Implementation of the Directive rules 

The rules set out in the Directive are introduced into the legal system in the form of two new top-up taxes in the Czech Republic:

• allocation top-up tax and
• domestic top-up tax.

The allocation top-up tax replicates a system of taxation based on two interrelated rules (the “GloBE rules” from Global Anti-Base Erosion) applicable where the effective tax rate of the group subject to the top-up tax in the respective jurisdiction is less than 15%:

• Profit inclusion rule: assigns a top-up tax to the parent entity in the event of under-taxation of the subsidiary entity.
• Undertaxed profits rule: allocates the top-up tax to the low-taxed entities themselves where it has not been possible to collect the full amount of the top-up tax through the parent company under the income inclusion rule.

These two rules are thus intended to ensure that a minimum tax is paid for each jurisdiction in which the group is located, regardless of whether that country has adopted the Pillar 2 initiative.

In order to allow the proceeds of the top-up tax to flow directly to the countries in which the low-taxed entities operate, the Directive allows Member States to introduce an equivalent local (national) top-up tax, whereby if the minimum level of taxation is achieved through a local top-up tax, the top-up tax allocated according to the rules for the inclusion of income and undertaxed profits will be zero. The local top-up tax is represented in the proposed law by the domestic top-up tax.

Czech companies that are part of a group subject to the top-up tax will thus be subject to the domestic top-up tax. Czech parent entities that are part of a group subject to the top-up tax in respect of profits of their subsidiaries in other countries will be subject to the allocation top-up tax. The obligation to collect the allocation top-up tax will not arise for the Czech parent entity if the state of the subsidiaries imposes and collects a local (national) top-up tax. The local top-up tax thus has application priority over the allocation top-up tax.

How should Czech companies proceed?

First, it is necessary to determine whether the company is subject to the top-up tax provisions, i.e. whether it is part of a group with annual consolidated revenues exceeding EUR 750 million in two of the four preceding tax periods and whether it is not so a called excluded entity (e.g. pension funds, government and non-profit organisations).

If the Czech company is part of a group subject to a top-up tax, the next step is to calculate the effective tax rate as the share of included taxes included in the qualified profit. The effective tax rate is calculated for the given tax period for the entire group in the Czech Republic.

If the calculated effective tax rate of the group is less than 15%, it will be necessary to calculate the effective tax rate for the individual members of the Czech group and identify those with an effective tax rate lower than the minimum. Companies with an effective tax rate lower than 15% will be obliged to pay the domestic top-up tax. The domestic top-up tax will be calculated from the data for the entire Czech group and will be distributed among the under-taxed members based on their share of qualified profits.

The procedure for determining the domestic top-up tax is described in a simplified way in the following diagram:

The proposed legislation contains relatively complex rules for determining the included taxes and calculating the qualified profit, while it is not be possible to simply take data from financial statements prepared in accordance with the Czech accounting standards. In many cases, it will be necessary to rely on the data provided to the parent company as part of the consolidation and to subsequently adjust them.

Administration of top-up taxes in the Czech Republic 

The registration obligation of top-up tax taxpayers will have to be fulfilled within 15 days after the fulfilment of the group membership condition. With regard to the expected effectiveness of the law from the beginning of 2024, it will be necessary to register by 15 January 2024.

Another administrative obligation will be the submission of information reports. The information reports shall include information about the group, as well as the information necessary to calculate the effective tax rate, the top-up tax and its correct allocation. The deadline for submitting the information report on the domestic top-up tax is set at 10 months after the end of the tax period, and the tax return must be filed within the same period.

The deadline for filing the information report on the allocation top-up tax is set at 15 months after the end of the tax period (up to 18 months for the first filing) and the deadline for filing the tax return on this tax is 22 months after the end of the tax period.

The deadline for determining top-up taxes in the Czech Republic is set differently from the Tax Code as a four-year period.

The relevant tax office for the administration of top-up taxes will be the Specialised Tax Office.

If you have any queries about the top-up taxes in the Czech Republic or need to adapt to the new rules, the experts and advisors of WTS Alfery, the exclusive representative of WTS Global for the Czech Republic will be happy to provide you with professional support.

