5306 days ago

Place of taxable supply of services and other changes in the VAT law from 01/01/2010

A new amendment of the VAT act came into effect as of 1 January 2010. The novel implemented latest EU VAT directives and introduced new rules for determination of a place of taxable supply of services and new implementing regulations for VAT refunds to taxable persons.

A basic rule for the determination of the place of taxable supply when providing services is not more the place where provider of services has established his business (seat of a legal entity, place of business of an individual or their fixed establishment). In case that a service is being provided to a taxable person, the basic rule to determine the place of taxable supply is the place where the customer has established his business. The basic rule is accompanied by several exceptions, for example for services connected with immovable property, cultural, artistic, sporting, educational services, hiring of means of transport and others.

If a taxable person from one EU member state provides services to another taxable person from another EU member state, then the reverse charge system shall be applied to a broader group of services. This change is advantageous for those VAT payers who in past had to pay VAT charged by their suppliers from another EU member state first and then they could apply for VAT refund. Practical VAT application might be easier in some cases now; for example the reverse charge system shall be applied to all works on movable properties provided to a taxable person in another EU member state as the condition that the movable property has to be sent or transported from the territory of the state where the service was physically carried out was removed.

On the other hand means of transport lenders will have to distinguish between a short-term rent (the place of supply is where the mean of transport is actually put at the disposal of the customer) and the long-term rent (the place of supply shall be determined based on the basic rule, i.e. if the customer is a taxable person then the place of supply is where he has established his business).

Everybody who provides services to persons from other EU member states or from abroad, or in contrary to whom these persons provide their services, should check, whether they have to change VAT application since 1.1.2010 or not. Moreover providers of services to persons from other EU states, to which the reverse charge is applicable, will have to declare these services in a recapitulative statement, which they will have to submit in electronic form only.

Furthermore I would like to draw your attention to following changes:

  • New definition of a mean of transport.
  • Introduction of a liability to determine the tax base equal to market price in case that the recipient of the supply cannot deduct the input VAT from the received supply and/or in case that the service provider has to calculate reduction of his own input VAT.
  • Income from a transfer of shares in companies and cooperatives was defined as a supply exempt from VAT.
  • New rules and procedures for VAT refund to taxable persons not established in EU member state of refund but established in another EU member state. Czech VAT payers will apply for refund by means of an electronic portal administrated by the Ministry of Finance.
Daniel Kunc

5307 days ago

Changes mostly for the benefit of tax payers, however tax mortgage right stiffens up

The amendment act No. 304/2009 Coll. to the still effective tax administration act introduced some changes for the benefit of tax payers from 01/01/2010. The following positive changes are being included:
  • The tax office decisions generally shall be reasoned. If the decision was made based on the validation procedure then a statement of reasons must include the following essentials: which facts the tax office considered to be proven, which proofs were the facts based on, what considerations did he take when assesing the proofs and how he considered the legal aspects of the matter.
  • An appeal against an additional tax assessment issued after a tax audit will have suspensory effect, i.e. the additionally assesed tax may become due when the decision on the appeal becomes effective only.
  • The tax assessment term of 3 years from the end of the taxation period in which the tax liability arose (the so called 3+0 theory)which was earlier stated by the case law was included into the act.
  • A confirmation of the zero tax indebtedness newly obtains also a tax payer who owes to the tax office but obtained a permission to pay the tax underpayment in a prolonged term or to pay it in the installments and at the same time is fullfilling the conditions stipulated by the permission.
On the contrary, the tax offices will excersise the tax mortgage right against the tax debtors in a more tough way. The tax mortgage right will no more arise at the moment the decision of the tax office on the tax mortgage right becomes effective only but comes into effect at the time of delivering the decision to the tax debtor already. The tax mortgage right to land and buildings registered in the Real Estate Register and to other assets that are registered in any kind of public register will arise at the time of delivering the decision to the Real Estate Register or to other person concerned who keeps the appropriate public register.

From now on application of the mortgage right shall be a more effective tool of the tax authorities to exact the tax underpayments. Tax debtors to which assets the tax offices may plan to impose a mortgage right will have relatively less time to transfer their assets to other persons.

