendment is quite complex, so if you need anything explained, please, do not hesitate to contact us.
This amendment to Act No. 586/1992 Coll., on Income Taxes, as amended (hereinafter referred to as “ITA”), introduces a new separate corporate income tax that will be applied in the years 2023 – 2025.

The windfall profits tax is considered a separate corporate income tax and the Specialized Tax Office is the administrator of this tax.

The proposed amendment to the ITA only addresses the taxation of excessive profits that would accrue to certain corporate taxpayers, but does not address the capping of gas, electricity or petroleum product prices.

In order to address the capping of prices of the above commodities, the Council of the European Union issued a proposal for a Council Regulation on emergency adjustment of high energy prices, which should determine the method of capping energy prices on the level of the European Union and the method of redistribution of taxes on excessive profits between Member States based on the principle of solidarity, depending on the threat of high energy prices to the economies of the Member States.   

WINDFALL PROFITS TAXPAYER

A taxpayer that is not a bank or a gas, oil, coal or coke producer

According to the draft amendment, the taxpayer of the windfall profits tax is a legal entity – which is not a bank, which in the taxable period or the period for which the tax return is filed that falls at least partially within the calendar years 2023 – 2025 (hereinafter referred to as the “Tax Application Period”), receives relevant income for the windfall profits tax in the amount of at least CZK 50 million and which

a)    in the Windfall Profits Tax Application Period is part of a group of enterprises with windfall profits, i.e. a group of enterprises according to the Act on International Cooperation in Tax Administration (excluding banks), if the aggregate of the relevant income for the Windfall Profits Tax of taxpayers, who are part of this group for the first reported accounting period ending from 
1 January 2021 reaches CZK 2 billion (hereinafter referred to as the “Group of Enterprises”),

or

b)    had relevant income for windfall profits tax of at least CZK 2 billion for the first accounting period ending on or after 1 January 2021. 

Thus, if a legal entity carries out the above-mentioned relevant activities (it is registered in the Register of Economic Entities of the Czech Statistical Office) and at the same time achieves an annual net turnover of a minimum of CZK 50m in the Tax Application Period, it will thus meet the basic prerequisite of the above definition of a taxpayer of windfall profits tax. However, in order to be considered a taxpayer for windfall profits tax, such legal entity must, in addition, alone or together with other taxpayers within the Group of Enterprises, achieve an annual net turnover from the relevant activities in the amount of CZK 2bn at minimum.

Therefore, if the legal entity itself achieves an annual net turnover of at least CZK 2 billion from the relevant activities in the tax period, it becomes a taxpayer of the windfall profits tax. 

In the event that a legal entity is part of a Group of Enterprises, which achieves an annual net turnover of at least CZK 2 billion from the relevant activities in the Tax Application Period, then such legal entity will also become a taxpayer of the windfall profits tax only if it itself achieves relevant income of at least CZK 50 million from these relevant activities. 

If the legal entity is part of a Group of Enterprises that has achieved as a whole a relevant income of at least CZK 2 billion, however, the legal entity itself: 

• does not perform the relevant activities, or 
• performs the relevant activities, but has not achieved the relevant income of a minimum of CZK 50m in the Tax Application Period,then such a legal entity will not be subject to the windfall profits tax.

Banks

A taxpayer of the windfall profits tax is also a corporate taxpayer who, in a taxable period or a period for which a tax return is filed that falls at least partially within the period of application of the windfall profits tax, receives decisive income for the windfall profits tax of at least CZK 50 million and that is a bank and had a relevant income for windfall profits tax of at least CZK 6 billion for the first accounting period ending on or after 1 January 2021.

Coal, oil, gas and coke miners

A taxpayer of the windfall profits tax is also a corporate taxpayer who, in a taxable period or a period for which a tax return is filed that falls at least partially within the period of application of the windfall profits tax, receives relevant income for the windfall profits tax in the amount of at least CZK 50 million from the following activities: 

• 05.10 – Mining and preparation of black coal,
• 06 – Extraction of petroleum and natural gas,
• 19.1 – Production of coke products,
• 19.2 – Production of refined petroleum products,

Relevant income and relevant activities

In order to determine whether a corporation will be subject to windfall profits tax, it is first necessary to analyse the terms “relevant income” and “relevant activities”.

The relevant income for the windfall profits tax is income derived from relevant activities with the exception of income from sources abroad which, according to an international treaty, can be taxed abroad if the taxpayer is a tax resident of the Czech Republic, and income from relevant activities from sources in the Czech Republic with the exception of income which, according to an international treaty, cannot be taxed in the Czech Republic if the taxpayer is a tax non-resident.

The relevant income for windfall profits tax is domestic income from relevant activities for windfall profits tax, excluding income from activities:

• 35.1 – Generation, transmission and distribution of electricity, excluding combined generation of electricity and heat, with a ratio of generated electricity to useful heat supply of less than 4.4,
• 35.2 – Production of gas; distribution of gaseous fuels through networks, where the taxpayer has supplied electricity or gas to another taxpayer belonging to the same Group of Enterprises for its own consumption.

