Amendment to the Income Tax Act in response to the amendment to the Accounting Act

Simplification of tax depreciation

The draft contains a significant simplification of the tax depreciation method. Depreciation groups should be abolished and the amount of the tax value should be decisive for determining both the depreciated asset and the depreciation period. The depreciation limit should be increased to CZK 100,000 and three main tax depreciation periods should be introduced, with a minimum length of time over which an asset is allowed to be depreciated: (i) 60 months for movable and immovable assets with a value of up to CZK 2,000,000, (ii) 360 months for other immovable assets and (iii) 180 months for goodwill.

Tax depreciation will be applied on a monthly basis. The straight-line and accelerated depreciation methods should be abolished; so too will the possibility to discontinue tax depreciation. The depreciation period will be extended if the asset in question appreciates in value.

New determination of the tax period for legal entities

Under the new regulation, the tax period for corporate income tax will be linked to the accounting period and may therefore in some cases be determined by calendar weeks. If the taxpayer is not deemed to be an accounting entity under the Accounting Act, its tax period will always be the calendar year. Foreign taxpayers with limited income from sources within the Czech Republic will have this option if they keep their accounting abroad and their accounting period is not the calendar year.

Changes in valuation of assets and debts

A new concept of "tax value of an asset" is introduced, which represents the maximum amount that can be claimed as an expense for the purposes of the Income Tax Act. The term "technical appreciation" is replaced by "additional appreciation", which will be applied in cases when the higher amount is more than CZK 100,000 or 10% of the value of the asset. For a value above CZK 10 million, it should always take the form of an additional appreciation of the asset. The tax value of debt and the tax value of receivables are also newly defined.

New rules for financial leasing

The new accounting rules will consider financial leasing in a similar way to international accounting standards - that is, the user will have an asset in the form of a right of use with a subsequent purchase. This asset will then be tax depreciated if the legal conditions are met. The amendment contains special transitional provisions under which the new rules for determining the tax depreciation period and the financial leasing will also apply to assets acquired before the amendment takes effect.

Application of international accounting standards

It will now also be possible to use profit or loss determined in accordance with international accounting standards to determine the tax base. However, the economic result according to IFRS will have to be adjusted for permanent differences in relation to Czech accounting and to take into account in the tax base operations that were accounted for in IFRS on the balance sheet and in Czech accounting on the basis of results. When switching from one system to the other, differences in the tax value of assets and debts under each accounting system will need to be determined and taken into account in the tax base over a 10-year period.

Determination of the tax base of foreign tax payers

Foreign corporate taxpayers (including those with permanent establishment in the Czech Republic) will not be newly considered an accounting entity and will not be obliged to keep accounting records under the Accounting Act.
Companies having a permanent establishment in the Czech Republic (except for a permanent establishment established on the basis of the duration or conclusion of contracts) will keep accounting only to the extent necessary for determining the tax base on the basis of Czech accounting or international accounting regulations, or on the basis of the accounting of a foreign taxpayer.
Companies that establish a permanent establishment by providing services, by continuing a construction and assembly project or by concluding contracts (including those that still have income from other sources such as the sale of securities or real estate) may choose whether or not to use this procedure.

Option to report and pay tax in euros

Taxpayers keeping their accounting in euros will be able to stipulate the tax base and tax in their tax return directly in euros without the obligation to convert it into Czech crowns. The same applies to other foreign currencies if they are the company's functional currency. They will also be able to pay the tax in this other currency.

Tax deductibility only after payment is cancelled

In the case of social security contributions and contractual fines and penalties, tax deductibility linked to payment is abolished; the decisive factor will now be when the case was recorded in the accounting.