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Corporate income tax

The Czech recovery package would increase the standard income tax rate from the current 19% to 21% and extend the extraordinary depreciation for electric vehicles purchased between 2024 and 2028. Regarding the deductibility of tax costs, the Czech recovery package proposes to introduce a limit for the tax deductibility of costs for acquisition of company cars of category M1 to CZK 2 million (roughly EUR 85,000) from the price of the car. This limit will also limit the increase of the entry price at technical appreciation. The tax deductibility of still wine as an advertising item (gift) up to CZK 500 (roughly EUR 21) would be abolished.

Personal income tax

According to the proposals of the Czech recovery package a progressive tax rate of 23% will apply to monthly income of employees exceeding three times the average wage instead of the current four times. Also a general limit of CZK 50,000 (roughly EUR 2,110) per year for the exemption of other income of the same kind will be introduced.

Several tax exemptions will be abolished, such as:

• discount for a student;
• discount on child placement (the so-called kindergarten fee);
• deduction of expenses for trade union membership fees and examinations verifying the results of further education;
• the exemption from the provision of meals in a non-monetary form (meal vouchers, canteens) above the set limit;
• the exemption of non-cash benefits provided to employees.

Following tax exemptions will be limited:

• exemption of income from the sale of securities or shares in a company upon meeting the time test of possession of three or five years to the amount of CZK 40,000,000 (roughly EUR 1,690,000) per year per taxpayer;
• reduction of the wife/husband discount, which will now only be available to a spouse caring for a child under the age of three years;
• restrictions on the exemption of income from raffles and gambling.

Social security 

The Czech recovery package would increase the levy burden for self-employed persons by setting the assessment base at 55% of the tax base compared to the current level of 50% of the tax base. Also the minimum assessment base for calculating insurance premiums for self-employed persons would be increased from 25% of the average wage to 40%.

The proposal would reintroduce the health insurance for employees at 0.6% of the assessment base and change the conditions for participation in insurance for employees working under a work performance agreement (DPP).

Value added tax 

As part of the simplification of the VAT system the Czech recovery package would align the first and second reduced VAT rates (15% and 10%) into one reduced rate of 12%. Most goods and services currently subject to one of the reduced rates will be subject to the 12% rate under the proposal. However, some items will be reclassified.

In particular, the following are to be subject to the reduced rate of 12%:

• food;
• newspapers and magazines;
• medications;
• selected construction works;
• irregular public bus transport of passengers.

In particular, the following will be reclassified to the basic rate of 21%: 

• alcoholic and non-alcoholic beverages with the exception of tap water;
• hairdressing services;
• repair of footwear, clothing and bicycles;
• household cleaning services;
• delivery of cut flowers.

At the same time, the Czech recovery package proposes to introduce a 0% VAT rate on books. 

Real estate tax 

According to the proposal the real estate tax rates increase up to double and an indexation mechanism will be incorporated to allow the tax to be increased in line with the current inflation.

With the above-detailed Czech recovery package the government aims to reduce the public deficit from 3.5% of GDP this year to 1.8% of GDP in 2024 and 1.2% of GDP in 2025.

If you have any queries about the Czech recovery package or need to adapt to the new rules, the experts and advisors of WTS Alfery, the exclusive representative of WTS Global for the Czech Republic will be happy to provide you with professional support.

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Introduction of paternity leave 

As of 1 December 2022, the Czech Labour Code has been amended to add paternity leave as a new obstacle to work on the part of the employee. According to the new provision of Czech labour law, the employer is obliged to grant the employee paternity leave in connection with the birth and care for a child. The employee is entitled to paternity leave for the duration of the paternal care benefit under the Czech Sickness Insurance Act. A male employee on paternity leave is afforded the same protection as a female employee on maternity leave (e.g. the prohibition of termination with certain exceptions and prohibition of immediate termination of the employment relationship by the employer during paternity leave, the right to be assigned to the original job and workplace, right for leave immediately following the paternity leave, etc.).

Quarantine rules

From 1 December 2022, the Czech labour law has also introduced some new quarantine rules. Consequently, the employer is (with exceptions) prohibited from terminating the employment relationship during the period when the employee is quarantined. At the same time, it has also been added to the Czech Labour Code that in the event that a quarantine is ordered for an employee during their leave, the leave is interrupted unless the employee requests to continue taking leave during the quarantine.

Furthermore, the communication in the area of ordered quarantine has been simplified in connection with the implementation of the “quarantine computerisation” plan. The ordered quarantine and the processes associated with it (notifications), as well as temporary incapacity for work, are now carried out electronically (in electronic form).

