I. APPROVED AMENDMENTS

1. Social Security Convention with Austria

Starting on 01 January 2001 the social security convention between the Czech Republic and Austria has entered into force. Besides the non-discrimination principle this treaty governs the claims for benefits resulting from health insurance, old-age pensions, disability pensions or survivorship annuity.

Mandatory health and social security insurance is still govern by legal regulations of the state, in which the work is performed. For example, if an Austrian citizen is in the position of an authorised representative (executive) of the company in the Czech Republic and is remunerated for this performance, he is subject to the social security insurance in the Czech Republic as up to now.

The time of insurance collected in the other contractual state is included in the insurance period decisive for the origin of the pension claim. If a Czech citizen is seconded by his employer to Austria to perform his work, the period worked-off there shall be included in the insurance period decisive for obtaining of the pension claim in the Czech Republic. The similar situation is in the case of an Austrian citizen seconded to the Czech Republic.

The Czech Republic has already concluded similar social security conventions with e.g. France, Slovakia and Switzerland. The social security convention between the Czech Republic and Germany was concluded on 27 July 2001. Due to the fact that this treaty is yet to be ratified, it is expected to come into force only during the year 2002.

 

2. Amendment to the Excise Duties Tax Act

As of 01 August 2001 the amendment to the Excise Duties Tax Act has come into force, which brings the changes in the following areas:

(i) Tax Payment

The deadline of the payment of the taxpayers whose excise duty liability does not exceed CZK 10,000,000.00 per month has been altered. In this case the tax due is payable by 55th day following the end of the taxable period. Till now it was necessary to pay the tax due by 25th day.

(ii) Taxation of Lubricating and Other Oils

Following the previous amendment to the Excise Duties Tax Act as of 01 July 2001 respectively as of 01 August 2001 the provisions regarding the taxation of lubricating and other oils has been newly adjusted. Lubricating and other oils have been more precisely specified and the tax rate is in the amount of CZK 8,150.00, respectively CZK 0.00 for 1,000 litres.

 

3. Decree No. D-223 to the Unified Procedure for Employers of Applying for the Contribution to Another Main Course

This decree reacts to the change of the Labour Code, which newly defines the term of working time and/or work shift, effective as of 01 January 2001. Subject to the change are the obligatory breaks that are not included into the working time and/or work shift. The possibility for the employer to consider the contribution to another main course for an employee, who works including the obligatory breaks for more than 11 hours a day, as a tax deductible expense remains unchanged.

 

4. Notification to VAT Refunds to Foreigners

With respect to the possibility of VAT refunds to foreign persons the Ministry of Finance of the Czech Republic announced the following:

The principle of reciprocity applies only to the following states: Austria, Finland, Belgium, Denmark, Luxembourg, Great Britain, Hungary, Sweden, Ireland, Switzerland and Germany. However, in the case of Germany the amount of tax paid on fuels is excluded from VAT refunds. The residents of other states are not entitled to VAT refunds.

Providing that any of the above mentioned states will not refund to the Czech entrepreneurs the tax from selected goods or services, the Tax Office for Prague 1 will suspend the refunds of the tax from such selected goods or services to entrepreneurs of that state.

 

II. PROPOSED CHANGES OF LAWS

1. Proposal of the Amendment to the Accounting Act

Currently, the amendment to the Accounting Act is under the approval procedure by the Parliament of the Czech Republic, which should become effective as of 01 January 2002. The purpose of this amendment is the approaching of the Czech law with the law of the European Community. Therefore, the accounting procedures and their extent shall be tighten up and more specified. To the main changes cover especially:

  • technical form of accounting records is equalised with the written form (important especially for e-business and for retention of the documents in the electronic form);
  • stricter criteria of subject to a statutory audit of the annual accounts of other companies. The liability to the statutory audit of the annual accounts by a certified auditor firstly rises if at least two of the following three criteria are met
    • total sum of the balance sheet < CZK 80,000,000.00;
    • net turnover < CZK 120,000,000.00;
    • average re-counted number of employees < 50;

Joint stock companies are still subject to a statutory audit even in case they do not meet the above mentioned criteria.

  • so-called "real value" is introduced as another evaluation method (especially for transformation of companies and in special cases as of the balance day – e.g. derivatives, short-term securities);
  • secondary costs on the purchase of securities and capital participation are included in the acquisition price (currently they are evaluated only by the acquisition price without secondary costs);
  • liabilities are recorded in the balance sheet at the price ascertained by the inventory (higher or lower than their price recorded in accounting);
  • physical stock taking inventory time limit is extended from 3 months to 4 months before the balance day;
  • the competency of the Ministry of Finance to publish the Czech Accounting Standards, which should replace current Accounting Procedures in the future;
  • stricter fines, which shall be determined as a percentage of the total sum of the property in the balance sheet respectively in the overview of the assets and liabilities of the accounting unit;
  • if, in the case of winding-up of the accounting unit, the retention duty of the documents does not pass to another person, the ceasing accounting unit is obliged to secure this duty and has to inform the state archive about the way of securing.

