Tax heavens will provide information

The Czech Republic has entered into diplomatic relations with Principality of Liechtenstein. Liechtenstein is considered to be a tax heaven which takes pride in confidentiality for clients of banks seated in its territory. Entering into diplomatic relations was a condition for conclusion of an information exchange agreement which shall enable to obtain information on suspicious transactions the purpose of which potentially might be money laundering or tax evasion.

The information exchange agreement which is being prepared now by the Czech Ministry of Finance should enable the Czech authorities to find out who is the owner of suspicious bank accounts or who stands behind anonymous firms incorporated in Liechtenstein. Liechtenstein concluded similar agreements already with United States, United Kingdom and Germany.

Ministry of Finance of the Czech Republic does not provide details on the preparation of the information exchange agreements. However, it was published that except Liechtenstein it is being negotiated also with Switzerland, Seychelles and Cayman Islands as these states showed interest to conclude information exchange agreements as well.

Pay attention to the maturity of taxes and statutory contributions

Taxes and statutory contributions to social and health insurance will have to be paid sooner! The Act No. 285/2009 Coll., which amends several other acts in connection with the ratification of the act on payment services, changes also tax administration act, act on contributions to general health insurance and act on contributions to social security and employment policy.

The amended acts will newly define the "day of payment" of noncash payments. The day of payment shall be the day when the payment is credited to an account of the payment services provider of the tax office, of the social security administration or of the health insurance company. Whereas for the transfers from bank accounts kept in the Czech Republic and at the same time kept in CZK for tax purposes is true that the current legislation defines the day of payment as the day when the withdrawal from the payer´s bank account is effected.

New act on payment services stipulates maximum terms for execution of payments which the providers of payment services will have to follow. When considering a most common way of payment of taxes and of statutory contribution, namely a payment initiated based on an electronic payment order and transferred from a bank account kept in CZK in the Czech Republic or kept in EUR, then the payment services provider of the payer has to credit the payment to an account of the payment services provider of the receiver the following working day after the receipt of the payment order.

Therefore the actual deadlines for initiation of payments of taxes and of statutory contributions will be shortened by one working day in most cases. If a liability to pay tax or statutory contribution arises, then it has to be remembered that also the relevant tax return and obligatory reports on statutory contributions have to be prepared sooner. The change will impact also the maturity of advance payments and therefore it will be necessary to change respective permanent payment orders as well. The change comes into effect on 1 November 2009 for payment of taxes and on 1 January 2010 for payments of statutory contributions.

Change of the double taxation treaty with Russia

A Protocol to the Convention between the government of the Czech Republic and the government of the Russian Federation for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and on capital entered into force this year. The Protocol was published in the Collection of international agreements in the beginning of July 2009.

The Protocol amends wording of the original double taxation treaty and several changes are rather important. Russian firms operating in the Czech Republic should note that a concept of the so called servicing permanent establishment was implemented into the treaty.  It means that a tax liability in the Czech Republic may arise also from provision of services by a Russian firm, for example provision of advisory or managerial services.

For financial operations might be important  that more precise definitions of dividends and interests will enable taxation of interests reclassified according to thin capitalization rules to dividends in the state of their source. Another change, which may mean new tax liabilities, is the taxation of income from sale of a company, which value is from more than 50 percent formed by immovable property situated in the contracting state. The income from this sale can be taxed by the state in the territory of which is the immovable property situated. It means that if a person tax domiciled in Russia sells a share in a Czech company, which value is from more than 50 per cent derived from immovable property located in the territory of the Czech Republic, then this person has to file a Czech tax return.

New wording of the double taxation treaty shall according to notification of the Czech Ministry of Finance enter into effect as of 1 January 2010.

Extraordinary depreciations and other changes of the Income Taxes Act 

The amendment to the Income Taxes Act introducing the possibility of faster extraordinary depreciations of certain newly acquired assets was published in the Collection of Law under the No. 216/2009. According to this amendment, new assets categorized into depreciation groups No. 1 and 2, purchased in the period from 2009/01/01 to 2010/06/30, could be depreciated within a considerably shorter period for tax purposes. The optional extraordinary depreciation should be calculated on a monthly basis, starting with the first month subsequent to the month when the asset was put into use in accordance with the conditions of the Income Taxes Act. The group No. 1 assets might be depreciated for 12 months and the group No. 2 assets for 24 months only. Furthermore, if a lessor applies these extraordinary depreciations, the minimum duration of a financial lease with subsequent purchase of the leased assets shall be shortened in the same way (to 12 or to 24 months).

Some other changes were added to the amendment of the Income Taxes Act in the Parliament during the approval procedure. For example, the time spent for trainings does not need to be classified as "working performance of the employee" more to consider costs for the staff training tax deductible (ie. the seminar, lecture, training etc. can be organized out of the employees working hours as well). Further, tax payers tax domiciled in the EU can include selected earnings that are subject to withholding tax in the Czech Republic into their Czech tax return and credit the withholding tax deducted against their general Czech tax liability. Lastly there was newly introduced a possibility for Czech tax residents to apply the exemption method to eliminate double taxation even if the applicable double tax treaty stipulates the credit method. This option is available to individuals who achieved income from dependent activity (wage) from employers domiciled in countries with which the Czech Republic concluded a double tax treaty.

Social insurance contributions reduction – claim the reduction retroactively in time

Introduction of a social insurance contributions reduction is a favourable message for employers. It belongs to goverment measures to support the GDP development during the time of economic recession. This reduction was designed to support employment of employees with relatively lower wages. The lower base of the specific employee for calculation of social contributions, the higher reduction to be claimed. In the concrete terms, if the conditions are fulfilled then the reduction for one employee amounts to 3.3% of the difference between 1.15 multiple of the average wage rounded up to hundreds CZK (27,100 CZK in 2009) and the employee´s base for calculation of the social contributions, but not more than 25% of the calculation base. For example, if the calculation base (wage of the employee) amounts to CZK 10,000 then the reduction of the social insurance contribution may amount to CZK 565.

Claiming this reduction is possible from August 2009 to December 2010. However, in case of fulfilling conditions the reduction can be claimed retroactively for a period preceding the efficiency of the specific amendment to the Social Insurance Contributions Act, that is for the calendar months from January 2009 to July 2009! This extra retroactive reduction has to be claimed when calculating social insurance contributions for the month August 2009.