Changes to occupational health services

As of 1 January 2023, changes in the area of occupational health services, in particular occupational health examinations of employees, shall apply. One of the main changes is that the obligation of periodic occupational health examinations in categories 1 and 2 of “risk-free occupations” (risk-free work categories, work without occupational risk) for employees in an employment relationship is abolished and these are now only carried out if required by the employer or employee. The changes have not affected the obligation to carry out entry examinations on employees. Periodic examinations shall also be carried out, inter alia, in the case of work of the same type carried out on the basis of agreements on work performed outside the employment relationship, in respect of work at occupational risk or carried out pursuant to other legislation, or if the employee or employer requires such examinations. Due to the latest modifications, the area of workplace supervision has also undergone major changes.

Travel allowances for 2023

As of 1 January 2023, the extent of data for the purposes of travel allowances granted to employees has been updated in the Czech Republic on the basis of Decree No. 467/2022 Coll., on the change of the basic compensation rate for the use of road motor vehicles and meal allowances and on the determination of the average price of fuel for the purposes of granting travel allowances for 2023.

Minimum wage in the Czech Republic

Similarly to other countries (see Hungary and Slovenia), as of 1 January 2023, the minimum wage has been increased also in the Czech Republic. The monthly minimum wage for fixed weekly working hours of 40 hours per week has been increased to CZK 17,300 and the minimum wage per hour to CZK 103.80. For other lengths of fixed weekly working hours, according to the recalculation, the minimum wage per hour is CZK 107,10 for the fixed weekly working hours of 38.75 hours and CZK 110,70 for the fixed weekly working hours of 37.5 hours. There has also been an increase in the lowest level of guaranteed wages, but only in work categories 1 and 8.

New premium discount in Czech labour law

As of 1 February 2023, an employer in the Czech Republic can claim a discount on social security premium for the selected groups of employees for the first time for the month of February 2023 provided that the statutory conditions are met. This option applies to employees in an employment relationship (or service relationship) with agreed shorter working hours. To qualify for the discount, all other conditions set out in the Czech labour law must be met (including, for example, shorter working hours of not less than 8 hours and not more than 30 hours per week), and at the same time there must not be any of the reasons for which the discount on the premium for an employee is not applicable. A statutory condition for claiming the discount on the premium is the prior notification of the intention to apply such premium discount for a particular employee to the Czech Social Security Administration (CSSZ). Only one employer may be entitled to a premium discount for the same employee. Therefore, there applies a rule that if more than one employer intends to claim a premium discount for the same employee, the employer who has first notified the Czech Social Security Administration of this intention is entitled to the premium discount for that employee.

Furthermore, a major change of the Czech labour law (Czech Labour Code) is highly expected in 2023.

If you have any queries about the Czech labour law or need to adapt to the new rules, the experts and advisors of WTS Alfery, the exclusive representative of WTS Global for the Czech Republic will be happy to provide you with professional support.

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Windfall tax

Windfall tax, i.e. tax on unexpected profits, is introduced into the Czech tax system as a subcategory of corporate income tax for banks and companies in the energy and fossil fuel sectors that generate unexpected profits as a result of energy prices and interest rates increase. It should apply between 2023 and 2025.

Banks in the Czech Republic are subject to windfall the tax for the given tax period, in which they achieve a net interest income of at least CZK 50 million and at the same time, in 2021 they achieved the same income of at least CZK 6 billion.

Non-bank taxpayers in the Czech Republic are subject to the windfall tax for the given tax period in which the total annual net turnover from the following activities amounts to at least CZK 50 million and at the same time, in 2021 they achieved a turnover of at least CZK 2 billion from these activities:

• mining of hard coal, oil and natural gas;
• production of coke oven products and refined petroleum products;
• generation, transmission and distribution of electricity (with certain exceptions) and gas production and distribution;
• wholesale of liquid fuels, gaseous fuels and related products;
• pipeline transport by oil and gas pipeline.

The windfall tax also applies to taxpayers for the given tax period in which the total annual net turnover from the following activities amounts to at least CZK 50 million and at the same time, in 2021 the income from these activities accounted for at least 25% of their turnover:

• mining and treatment of hard coal, oil and natural gas;
• production of coke oven products and refined petroleum products.

The tax base for windfall profits is based on the amount by which the tax base (calculated for corporate income tax purposes) for the given tax period exceeds the comparative tax base plus 20% of its value. The comparative tax base is the arithmetic average of the tax bases for the years 2018 to 2021. A tax rate of 60% applies to the tax base thus calculated. 