 

2. Proposal of the Amendment to the Investment Incentives Act

At present the Parliament of the Czech Republic is discussing the governmental proposal of the amendment to the Investment Incentives Act, which should eliminate above all some of the interpretation and application discrepancies. The current legal regulation contains only three types of incentives that are addressed directly to investors (income tax relief, financial support to create new jobs and financial support for retraining employees). New types of incentives in the form of granting of the technically equipped area for an advantaged price or assignment of the property owned by the Czech Republic have been added.

The amendment to the Investment Incentives Act is also supposed to indirectly alter the Income Taxes Act. Namely the following changes have been proposed:

  • specification of the beginning of the taxable period, for which the income tax relief could be applied;
  • the limit of the tax relief shall be reviewed for individual taxable periods instead of the total sum of all taxable periods;
  • time limit for determining or additional determining of a tax due is reduced from 15 to 10 years in the case of tax relief granted as a part of investment incentives.

 

III. ACTUAL TOPICS

In the following articles we would like to point out the most significant aspects of the change of the accounting period. Further, we would like to inform about tax consequences of contractual fines as well as compensation payments to employees, which are above the statutory limit.

 

1. Change of the Accounting Period – Assumptions and Tax Particularities

Pursuant to the amendment of the Accounting Act as of 01 January 2001 the accounting units may freely choose their fiscal year. Formerly the fiscal year was defined as a calendar year. This fact was inconvenient especially for concerns (group of companies) with different fiscal year because they were obliged to prepare two separate annual accounts (both verified by an auditor). The first one was the statutory annual accounts as of 31 December and the second one was the annual accounts for the consolidation purposes as of the date of the consolidated balance sheet.

The possibility to choose a different fiscal year shall avoid the discrepancy between both decisive days, which shall reduce the costs and the working load as well. However, before the decision on the change of the accounting period is made some consequences as described below should be considered:

(i) Accounting Period Definition

As of 01 January 2001 the accounting period is determined as a period of twelve successive calendar months (Section 3 (2) of the Accounting Act). The accounting period therefore corresponds to a calendar year or a fiscal year. The accounting period becomes the fiscal year only if it begins on the first day of any month other than January. In the following cases the accounting period may be shorter, respectively longer, than 12 months:

  1. change of the accounting period (from a calendar year into a fiscal year and vice versa);
  2. creation or winding-up of the accounting unit;
  3. transformation of a company.

(ii) Legal Framework

Accounting Act

The application of the fiscal year is only allowed with the approval of the tax administrator at least 3 month prior to the supposed date of change of the accounting period. The reason and the supposed start date for the change must be stated in the application. The tax administrator is obliged to decide in this application without undue delay, at the latest within 30 days. He is entitled to reject the application only if he has objective and fundamental economical reasons for that. However, the accounting unit may not apply the newly determined fiscal year until it receives the approval from the tax administrator. The accounting unit has a notification duty to the tax authority when reasons leading to the change of the fiscal year expire and eventually has to file a new application for the change of the fiscal year.

The accounting period immediately preceding a change of the fiscal year can be shorter or longer than 12 months (in extreme case it may last for 23 months). Should the accounting period immediately preceding the change be longer than 12 months, we recommend filing the application of the fiscal year before the end of the calendar year in order to inform the tax authorities in due course. In this case the accounting unit is not obliged to ordinary annual accounts operations at the end of the calendar year but as of the newly determined decisive day. If the accounting unit is subject to a statutory audit of the annual accounts or a publishing liability, this liability also applies to the newly determined decisive day.

Income Taxes Act

In this connection the definition of taxable period has been also altered. So far it was only defined as a calendar year. Currently it is:

  1. calendar year;
  2. fiscal year;
  3. in case of consolidations the period from decisive day to the end of the accounting period, during which the registration at the Commercial Register is effective;
  4. accounting period according to the Accounting Act if it is longer than 12 months.

When altering the accounting period the liability to file a tax return for the previous period arises, i.e. if the accounting period is longer than 12 months it is not necessary to file the tax return by the end of the calendar year but by the end of the accounting period. It is necessary to file the tax return by the end of the month following the change (e.g. if the change takes place as of 01 July the tax return must be filed by 31 July). When preparing the tax return by a certified tax adviser there should be a possibility to extend the filing deadline.

The taxpayer has the possibility to choose whether the period immediately preceding the change would last more than 12 months or less. If it is longer than 12 months then the generally accepted rules should apply (just like in the case of an ordinary tax return). The period longer than 12 months is not problematic from a tax point of view because it is defined as a taxable period. However, it is important to bear in mind that the tax deductible expenses such as depreciation, investment allowances, adjustments and legal reserves may be applied only for 12 months period. Thus, the taxpayer will have revenues for e.g. 18 months but will be able to apply deductions only for 12 months.

