In August, the Government proposed an act in the Chamber of Deputies, which would bring fundamental changes to some tax laws (proposal no. 873/0). A discussion about this proposal was supposed to take place during week no. 36, however, it has not taken place yet. The text should come into force on 1^st January 2017 but some of the regulations would be applicable to 2016 tax period already.

Here, we are offering you a summary of the most fundamental changes concerning the Act on income tax. Because of the scale of the proposed changes we have divided this topic into several articles. In the previous two we have discussed the changes concerning taxation of natural persons. This issue will offer information on changes concerning income tax of corporate bodies. The next issue will focus on common provisions.

House Unit Owners Associations

The income of House Unit Owners Associations (HUOA) is usually not high enough to be taxable and therefore is seems unnecessary to burden these associations with the obligation of tax return.

This is the reason why the Act states that grants, expenses made for house and land maintenance by the unit owners, and expenses associated with the usage of apartments and non-residential premises are not subject to taxation in the case of  HUOA.

The amendment further adds – or rather specifies – that neither payments of insurance contracts concluded by HUOA and providing insurance on the common parts of buildings are subject to taxation in the case of HUOA.

As regards the income tax this payment is always viewed as income for the unit owners even in the case where the association recognizes the payments in profit.

For a similar reason provision § 36 paragraph 9 is being extended and moved to § 36 paragraph 5. This provision provides for taxation of interest income and lays down a special tax rate for HUOA and some public benefit purpose taxpayers. Until now these taxpayers were not obligated to fill out tax returns only in the case of current account interest income tax. Now they should not be obligated to tax returns by banks or credit union deposits either (i.e. now they should not be obligated by any form of deposit) because tax of 19% is deducted and payed by these institutions already.

Lowering the basis of assessment for non-profit organizations

This paragraph lays down the possibilities for lowering the basis of assessment for public benefit purpose taxpayers.

Until now these taxpayers could benefit from lowered basis of assessment only if the funds acquired by these savings were used in the following three tax periods to cover expenses connected with activities which do not bring taxable income, meaning especially in non-entrepreneurial activities which created loss.

According to the new amendment, funds from these savings could be used to cover expenses connected with non-entrepreneurial activities in general, i.e. no longer only loss-making ones.

However, it will be possible to use the funds acquired by this method only in the following tax period, no longer in the three following tax periods.

Cultural and Social Needs Fund (CSNF) and other funds of public benefit purpose taxpayers

This subject change concerns only public benefit purpose taxpayers and universities, which make up the cultural and social needs fund and other funds as according to special acts and regulations. Until now, concerning the taxability of these expenses, the act on income tax lays down a fixed limit for rations to these funds of 1% of yearly expenses made for salaries and allowances.

After the new amendment is passed the amount of these taxable expenses will be deduced directly from the limit stated by the relevant regulation (Art. 114/2002 Coll. on cultural and social needs fund). Currently, this regulation lays down the limit at 1,5% of yearly expenses made for salaries and allowances; the suggestion for 2017 is 2% of yearly expenses made for salaries and allowances.

Building demolition in relation to new construction

This regulation, which defines the entry price of tangible assets, contains a new addition which says that the residual value of the demolished building shall be a part of the entry price of the new construction.

Said addition works as a fix for the current situation where the discussed issue is not directly provided for in the act and therefore the entry price of a new construction contained not the tax residual value but the book residual value of the demolished building.

In such case when the demolition of the original building is only partial, the price of the new construction will contain only the tax residual value of the demolished part.

If a part of the original building, which is being demolished, continues to serve its purpose separately, the depreciation will continue to be done from the lowered entry price or the residual value.

Withholding tax and share in profits

The proposed amendment confirms that this regulation views every paid advance of income, which is taxed by a deduction defined by a specific rate, and every payment balancing the final payment as a separate revenue.  

This concerns namely the fulfillment of requirements for exemption of shares in profits (§ 19 paragr. 1 ze) anad zj)) where the requirements are assessed separately for payed advance and for the following balance of share in profits.

Thus, for example, if a taxpayer who is not a parent company is payed an advance on share in profits and subsequently becomes a parent company before this advance is settled, there will be no additional exemption of the advance on share in profits made.

Further, the amendment regulates what shall be done in case of return of payed advance on share in profits where the share was transferred to a business corporation.

Because the obligation to return an advance on share in profits (for example because the estimated profit was not reached) arises for the new owner of shares, this owner also gains the right to the return of “wrongfully” withheld tax.

Also the period during which the taxpayer may ask for an explanation doubts about the rightfulness of the withheld withholding tax is now longer.

The current subjective deadline is 60 days starting on the day when the taxpayer was informed about the amount of tax deducted, the new amendment determines also an objective deadline of 2 years starting on the day of tax deduction while the subsequent 60 day period is to be kept also.

This regulation is important mainly for foreign entities for which the current period proves as too short in cases where they are required to submit some other documentation for example (justification for lower tax rate by means of a tax residence certificate etc.). This should have an effect for taxes charged under specific tax rate deducted from 1^st January 2017.

One may assume that some further changes of this amendment can occur during the legislative process. Therefore we will strive to inform you about the amendment’s development in the future. Should you have any questions concerning this topic please don’t hesitate to contact our firm.