Windfall tax has to be paid during the tax period similarly to income tax through the payment of advances calculated from the last known tax. The amount of advances paid in 2023 shall be calculated on the basis the notional windfall profits tax amount. This notional tax is determined from the data provided by the company in its 2022 notional tax notice. The notice shall state the details for calculating the windfall profits tax and shall be filed with the Specialised Tax Office of the Czech Republic no later than 3 July 2023. Advances paid during 2023 will then be offset against the actual amount of tax for 2023.

Extraordinary depreciation

Extraordinary depreciation is a special category of tax depreciation, which is not determined on annual basis, but with accuracy to months. It is applied within 12 months for assets included in the 1^st depreciation group, or within 24 months for assets included in the 2^nd depreciation group. They cannot be interrupted and their use is voluntary.

The previous Czech regulation allowed extraordinary tax depreciation only for assets acquired in 2020 and 2021. Thanks to an amendment included in the 2023 tax package for the Czech Republic, the extraordinary depreciation regime can also be applied to assets acquired in 2022 and 2023.

Limits for mandatory filing of income tax returns

The 2023 tax package for the Czech Republic increases the income limits decisive for the obligation to file personal income tax returns. Newly, taxpayers will not have to file tax returns in the following cases:

• employees with other income up to CZK 20,000 (the previous limit of CZK 6,000 still applies to the 2022 return),
• persons with total income not exceeding CZK 50,000 (until 2022, the limit was CZK 15,000).

Flat-rate scheme for natural persons

The flat-rate tax was introduced in the Czech Republic for the first time for the 2021 tax year. But due to the strict conditions for its application, very few personal income taxpayers have signed up for it. The 2023 tax package for the Czech Republic also amended this conditions which should therefore extend the use of the flat-rate tax regime and simplify the administrative obligations of small entrepreneurs overall. It is also connected with an increase in the limit for compulsory VAT registration from CZK 1 million to CZK 2 million.

The flat-rate tax allows natural persons / entrepreneurs in the Czech Republic, who are not VAT payers and have no other significant income, to avoid the need to file annual tax returns and reports for the social security administration and the health insurance company and to pay contributions to three different accounts.

In accordance with the provisions of the 2023 tax package for the Czech Republic, from 2023, instead of one lump-sum tax, a three-band taxation is newly introduced, where the amount of the lump-sum tax is graded according to the turnover achieved. For most taxpayers, the following settings apply:

• turnover up to CZK 1 million – flat tax CZK 6 thousand per month
• turnover between CZK 1 million and CZK 1,5 million – flat tax CZK 16 thousand per month
• turnover between CZK 1,5 million and CZK 2 million – flat tax CZK 26 thousand per month.

For 2023, it was possible to enter the flat-rate scheme until 10 January 2023.

Control report

From January 2023, the length and starting date of the period for responding to the tax administrator’s request to change, supplement or confirm data in the control report have been changed. Newly, it is necessary to respond within 17 calendar days of the delivery of the notice to the data box instead of 5 working days from the notice.

For selected VAT payers (natural persons, limited liability companies with a sole shareholder – a natural person and quarterly payers), certain fines for breaches of obligations related to the submission of control reports are halved.

All VAT payers are no longer subject to the first fine in a calendar year for submitting a control report within a substitute deadline.

If you have any queries about the 2023 tax package for the Czech Republic or need to adapt to the new rules, the experts of WTS Alfery, the exclusive representative of WTS Global for the Czech Republic will be happy to provide you with professional support.

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Which changes do you need to prepare for?

The European Commission in particular objected to the incorrect definition of the so-called material beneficial owner, which the Czech Republic conceived in the ARBO differently from the Anti-Money Laundering Directive, this being by means of a two-component definition. This is to say that in its wording to date, the ARBO distinguished between an ultimate beneficiary and a person with ultimate influence.

The amendment to the ARBO now omits this division altogether and redefines beneficial owner as “a natural person who ultimately owns or controls a legal entity or legal arrangement”.

The amendment to the ARBO continues to work with the 25% threshold for the size of the shareholding, for voting rights and for profit received, which means that the profit-sharing criterion will continue to be maintained. However, in addition to the persons who receive a specified portion of the distributed funds or control the company, a person who only owns a share of the relevant size is also deemed to be a beneficial owner.

It is still the case that the concept of beneficial owner is linked only to a natural person. It also holds true that there may be more than one beneficial owner.