The relevant activities for windfall profits tax are those listed in the NACE classification under the codes:

• 05.10 – Mining and preparation of black coal,
• 06 – Extraction of petroleum and natural gas,
• 19.1 – Production of coke products,
• 19.2 – Production of refined petroleum products,
• 35.1 – Electricity generation, transmission and distribution,
• 35.2 – Production of gas; distribution of gaseous fuels through networks,
• 46.71.2 – Wholesale of liquid fuels and related products,
• 46.71.2 – Wholesale of gaseous fuels and related products,
• 49.50.1 – Oil pipeline transportation,
• 49.50.2 – Gas pipeline transportation and
• 64 – Financial intermediation, except insurance and pension funding, with the exception of activities listed in the NACE classification under code 64.11 – Central banking, if the taxpayer is a bank.

The amount of relevant income for windfall profits tax is determined as

a)    the annual net interest income for a taxpayer that is a bank or 

b)    the annual aggregate net turnover under the law governing accounting for relevant activities for windfall profits tax for a taxpayer that is not a bank.

Binding assessment

A corporate income tax payer may apply to the Specialised Tax Office for a binding assessment on whether or not it is part of a windfall profits Group of Enterprises along with another corporate income tax payer in a particular taxable period or a period, for which tax return is filed.

TAX BASE FOR WINDFALL GAINS

The amendment to the ITA introduces new concepts for the purposes of determining the windfall profits tax, namely the windfall profits tax base, the tax base to be compared and the comparative tax base. It is very important to stress that in neither case are the tax bases derived solely from the relevant income from the relevant activities. According to the amendment, relevant income and relevant activities are important only for determining whether or not a given legal entity is subject to the windfall profits tax. Once a legal entity is considered a windfall profits taxpayer, its windfall profits tax is determined on the tax base derived from all of that taxpayer’s activities. 

The tax base for windfall gains is determined for taxable periods or periods for which tax return is submitted that fall at least partially within the Tax Application Period, for which the tax base to be compared is positive. 

The tax base on windfall profits is determined as the positive difference between the tax base to be compared, i.e. the tax base of the current tax period or the period for which the tax return is filed, and the arithmetic average of the adjusted comparative tax bases.  

The tax base to be compared

The tax base to be compared is the tax base before the application of entries reducing the tax base and entries deductible from the tax base and without the inclusion of income from foreign sources that may be taxed abroad under an international treaty and related expenses, which is shown on line 200 of the corporate income tax return. In the case of a limited partnership, the part of the tax base to be compared attributable to the general partner is also part of the tax base to be compared.

If the taxable period or the period for which tax return is submitted, for which the tax base for windfall gains is determined, falls only partially within the calendar years 2023 – 2025 (i.e. the windfall profits tax application period) or if the windfall profits taxpayer is part of a Group with windfall profits for only part of the 2023 – 2025 period, only a proportionate part of the taxable period or the period for which tax return is submitted that falls within that 2023 – 2025 period shall be treated as the tax base to be compared.

Comparative tax base

The comparative tax base means the tax base before the application of entries lowering the tax base and entries deductible from the tax base or the tax loss for the taxable period or period for which the tax return is submitted, commencing on 1 January 2018 and ending by 31 December 2021. The comparative tax base does not include income from foreign sources that may be taxed abroad under an international treaty and related expenses. In the case of a limited partnership, the part of the comparative tax base attributable to the general partner is also part of the comparative tax base.
The taxpayer’s comparative tax base is also the comparative tax base of its legal predecessor to the extent that its assets have passed to the taxpayer as a result of the transformation. The taxpayer’s comparative tax base is not part of its comparative tax base to the extent that its assets have passed to its successor as a result of the transformation. 

If the taxpayer had different taxable periods or periods for which tax returns were filed in the period from 1 January 2018 to 31 December 2021, then the comparative tax base is recalculated proportionally according to the length of the tax base to be compared. Both the comparative tax base and the tax base to be compared should be determined for taxable periods of the same length, or the periods for which the tax return is filed.

Adjusted comparative tax base

In the next step, the adjusted comparative tax base is determined by increasing the comparative tax base by 20%, which the legislator intended to reflect the taxpayer’s expected growth . If the taxpayer’s comparative tax base for the 2018 tax year was CZK 100 million, the taxpayer’s adjusted comparative base reaches CZK 120 million. If the taxpayer’s comparative tax base for the 2018 tax year was - 100 mil. CZK, then his adjusted comparative base is - 80 million CZK.

Arithmetic average of adjusted comparative tax bases

In the final step, a simple arithmetic average of the adjusted comparative tax bases is determined  and the tax base on the windfall gains is determined as the difference between the tax base to be compared and the simple arithmetic average of the adjusted comparative tax bases.

Transfers of averages of adjusted comparative tax bases 

If the taxpayer is a member of only one Group of Enterprises, the taxpayer may use the procedure of transferring the averages of the adjusted comparative tax bases to another taxpayer within that Group of Enterprises under the conditions set out below. 

