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24 March 2023

New limits for VAT and lump-sum tax, windfall tax

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Tax novelties in 2023

Written by: David Krch, Tax Partner, HAVEL & PARTNERS

With the start of the New Year, there have been significant changes in the area of taxes that affect many entrepreneurs and companies. An increase in the income threshold for VAT liability or the income limit for the application of lump-sum tax, the introduction of a new windfall tax, and changes in taxes for individuals will all come into effect. Get familiar with the new tax rules.  

Value added tax (VAT) and lump-sum tax

Significant changes have been made in connection with the obligation to pay value added tax. The limit for VAT registration has been increased from CZK 1 million to twice as much. VAT payment is therefore now obligatory for entrepreneurs whose annual turnover exceeds CZK 2 million.

This novelty is also connected with a fundamental change in the introduction of three bands of lump-sum tax, which can only be applied by VAT non-payers. Also here, the limit to apply the lump-sum tax has been increased to the income threshold of CZK 2 million per year.

Classification into one of the three tax flat-rate bands with different taxation then depends on the amount of income and the type of activity the taxpayer carries out. The first band is for entrepreneurs with income of up to CZK 1 million, the second one for entrepreneurs with income of up to CZK 1.5 million, and the third one for entrepreneurs with income of up to CZK 2 million. The classification into the band and the amount of lump-sum tax also depends on the type of income. The law allows a lump-sum expense of 80% for craft trades or agricultural production or forestry and water management, 60% for other trades under the Trade Licensing Act, 40% for freelance professions, income from copyright or business under special regulations, and a 30% lump-sum expense for rental income.

Which band an entrepreneur falls into depends on the upper limit of his income and the type of activity. The band should be chosen on the basis of the amount of previous income for 2022. If you anticipate a higher income for 2023, it is possible to voluntarily enter a higher band, but not a lower one.

Windfall tax

From 2023, a new temporary extraordinary income tax (a so- called windfall tax or WFT) is being introduced to target companies’ windfall profits. The WFT applies to selected companies in specific business areas. Whether a company is subject to the obligation to pay it can be found by testing the newly introduced WFT parameters.

The first thing to check is whether the company is a WFT taxpayer at all. At the same time the company must meet two conditions: First, it must be engaged in areas which, from 2023, the Income Taxes Act now classifies as so-called relevant activities. These include, in particular, electricity and gas generation and trade, banking, fossil fuel extraction, petrochemicals or fuel wholesale trade (the NACE classification codes must be used to precisely determine the so-called relevant activities). Second, it is then necessary to establish the amount of income (revenue) from these relevant activities. Please note that the new regulation is terminologically imprecise and allows for a different interpretation of the revenue or turnover from the relevant activities. Banks become WFT taxpayers in the case of income from CZK 6 billion and above, for other companies the income threshold is CZK 2 billion. For entities that are part of the WFT taxpayer group, the income threshold of CZK 2 billion is then reduced to only CZK 50 million if the turnover of CZK 2 billion is already achieved within the group.

Therefore, if the company is a WFT taxpayer based on the above conditions, it must then be determined whether it becomes liable to pay the windfall tax. The key is to compare the average profits from the previous years of 2018–2021 plus 20% (comparative tax base) with the general income base of the given particular period (the compared tax base, for example the corporate income tax base in 2023). The WFT base is then calculated as the difference between the compared tax base and the comparative tax base, which is then subject to a 60% tax. The WFT is then levied on top of the existing 19% corporate income tax (on the standard income tax base). 

The State will collect this windfall tax between 2023 and 2025. Each year will be assessed separately; that is, in any given year, the comparison with the 2018–2021 income will be decisive. Thus, companies may be liable for tax in 2023 but not in subsequent years, or they may have to pay tax for all three years, depending on when they meet the conditions for the mandatory WFT payment.