The amendment also significantly narrows the exceptions to the obligation to register the beneficial owner. In addition to other legal entities, the obligation to register the beneficial owner will now also apply to home owners’ associations, for which the concept of beneficial owner did not exist according to the previous wording of the ARBO. In the case of these legal entities, the members of their statutory body (typically the members of the HOA committee) will automatically be “copied from other registers and records” as the beneficial owners.

Transitional provisions of the amendment to the ARBO

The new legislation, effective as of 1 October 2022, determines a six-month deadline for meeting of the registration obligation in the case of entities which were previously deemed not to have a beneficial owner.

The transitional provisions also contain so-called protective provisions for legal entities which have duly met their registration obligation under the current legislation. These legal entities will have a period of six months from entry into force of the amendment to register a beneficial owner that meets the criteria of the new legislation. However, the ARBO provides for a transition period only for corporations which have everything properly registered, otherwise the obligation exists that they register or modify their entry without undue delay.

If any details need to be changed in the Register of Beneficial Owners during the transitional six-month period, the obligation exists that the party concerned adapt its entry to comply with the new rules together with this change.

In the period of one month, according to the latest information, it will not be possible to make changes to the recorded data due to its extensive automatic overwriting and lock-out of the Register.

Conclusion

Business corporations will be forced to evaluate who their beneficial owner is according to the new statutory definition after the amendment comes into force. Formal changes in the designation of beneficial ownership status will also be made by automatic copying from other registers and records. However, some business corporations, particularly those with complicated ownership and management structures, will be forced to submit a new proposal for change to their registered details.

Basically, all business corporations should check their entry in the Register of Beneficial Owners after the amendment comes into force and verify whether there are any material or formal errors even in the case of automatic copying from other registers and records, or whether the amended entry is complete.

If you have any queries about the Czech ARBO or need to adapt to the new legislation, the experts of WTS Alfery, the exclusive representative of WTS Global for the Czech Republic will be happy to provide you with professional support.

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Income tax changes related to low-emission vehicles

The first change of the Czech income tax law concerns employees who use a low-emission car provided by their employer also for private purposes. Their taxable base is now to be increased not by 1% but by 0.5% of the purchase price including value added tax. According to the transitional provisions, this provision is valid for the entire year 2022. Wages for the past periods will not be adjusted in individual months, but the adjustment will be made in a single payment within the annual settlement of advances and tax benefits or in the confirmation of taxable income from employment when it is issued to the taxpayer.

The definition of low-emission vehicles should be defined in a separate legal regulation, namely the Act on the support of low-emission vehicles through public procurement and public services in passenger transport. However, this act had not yet been adopted before the date of legal force of Act No. 142/2022 Coll. For this reason, the term ‘low-emission vehicle’ is also explained in the transitional provisions.

It should refer to a road vehicle in category M1, M2 or N1 whose CO2 emission limit does not exceed 50 g/km and 80% of the emission limits for air pollutants in real traffic as laid down in Annex I to Regulation (EC) No. 715/2007 of the European Parliament and of the Council on type-approval of motor vehicles.

The employer should be able to prove the application of the lower rate for the taxation of the employee’s non-monetary income at any time. If this information cannot be clearly deduced from the registration certificate, we recommend that, as a precautionary measure, the original rate of 1% of the purchase price of the car including value added tax should continue to apply.

Another change is the reclassification of electric vehicle charging equipment from depreciation group 3 to depreciation group 2. This will shorten the minimum depreciation period for this equipment and thus accelerate the application of costs for acquiring these devices as tax expenses.

The transitional provision on the change of depreciation group also allows the application of this rule already for the whole year 2022. If depreciation of such assets started before 2022, it is possible to reclassify such assets to the depreciation group corresponding to the current wording of the law starting from 2022.

Changes in road tax

In order to support even more low-emission mobility in the Czech Republic, the Act also makes changes to road tax for the full year 2022. Only trucks in categories N2 and N3 and their trailers in categories O3 and O4 will now be subject to road tax. Cars and buses will no longer be subject to the tax.

Trucks with a maximum weight of over 3.5 tonnes and truck trailers weighing over 3.5 tonnes remain subject to the tax, but some of them are now zero-rated. For example, no road tax will be payable on trucks with 2 axles with a maximum weight of up to 12 tonnes or on trailers weighing up to 12 tonnes. As a result, only operators of heavy trucks and trailers with a maximum permissible weight of 12 tonnes or more and tractor units will pay road tax for 2022. As the advance payments of road tax for the whole year 2022 have been cancelled by the general pardon of the Czech Ministry of Finance, the road tax will not be due until the end of January 2023.