If the period preceding the fiscal year is shorter than 12 months it is important to consider the fact that the shortened accounting period is not considered as a taxable period. This situation leads to legal uncertainty and various interpretations of how the tax return for this accounting period should look like and should be computed. In this respect the Ministry of Finance issued its unofficial interpretation stating that the period shorter than 12 months should be considered as a part of a taxable period. Therefore, for particular tax items the following conclusions should be binding:

  • Depreciation

Depreciation amounting to only one half of the depreciation of tangible assets may be applied just like if the assets were withdrawn from the property during the year. For intangible assets the date of acquisition shall be borne in mind. It is not possible to depreciate the intangible assets acquired before 31 December 2000. In case of intangible assets acquired after 01 January 2001 the tax depreciation is equal to the accounting depreciation.

However, it is disputable what would happen if the shortened accounting period is shorter than 6 months (in extreme case only 1 month). According to a stricter interpretation the above-mentioned rules should apply even in this case.

  • Investment Allowances

Investment allowances may be considered for assets acquired during the taxable period, for which the tax return is filed.

  • Tax Losses

The tax losses carried forward ascertained from previous taxable periods may be deducted from the tax base of a part of the taxable period. The tax loss from a part of the taxable period may be carried forward for seven subsequent taxable periods.

  • Adjustments to Receivables

It is possible to create tax deductible adjustments to receivables even if the tax return is filed for a taxable period shorter than 12 months, i.e. for a part of the taxable period. It is decisive whether the appropriate statutory time limit after the maturity has lapsed overdue.

  • Reserves for the Repairs of Tangible Assets

According to the Act on Reserves, the reserves for the repairs of tangible assets may be created for tax purposes only for a taxable period and thus only if it lasts at least 12 months.

  • Write-off of so-called "Old Receivables"

The write-off of so-called "old receivables" (i.e. receivables, which were due prior to 31 December 1994) in the amount of 20 % is possible only for the taxable period and not for its part. Therefore, it is possible to apply this write-off only annually.

(iii) Summary

As a result we may summarise that it is essential to consider the tax consequences with respect to the option of the length of the fiscal year preceding the new accounting period. Such decision is therefore individual. Firstly, it should be considered whether it would be more convenient to apply the tax depreciation for 6 months (for the period shorter than 12 months) or for 12 months (for the period longer than 12 months). Further, it would be necessary to review the possibility of applying the investment allowances and adjustments to receivables. Due to the fact that it is possible to deduct the tax losses from previous years, under certain circumstances some of the negative consequences may be avoided.

 

2. Contractual Penalties and Late Payment Interest

Till 31 December 2000 the contractual penalties and late payments interest, late payment charges, fines and other sanctions resulting from contractual obligations (hereinafter referred to as the Contractual Fines) were booked according to the Accounting procedures for entrepreneurs on the accounts 544 – Contractual fines and late payments interest and 644 – Revenues from contractual fines and late payments interest only after their actual payment. As a result of the amendment to the Accounting procedures for entrepreneurs valid as of 01 January 2001, the Contractual Fines should be booked on the above mentioned accounts at the moment of the origin of such receivable or liability.

In accordance with the provision of the Section 24 (2) (zi) of the Income Taxes Act only paid Contractual Fines are considered as tax deductible expenses. Unpaid but booked Contractual Fines must be excluded from tax deductible expenses.

Accordingly, received Contractual Fines become taxable income only after their actual payment. Therefore, in accordance with Section 23 (3) (b) (1) of the Income Taxes Act, valid as of 01 January 2001, the business profit shall be reduced by a difference, which the Contractual Fines booked to revenues exceed the actual payments of such Contractual Fines.

For the purpose of preparing the corporate income tax return we recommend booking paid contractual fines separately on analytical accounts.

 

3. Compensation Payment Higher than Double of the Average Monthly Wage

According to the Section 60a of the Labour Code an employee is entitled to a compensation payment in the amount of double of his average monthly wage on termination of his employment relationship by a notice of the employer or by mutual agreement under the Sections 46 (1) (a) – (c) of the Labour Code. As of 01 January 2001 the amended wording of the Section 60a of the Labour Code enables to provide even higher compensation payments if this is stipulated in the collective agreement or in internal regulations. The higher compensation payments may be raised solely by other multiples of an average monthly wage.

As a result, the compensation payments as of 01 January 2001 are considered in accordance with the Section 24 (2) (j) (5) of the Income Taxes Act as tax deductible expense for the employer, provided that this is stipulated in the collective agreement or in the internal regulations.

In compliance with the social security and health insurance regulations the compensation payment provided in accordance with the Labour Code, is not included in the assessment base of the employee for the payment of the mandatory social security and health insurance premiums. Further, according to responsible personnel of the General Health Insurance Company (VZP) and the social department of the Ministry of Labour and Social Affairs, also other multiples of the compensation payment based on the collective agreement or internal regulations should not be included in the assessment base.

 

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

While all reasonable care has been taken in the preparation of this News issue, VORLÍÈKOVÁ & PARTNERS accepts no responsibility for any errors it may contain, whether caused by negligence or otherwise, or for any loss, however caused or sustained, by any person that relies on it. Nevertheless, further professional advice should be sought before a specific decision is adopted.