Pitfalls of the windfall tax

Unfortunately, many issues were not resolved during the discussions on the form and wording of the Czech legislation on the windfall tax. We would therefore like to point out some pitfalls. Although only a company that carries out the so-called relevant activities and earns income from them in excess of the limits set by the law becomes a WFT taxpayer, if such a company carries out other activities, the WFT will also tax profits from them, even though according to its purpose the WFT should not apply to them (for example sales of unrelated goods). This is because the (WFT) tax base is based on a comparison of the total tax base of the current period and of the previous periods, which includes income from all activities carried out by the entity. 

The WFT tax base also does not take into account accumulated tax losses in any way, unlike the standard corporate income tax base. Companies may therefore find themselves in a situation where, due to the possibility of deducting accumulated tax losses from the tax base, they will not be obliged to pay any corporate income tax, but at the same time they may be subject to the WFT, with respect to which no losses can be deducted from the tax base.

The current WFT regulation goes far beyond the original intention of taxing only selected sectors and may therefore affect entities that do not benefit in any way from the current situation. For many companies, this tax can have quite fatal consequences. For example, the current legislation also does not address cases where companies in the initial phase of doing their business or which have generated tax losses in the period between 2018–2021 have a zero or very low comparative tax base for that period. They will then ultimately have to pay a total income tax of up to 79% of all generated profits (i.e., standard 19% corporate tax + 60% WFT) in the period of 2023–2025.  In these situations, which may actually arise, an additional 60% WFT may have liquidating effects, as such a high tax liability may lead to the company’s insolvency.

Therefore, the Chamber of Tax Advisers of the Czech Republic has repeatedly appealed to the Ministry of Finance of the Czech Republic to incorporate the possibility of individual tax remittance in the legislation. However, the Ministry has repeatedly refused these requests and the current legislation does not allow for any individual tax remittance. 

Further tax changes for individuals

Since the New Year, the minimum annual income threshold (not the tax base) for filing personal income tax returns has been significantly increased from CZK 15,000 to CZK 50,000. Individuals with an annual income of less than CZK 50,000 will therefore not have to file a tax return at all.

At the same time, the income threshold for filing a tax return when income from employment and other income are concurrent has also changed. Until now, it was not necessary to file a tax return if an individual's income outside employment was up to CZK 6,000 per year. This threshold has increased to CZK 20,000 starting from 2023.

The amendment to the Act on Social Security Contributions and State Employment Policy Contributions also changes the rules on when insurance premium discounts can and cannot be applied from February 2023. From 1 February 2023, employers will be able to take advantage of a discount on insurance premiums of 5% of the aggregate assessment bases for insurance premiums (i.e., from 24.8% to 19.8%) for selected groups of employees.

The amendment to the Act on Social Security Contributions and State Employment Policy Contributions lays down many rules on when the discount can and cannot be applied, but in general it is a support for part-time employees, e.g., parents caring for a child under the age of 10, pensioners or students. However, the employer must notify the Czech Social Security Administration in advance of its intention to apply that discount. We therefore recommend that you familiarise yourself with the relevant rules in good time.

Information for the tax authority on trading on digital platforms

The amendment to the International Cooperation in Tax Administration Act, which implements the European DAC7 Directive, introduces a new notification obligation for digital platforms operators, including Uber, Vinted, Airbnb and others, from 2023. The operators of these platforms would now be required to provide the tax authority with information about sellers - for example, their account numbers or details of their income from transactions on the given platform. This should give the authorities an overview of which business entities are making profits through digital platforms and thus ensure proper tax collection. The amendment is also intended to contribute to closer international cooperation in tax administration and to allow tax audits involving tax authorities of several EU Member States.

The new obligation is primarily aimed at platforms (e.g., websites, apps or other software) that allow sellers and users to connect for the purpose of selling goods, providing property, personal services or means of transport. Platform operators subject to the notification obligation will always submit information on sellers and transactions for the previous calendar year. The first notification for 2023 will be submitted by 31 January 2024.

Platform operators are advised to find out as soon as possible whether they are subject to the notification obligation. However, this can be quite complex in practice, as even apparent details (such as the chat window on a given platform) can be crucial to this assessment. With respect to the new notification obligation, the General Financial Directorate has therefore issued answers to frequently asked questions. 

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