If you would like to know more about the low-emission mobility supporting tax changes in the Czech Republic or other taxation issues in the country, please do not hesitate to contact the experts at WTS Alfery, the exclusive representative of WTS Global for the Czech Republic.

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Related parties in the Czech Republic according to the Income Tax Act

Transactions between related parties in the Czech Republic are regulated by the requirement to comply with the arm’s length principle. According to the Czech Income Tax Act, related parties in the Czech Republic are understood as follows:

• persons related through capital (25% threshold),
• persons otherwise related who are persons
  1. where one person participates in the management or control of another person,
  2. where identical persons or close persons participate in the management or control of other persons, then such other persons are persons otherwise mutually related; if a person is a member of the supervisory boards of two persons, such persons shall not be deemed otherwise related,
  3. controlling and controlled and also persons controlled by the same controlling person,
  4. who are close,
  5. who have created a legal relationship predominantly for the purpose of reducing a tax base or increasing a tax loss.

Based on the precise definition of a related person, the last variant of “otherwise related persons” is the most problematic. For this reason, it is important to examine two judgements of the Czech Supreme Administrative Court, which clarify the definition of related parties in the Czech Republic.

Obligations and difficulties of the tax authority

The Czech Supreme Administrative Court is of the opinion that to adjust the tax base according to the Czech Income Tax Act, it is essential to prove compliance with the related persons’ criterion. This is done by the tax authority. Admittedly, proving a creation of a legal relationship predominantly for the purpose of reducing a tax base or increasing a tax loss is difficult, but it is not sufficient to find that the price is excessive. The only exception could be the case of a clear price overrun for goods or services whose normal price is generally known or available, in the absence of any reasonable explanation for the acquisition of those goods or services, or that it was an artificial transaction (pointless for the real economic functioning of the tax entity), the only explanation for which is the reduction of the tax base. In this case, the company would also not be able to explain the difference between the price paid and the arm’s length price.

Likewise, sufficient evidence of creating related parties in the Czech Republic as defined by that provision would emerge if the buyer accounts for artificially increased tax costs, while the seller takes advantage of the tax loss they would already have available. It is essential, however, that the excessive price must be quite obvious, and the circumstances of the individual case must not offer any reasonable explanation other than the performed transaction being the result of an agreement between two persons to obtain a tax advantage. 

Another judgment of the Supreme Administrative Court on related parties in the Czech Republic

It follows from another judgment of the Czech Supreme Administrative Court (1 Afs 109/2021) that if the recipient of the service actually paid a certain price and at the same time it was not proven that the funds would be returned to them, paying the overpriced service for the purpose of incurring higher expenses would lack any rationality as it would be financially disadvantageous.

Both court decisions therefore mean the tax administrator is obliged to examine the possible existence of other circumstances indicating that such a relationship was established mainly to reduce the tax base or increase the tax loss, i.e. that the companies are otherwise related as defined by Section 23 para. 7 b) of the Czech Income Tax Act.

If you would like to know more about transactions between related parties in the Czech Republic or other transfer pricing issues in the country, please do not hesitate to contact the experts at WTS Alfery, the exclusive representative of WTS Global for the Czech Republic.

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Amendment to Act on Investment Companies and Investment Funds

The most important changes to the Czech Act on Investment Companies and Investment Funds made by an amendment in 2021 are compared to the previous year the following:

• Investment fund with legal personality: The Act was broadened by a new provision concerning an investment fund’s board of directors, whereby the investment fund’s board of directors with legal personality may be only one member, and its member can only be a legal entity, provided that the investment fund with legal personality is not a self-governing investment fund.

• Joint stock company with variable share capital: The statutory director of a joint-stock company with variable share capital, which is an investment fund, no longer has full management and therefore does not determine the basic focus of business management. The general meeting of a joint-stock company with variable share capital now does not elect or dismiss the statutory director nor approve his/her contracts or changes to that contract. Furthermore, the provision authorizing the legal entity to become a statutory director was removed if the conditions for membership of the Board of Directors are met. In the event that the same person wishes to fill more than one senior position in the same fund or company, a new consent from the Czech National Bank to perform another senior position is not required if the Czech National Bank has already granted one permit.