Daniel Kunc

5308 days ago

Loss and transfer prices

Due to drop in contracts more companies tended to be loss making in 2009. In case that a company is doing business with related parties (associated enterprises), setting up of the transfer prices is more important than ever. Can a subsidiary selling its own production to a parent company be loss making? Was the loss caused by a reduction in contracts only or by wrongly set prices too? Should be the loss compensated/set off?

These questions are connected with diversification of functions and risks of the associated enterprises within a group. The higher risk is the enterprise undergoing, the higher profit should it under favorable circumstances (market conditions, economic cycle etc.) reach. However on unfavorable circumstances the risk taker can suffer a loss. On the contrary, a company subordinated to orders of other associated enterprise, typically for example a contract manufacturer, which produces according to instructions and manufacturing orders of its dominant customer being another associated enterprise, is bearing minimum risk and should achieve relatively lower but steady profit. If the company is obeying the instruction of other entity and becomes loss making, consideration of some redemption might be upon the place.

When the both associated entities are lossmaking, the question of the loss allocation is coming up. Who shall bear higher loss, who the lower? Of course, there are more practical aspects that should be considered. Is it possible to transfer a part of the loss to a contract manufacturer? Is it necessary to change terms of contracts? What are the ways of deducting the loss from the tax base? Will the recorded loss endanger drawing of the obtained investment incentive in the form of the income tax relief?

From the tax perspective to solve successfully a problem of disposing of the loss generated by transactions between related parties it is vital to prepare transfer pricing documentation. This documentation will help the tax payer to prove within a tax audit its statements and to sustain the chosen methods. A binding assessment made by the tax authority on whether or not the agreed transfer prices conform to the arm´s lenght principle could also help significantly.

Daniel Kunc

5418 days ago

New double taxation treaty with Cyprus

The lower chamber of the Czech Parliament approved a new Agreement between the Czech Republic and the Republic of Cyprus for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income recently. Due to the fact that the existing almost 30 years old double taxation treaty will be replaced by a treaty reflecting the latest development, a lot of changes has to be anticipated.

The following changes belong to the most important ones: 

  • Change of the method of double taxation elimination - the tax credit method shall be aplicable to all kinds of income of a Czech tax resident derived from Cyprus.
  • Taxation of income from a sale of a company, which value is from more than 50 percent formed by immovable property situated in the contracting state. This kind of income can be taxed in the respective contracting state. 
  • Amendment of the definition of permanent establishment by the so called "servicing permanent establishment" concept. The tax liability in the Czech Republic may arise also from provision of services by a Cyprian firm, for example provision of advisory or managerial services.

Further the maximum withholding taxes rates applicable to dividends, interests and licence fees shall change:

  • Interests shall be taxable in the state of the interest income receiver only and not in the state of the source more.
  • The maximum withholding tax rate applicable to dividends decreases from 10 to 5 percent (or even to 0 percent).
  • On the contrary the maximum withholding tax rate applicable to so called "industrial licence fees" increases from 5 to 10 percent.

New double taxation treaty can bring significant changes of the effectiveness of business or equity structures which include person tax domiciled in Cyprus. If the ratification procedure of the new treaty is finalized in the both contracting states and the states notify each other on the ratification until the end of the year 2009, then the new treaty provisions will come into effect as of 1 January 2010 already. Therefore all "Cyprian" structures should be examined as soon as possible with respect to changes introduced by the new treaty.

Daniel Kunc

5427 days ago

Data boxes? Tax authorities from 1 November 2009 only

Ministry of Finance of the Czech Republic notified of the fact that the tax authorities will activate their data boxes as of 1 November 2009 only. Probably of the same intention are also other public power bodies (state authorities, municipalities, health insurance companies, notaries etc.), as only a small number of public power bodies has activated their data boxes till now. These are exceptions only. It means that we still need to wait some time for the revolution in delivering of official documents promised by the Ministry of the Interior of the Czech Republic.

Daniel Kunc

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