Sale of assets? First split off!

Sale of assets? First split off!
Do you intend to convert a part of limited liability company assets into cash? Splitting off the company and subsequent sale of the business share may be more tax beneficial than a direct sale of company assets.

Splitting off according to Section 243 and following of the Act No. 125/2008 Coll., on the Mergers and Acquisitions in the current wording, is one of possibilities how to detach a part of the company assets. The specified part of assets (and liabilities) of the company is transferred to another existing or newly established successional company (or to more companies) and partners of the splitted company become the partners of the successional company/companies.

Splitting off a limited liability company where partners are individuals who are conform to the time test of the participation in the company for more than five years might be very advantageous. If the conditions are met then the income from the subsequent sale of the business share might be tax exempt according to Section 4 Par. 1 Letter r) of the Income Taxes Act. To conclude: if the partners detach a part of assets from their limited liability company and put it into a new company, they can subsequently sell their new company shares and might get tax-free revenue.

It is possible to get the same effect in a joint-stock company if the shareholder – an individual has gained the shares before the end of 2007 and is conform to the time test of six months (or five years in specific case) according to Section 4 Par. 1 Letter w) of the Income Taxes Act in wording valid till 2007/12/31.

Lump-sum deductions, book of journeys cancellation

The upper chamber of Czech Parliament Senate approved two amendments to the Income Tax Act that can enable to some tax payers an attractive reduction of tax related paperwork and tax liability as such as well. Coincidentally the both amendments were approved as so-called “postiches” (act amendments added to a proposal of another act). The first one, increase of lump-sum deductions for individuals was added to the amendment to Compulsory Labelling of Spirit Act (the Senate document  No. 142) and the change of deductions of expenses for business cars was added to the amendment to Tax Administration Act  (the Senate document No. 119).

Lump-sum deductions

The first from the changes above represents increase of lump-sum deductions that can deduct individuals who have business income or income from other independent gainful activity instead of actual proved expenditures when calculating their taxable income. The higher lump-sum deduction means not only reduction of the taxable income (tax base) but also lower base for calculation of the social and health contributions due. This amendment brings higher deductions for individuals having income from handicraft industry - 80 % (formerly 60 %) and for individuals having income from non-handicraft industry, from other business according to special legal regulations and from other independent gainful activity - 60 % (formerly 50 % and 40 %).

Book of journeys cancellation

The second amendment was presented in media in a simplified way as a cancellation of book of journeys. This concerns the possibility to deduct costs related to not more than three business cars (owned or hired by the tax payer and used to achieve taxable income) in the form of a lump-sum cost deduction in the amount of CZK 5,000 pro month/a car instead of actual proved expenses for fuel and parking fees. Thus the taxpayer can avoid keeping the book of journeys or documenting remunerations for the travel expenses in case that the car is not included in the business property of the taxpayer - individual. The Income Tax Act does not impose keeping a book of journeys; nevertheless the book is often asked for by the tax office during tax audits to check up fuel expenses of company cars.

It stands to reason that the lump-sum car deductions will not be beneficial for everyone but mostly for those taxpayers who go their cars for relatively fewer kilometres. A threshold of kilometres gone depends on the fuel consumption of the specific car and on the fuel price. In case that the car is being used not only for business but also for private purposes as well, the lump-sum cost deduction, tax depreciations and other operating costs related to the car have to be shortened by 20%. Nevertheless applying the deductions could be rather beneficial. Surely there are going to be many questions on applying these deductions. The first one to solve is whether the deduction could be applied by individuals only or by both individuals and companies. 

According to transitional provisions of the both amendments listed above it is possible to take advantage of the increased lump-sum cost deductions and the business cars deductions already in the taxable period which began in 2009.