Reduction of support for solar power plants

Other significant changes in 2021 in the Czech tax system that may be important for foreign investors are the changes to green tax green tax in the Czech Republic. Thanks to the photovoltaic boom of 2009 and 2010, purchase prices of electricity produced by solar plants have increased several times over a period of time. For this reason, the government of the Czech Republic has decided to reduce support for solar power plants to a minimum level within the range set by the European Commission. The yield percentage is thus to be reduced from 8.4% to 6.3%. The main reason was the disparity between the support of solar power plants and their share in electricity generation, as they account for only 2% of the total electricity production in the Czech Republic.

Electricity tax

Taxpayers in the Czech Republic are obliged to pay a tax on electricity from renewable sources from 1 January 2016, when the law that abolished the exemption of environmentally friendly electricity from the electricity tax came into force. The obligation to pay an electricity tax applies to production plants with an installed capacity of over 30 kWp whose production meets their consumption. Technological consumption is not subject to the tax.

A tax return must be filed monthly. It is necessary to register for the tax at the locally responsible customs office in the Czech Republic, based on the address of the manufacturer’s registered office. However, if the manufacturer is not a taxpayer by law, he/she is not obliged to register. In case the manufacturer is registered, he/she must file a zero tax return on a monthly basis.

Subsidies

New projects are no longer eligible for operational subsidies in the Czech Republic but are entitled to other forms of assistance. Above all, they can apply for an investment grant under the New Green Savings Program. When transferring ownership of a photovoltaic power plant, the new operator must apply for a new license and the previous owner must annul the original license. Unless the technical conditions under which the original license was granted change, the amount of support remains the same. The new operator loses the right to said support when the previous license expires and, at the same time, a new one is not issued.

If you would like to know more about the changes to the Czech Act on Investment Companies and Investment Funds or about the green tax in the Czech Republic, please do not hesitate to contact the experts of WTS Alfery, the exclusive representative of WTS Global for the Czech Republic.

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Implementation of EU directive in the VAT Act of the Czech Republic

However, the delay in the legislative process hit a snag. The amendment should have been effective from 1 July 2021, as required by the relevant legislative package of the European Commission that aims to standardise and simplify VAT rules in the European Union that affect e-commerce. As announced earlier by the Czech Financial Administration, despite the delay in the legislative process the new EU VAT rules on e-commerce have been in force from 1 July 2021 in the Czech Republic, just like in all EU Member States, as required by the EU Directive.

Thus for the transition period from 1 July to 30 September 2021, taxpayers could make use of the directive’s direct effect and apply the rules defined in European legislation. This option was used by the vast majority of taxpayers. The main reason is that in other EU countries the relevant rules were amended from 1 July 2021, and it was not possible to continue applying the original procedures.

Now, however, the VAT Act of the Czech Republic is compliant with the relevant European directive. The main changes of the amendment concern the following areas:

Remote sale of goods (formerly, sending goods)

One of the most important changes to the VAT Act of the Czech Republic affects the taxation of shipments of goods between EU Member States. The original limit for delivering goods to final customers in other EU countries through an e-shop was EUR 35,000 or EUR 100,000, and was counted separately for each country. Now there is a single limit of EUR 10,000 per year for all EU Member States together. The limit for the duty to register for VAT in other EU countries will therefore be reached very soon.

Extension of the One Stop Shop concept

However, the European directive and the amendment to the VAT Act of the Czech Republic allow expanded use of the One Stop Shop (OSS) concept. If an e-shop registers with the OSS in the Czech Republic, it will pay VAT on all consignments to other EU countries in the Czech Republic in the form of a special VAT return and will also not have to register for VAT in any other EU Member State. This option can also be utilised for the import of consignments up to a value of EUR 150.

Abolition of exemption from VAT for low-value goods imports

According to this recent amendment, in the case of importing goods with a value not exceeding EUR 22 the exemption from VAT is cancelled. They are now subject to VAT.

If you are affected by the aforementioned changes of the VAT Act of the Czech Republic, please do not hesitate to contact the experts of WTS Alfery, the exclusive representative of WTS Global for the Czech Republic.