The averages of the adjusted comparative tax bases of taxpayers, who are part of the same Group of Enterprises with windfall profits and who have the same period for which the tax base to be compared is determined, may be increased by the same amount for one taxpayer and decreased for the other taxpayer in that period if 

a)    the increase results in the tax on the first taxpayer’s windfall profits being lower than if the shift in average had not occurred,

b)    the reduction does not result in the second taxpayer’s windfall profits tax being higher than if the shift in average had not occurred, and 

c)    a notice of shifting of averages of the adjusted comparative tax bases within the windfall profits Group of Enterprises is filed, where the shifting of averages occurs on the basis of a filed tax return or supplementary windfall profits tax return.

The shifting of the averages of the adjusted comparative tax bases may not be used by a taxpayer of windfall profits tax that:

• is part of more than one Group of Enterprises with windfall profits; or
• did not have for the first accounting period ending on or after 1 January 2021 relevant income for windfall profits tax of at least CZK 50 million.

Notice of the shifting of the average of the adjusted comparative tax bases within the windfall profits Group of Enterprises may be given by the representative taxpayer to the tax authorities up to the deadline for filing the tax return or supplementary tax return for windfall profits of the taxpayer participating in the shifting and whose deadline expires first. 

For windfall profits tax purposes, a representative taxpayer means a corporate taxpayer that is tax resident in the Czech Republic and that is part of the windfall profits Group of Enterprises and that the windfall profits Group of Enterprises has elected to submit a notice of shifting the average of the adjusted comparative tax bases within the windfall profits Group of Enterprises. A group of enterprises with windfall profits may have only one representative taxpayer.

TAX

The tax rate on windfall gains reaches 60%. 

The windfall profits tax is calculated as the product of the tax base on windfall profits rounded down to the nearest thousand and the tax rate for that tax base. Tax credit cannot be applied to windfall gains tax. 

Taxpayers’ tax base for windfall gains will thus be taxed at a total rate of 79%, i.e.:

• standard corporate income tax of 19%; and
• windfall gains tax of 60%.

ADVANCES ON WINDFALL PROFITS TAX

Although windfall profits tax will not be determined and paid for the first time until 2024 for the taxable period of 2023, advances on this tax will be due in 2023 already.

For the purposes of advance payments of windfall profits tax, the provisions governing advance payments of income tax based on the last known tax liability shall apply, unless this Act provides otherwise. The last known tax liability for the purposes of advance windfall profits tax includes windfall profits tax.

The first advance period for windfall profits tax of a corporate taxpayer, who would have been subject to windfall profits tax if the last tax year or tax return period ending before 1 January 2008 had been a tax year or period, for which tax return is submitted, ending before 1 January 2023 would fall within the windfall profits tax application period, is the period from 1 January 2023 to the last day of the windfall profits tax period for the first taxable year or period, for which the tax return is submitted, falling at least partially within the windfall profits tax application period.

For the purposes of the last known tax liability for windfall profits tax advances due in the first windfall profits tax advance period, the amount

a)    reported by the advance tax payer to the tax authorities in the notice of notional windfall profits tax shall be treated as the amount that would have been a windfall profits tax if the last taxable year or period for which the tax return is filed ending before 1 January 2023 falls within a windfall profits tax application period (“notional windfall profits tax”), shall be treated as the windfall profits tax claimed by the taxpayer for that last period; such amount shall be the last known tax liability effective as of the first day of the first advance windfall profits tax period; and 

b)   the notional windfall profits tax determined in the tax administrator’s decision on the amount of the advance payments of windfall profits tax shall be deemed to be the windfall profits tax determined by the tax administrator for that last period.

The taxpayer of a windfall profits tax advance is obliged to notify the tax administration of the notional windfall profits tax for the last tax period or period for which a tax return is filed ending before 1 January 2023 by the last day of the deadline for filing the tax return for this last period. If the deadline for filing a return for this last period ends before 3 July 2023, the deadline for filing a notice of notional windfall profits tax is extended to 3 July 2023. 

In the notional windfall profits tax notice, the taxpayer will state the information that would have been disclosed in the windfall profits tax return.

If the obligation to submit a notice of the notional windfall profits tax is not met or if the amount of the notional windfall profits tax notified or determined is not the correct amount, the tax administrator shall decide on the amount of advances for windfall profits tax and determine the amount of the notional windfall profits tax in the decision. 

The due date of an advance payment of windfall profits tax payable before the deadline for filing a notice of notional windfall profits tax, or before the date of filing if it is filed late, shall be postponed to the due date of the first advance payment of windfall profits tax payable after those times. If no obligation to file a notice of notional windfall profits tax arises, the advance payment of windfall profits tax due before the deadline for filing the windfall profits tax return for the first taxable year or period, for which a tax return is filed falling at least partly within the windfall profits tax application period, or due before the date of filing if it is filed late, shall be postponed to the due date of the first advance payment of windfall profits tax due after those points. If, by postponing the due date, the advance would have been paid in a different taxable period or period, for which tax return is submitted, than that, in which the advance was originally due, the advance is not payable.

We are available for any questions you may have on this topic. 

Author: Jiří Jakoubek, Tomáš Brabenec, Jaroslav Foltýn