The Czech Republic introduces an extraordinary windfall tax as of 1 January 2023. The legal conditions of the WfT were established by the amendment of Act No. 586/1992 Coll., on Income Taxes.
The windfall tax will be levied on excess profits for a period of years 2023 - 2025 and will apply to companies in the sectors of energy production and trade, banking, oil industry, mining and fossil fuel processing. The windfall tax rate is 60 % of the excess profits that will result from the differences between the annual tax bases in the period 2023 - 2025 and the average of the tax bases increased by 20 % in the last four years (i.e. 2018 - 2021).
The windfall tax relates to the following entities:
1) any bank whose net interest income for the first financial year ending after 1 January 2021 exceeds CZK 6 billion and which has an annual net interest income of at least CZK 50 million in the calendar years 2023 - 2025.
It is assumed that the windfall tax will apply to Česká spořitelna, Komerční banka, ČSOB, Raiffeisenbank, UniCredit Bank and Moneta Money Bank in the Czech Republic.
2) an energy company,
The income relevant to the windfall tax is the income generated on the territory of the Czech Republic from the following activities:
In the case of companies engaged in coal mining and processing, oil and gas extraction or the production of coke and petroleum products, it is sufficient if they meet the criterion of a net turnover from these activities in the current year of at least CZK 50 million, provided that this income represents at least 25% of the taxpayer's annual turnover.
For windfall tax purposes, a group of companies is defined as a group of companies within the meaning of Act No. 164/2013 Coll. on international cooperation in tax administration. Therefore, it is mainly legal entities for which the consolidated financial statements must be prepared.
If the taxpayer belongs to such a group of companies only during a part of the period, its income shall be taken into account for WfT purposes only in the proportion corresponding to that part. If the taxpayer is included in the consolidated financial statements of such group on the basis of proportionate consolidation, the taxpayer's WfT-relevant income shall be determined in the same proportion for the purposes of determining the amount of WfT-relevant income of the group.
The windfall tax base is the difference between
The average of the tax bases is calculated as the arithmetic mean. If the average of the tax bases is negative, it is considered to be zero. The average will not shift in future years, but will always be based on the average of the 2018 - 2021 bases.
The tax base does not include income from sources abroad that may be taxed abroad under a double taxation treaty and any related expenses.
The WfT amounts to 60% of the WfT tax base and no tax reduction is granted for it. The VAT is not included in the Czech tax liability when applying the imputation method.
Advances on WfT together with advances on corporate income tax (at the rate of 19%) will be paid already in 2023. The total amount of the advances is based on the amount of the hypothetical WfT for the year 2022, for which no WfT will be levied due to the principle of non-retroactivity. This will provide the Czech government with its revenue from the newly introduced tax already in 2022.
The taxpayer must notify the Czech tax administration of the hypothetical WfT for the last assessment period or the last tax return period ending before January 1, 2023, by the last day of the deadline for filing its corporate income tax return for this last period.
The specialized tax office in Prague will be responsible for the administration of the WfT. The tax will be reported in a special WfT return and is payable within the same deadline as the corporate income tax.
Any taxpayer may request binding information from the Czech tax office as to whether it belongs to a group of companies with excess profits together with another taxpayer in a given tax assessment period.
The other important changes in the Czech tax law is the extension of the extraordinary depreciation of tangible fixed assets and the increase of the turnover amount for the obligatory registration to the VAT.
For tangible fixed assets acquired in the period from 1.1.2020 to 31.12.2023 (instead of 31.12.2021), entrepreneurs can claim faster depreciation. Tangible fixed assets included in the 1st depreciation group can be depreciated over 12 months (e.g. IT technology) instead of 3 years and fixed assets included in the 2nd depreciation group (e.g. cars, furniture, various machines and equipment) can be depreciated over 24 months (instead of 5 years), whereby the depreciation for the first 12 months is claimed on a straight-line basis up to the amount of 60% of the acquisition price and for the further 12 months on a straight-line basis up to the amount of 40% of the acquisition price.
As of 1.1.2023, the turnover amount for mandatory registration for VAT will be increased from CZK 1 million to CZK 2 million. In this context, it should be noted that this limit does not apply to foreign companies that have their registered office outside the territory of the Czech Republic. If these companies have provided a taxable service with the place of performance in the Czech Republic, they must register for Czech VAT regardless of the value of this service.
The article was published in the ISTR-Länderbericht
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