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In addition to a stricter definition of the term ‘beneficial owner’ and related definitions, the new law also regulates in more detail the proceedings for registration in the records of beneficial owners in the Czech Republic. And what is even more important, compared to the previous regulation, it introduces completely new sanctions for failure to comply with the obligation to perform proper registration in the records of beneficial owners. These new sanctions comprise, on the one hand, the possibility of a financial fine for a missing or incorrect record in the records of beneficial owners, but also a restriction or prohibition on the payment of a profit share and a restriction on the exercise of voting rights for those members not recorded as beneficial owners even though they are.

New definitions 

The Registration Act was adopted in connection with the requirements of the fifth EU Anti-Money Laundering Directive. These are intended to improve the transparency and efficiency of the legal regulation of records of beneficial owners. The Registration Act therefore imposes on ‘registrants’ (basically meaning every legal person with a registered office in the Czech Republic and the trustees of trust funds) the obligation to ensure that all natural persons who meet the definition of beneficial owner are registered in the records of beneficial owners in the Czech Republic.

According to the new definition, a beneficial owner is any natural person who is an ‘end beneficiary’ or person with final influence. The Registration Act then defines in detail these new terms for various types of legal person. For example:

• an end beneficiary of a business corporation (meaning an enterprise) is any person with a direct or indirect right to a share in the profit, other own resources, or the liquidation balance of a business corporation of over 25%, and who does not pass this share onto others;

• a person with final influence in a business corporation is any natural person who is a controlling person pursuant to the Czech Business Corporations Act.

If it is not possible to determine any beneficial owner even after the registrant take all efforts that can reasonably be required of them (while the performance of such steps must be demonstrably documented), every person in the senior management of the corporation will be considered a beneficial owner.

Registration, public access and inconsistencies in records of beneficial owners in the Czech Republic

The new Registration Act also newly regulates the proceedings for registration in the records of beneficial owners performed by register courts. There will now be partial public access to records of beneficial owners in the Czech Republic. This means that anybody will be able to obtain a partial extract from the records showing information about the beneficial owner.

The Registration Act also introduces the institute of ‘inconsistencies in the records of beneficial owners and court proceedings on inconsistencies. This is intended to enable the register court to effectively enforce the obligation to register. New obligations in relation to inconsistencies are also imposed on obligated persons pursuant to the Act on Selected Measures Against the Legitimisation of the Proceeds of Crime and Financing of Terrorism (e.g. financial institutions like banks and insurance companies, but also e.g. auditors, lawyers, notaries, tax advisers and others) who will, in some cases, be obliged to notify their clients – and potentially also the register court – of inconsistencies.

Significant new sanctions

Sanctions for failure to comply with the obligation to perform proper registration in the records of beneficial owners in the Czech Republic will also undergo significant changes compared with the current legislation.

In accordance with the requirements of the fifth EU Anti-Money Laundering Directive, sanctions of up to CZK 500,000 (roughly EUR 20,000) will be introduced for infractions. These can be imposed both on the registrant (e.g. a business company) but also on its beneficial owner, end beneficiary or e.g. person with final influence, if they do not provide the necessary cooperation to the registrant. The introduction of sanctions impacting the internal decision-making of a business corporation is completely revolutionary.

If a beneficial owner of a business corporation is not registered in the records of beneficial owners in the Czech Republic, the business corporation may not pay them a share of the profit. Nor may it pay this share to a different legal person (e.g. a parent company) where they are also a beneficial owner. The same applies if the business corporation does not have any beneficial owner recorded in the records of beneficial owners. The payment of a share of the profit in violation of this prohibition would represent, on the part of the statutory bodies of that company, a breach of their obligations and could establish their personal obligation to compensate the company.

Similarly, if the beneficial owner of a business corporation is not recorded in the records of beneficial owners, they may not exercise voting rights during decision-making by the general meeting of that business corporation or make decisions as its sole member. Decisions taken in breach of this prohibition would be invalid, and would need to be enforced at a court of law through a procedure pursuant to the Business Corporations Act.

These latter sanctions (restrictions or prohibition on the payment of a share in the profit and restrictions on voting rights) represent an unprecedented and significant intervention through the public law regulation of records of beneficial owners in the internal relations of legal persons, in particular business corporations.

For the above reasons, we recommend in particular that all statutory bodies of business companies and also members do not underestimate their preparations for the Registration Act. It is in the interest of companies and their beneficial owners to supplement any missing or incomplete records in the records of beneficial owners as soon as possible.

If you have any queries or need to adapt to the new legislation, the experts of WTS Alfery, the exclusive representative of WTS Global for the Czech Republic will be happy to provide you with professional support.

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