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The Income Tax Act after 1 January 2014

Czech Republic: Effective as of 1 January 2014, a series of laws amended the Income Tax Act (Act No. 586/1992 Coll.), modifying tax law in a number of ways.

As of 1 January 2014, the Income Tax Act has undergone a host of changes, the most conspicuous of which is the incorporation of provisions on inheritance and gift tax - two types of taxes which were previously governed by a separate law. Other changes include the extension of the tax exemption cutoff period for income generated by the sale of securities, and new rules for the creation of adjustment items for receivables.

A very visible change was to incorporate inheritance tax and gift tax in the Income Tax Act, hand in hand with factual changes (in terms of tax exemptions). Inheritance income is newly fully exempt (including income specifically bequeathed in a testament, and including situations in which heir and testator are not blood relatives). The exemption of gifts between relatives and gifts from individuals with whom the taxpayer lived in a joint household for at least one year has been preserved.

Also, the tax exemption cutoff period for income generated by the sale of securities has been extended from previously six months to newly three years. For small-time investors, an exemption applies up to an annual limit of CZK 100'000 of income from the sale of securities. The change may only be invoked for securities acquired after the beginning of 2014; securities that were acquired earlier are still subject to the previous rules. The five-year cutoff period for the tax exemption of income from the transfer of ownership interest has been preserved.

The amendment increases the cap on the deductibility of donations to charitable causes to 15% (for donations made by private individuals) and 10% (for donations made by legal entities).

Another important change affects the transfer pricing rules: the tax base must newly be adjusted even if the price agreed between affiliates equals zero. An exemption has been made for loans for no consideration, loans terminable at will, and low-interest or zero-interest loans if the lender is a non-resident, or member of a corporation, or private individual - in other words, in those cases no adjustments will be necessary. Making the definition for affiliated entities clearer has removed the kind of previous uncertainties which used to arise when the agreed price was zero or when the transaction amounted to lending for no consideration, as to whether taxable income was generated or whether such income was subject to gift tax.

Yet another change brings greater leniency with respect to the tax deductibility of land plots. Legal entities will newly be able to deduct even losses derived from the sale of land. In the case of natural persons, the acquisition price of a given land plot will remain deductible only up to the amount of revenues from its resale.

Finally, the creation of adjustment items for receivables has been simplified. For receivables that are more than 18 months past maturity, it is possible to create an adjustment item of up to 50 % of their outstanding value, and for receivables more than 36 months past maturity, an adjustment item in the amount of 100 % of the outstanding value. This change applies to receivables that have come into existence after the amendment took effect. Pursuant to the new Civil Code, the standard statute of limitations is three years (subject to an extension agreed upon by the parties) which is why adjustment items for receivables more than 36 months past maturity will not be a common sight.

Monika Baliharová, accountant

Radka Šlancarová, tax advisor