While the previous year brought quite a number of tax changes, no significant tax changes are to be implemented in 2022 – or the first half of it at least.
The pre-election period and, even more so, the post-election period are traditionally connected with the formulation of general political and programme priorities rather than with the introduction and approval of specific tax changes. At the beginning of 2022, everything except for minor parametric adjustments (such as the increase of a taxpayer’s tax credit) remains basically the same.
VAT on electricity and gas
At the end of last year, the previous government granted a ministerial pardon to value added tax on electricity and gas in response to the dramatic situation on the energy market. The pardon applied only in November and December 2021. It was announced only a few days before its effective date, and tax specialists were ambivalent about it as they saw the pardon as a non-systemic measure that exceeded statutory powers. The application of the pardon on VAT in practice confused energy suppliers and landlords who recharge powers to their tenants alike.
The proposal to exempt electricity from VAT submitted by the previous government at the end of last year was rejected (because of its non-compliance with the EU law, among other things), and the current government now focuses on measures targeting underprivileged people rather than on population-wide measures. Hypothetically, the possibility of reducing VAT on electricity to 5% (from the existing 21%) is still in play, which, upon approval of the exception by the European Commission, would be a legally permissible way of reducing the tax burden. However, significant budget implications are an argument against it.
Increasing the limit for mandatory VAT registration
Unlike in the case of VAT, the politicians agree on increasing the limit for mandatary VAT registration for entrepreneurs. The turnover limit of CZK 1 million has applied without change since 2004, when the Czech Republic was admitted to the EU. The limit for mandatory registration has been recently increased universally at the EU level, but the increase will not become effective until 2025. The Ministry of Finance has already requested an exemption for the Czech Republic from the European Union in order to introduce the higher limit for mandatory registration of CZK 2 million before that (presumably from 2023). The increased limit will allow multiple businesses (restaurants, service providers) to deregister, which might in turn lead to an increased number of VAT non-payers among tenants of smaller commercial premises. Landlords should already start considering this eventuality and its potential impacts on the VAT rate and deduction of the input VAT.
Ultimate cancellation of EET
The obligation to keep electronic registration of revenues, which was an issue not only for the retail sector, has been temporarily suspended from the beginning of the Covid pandemic until the end of this year. The incumbent government, in its programme statement, does not intend to renew this obligation, and a bill that will finally repeal the obligation to keep electronic registration of revenues has already been submitted for the comment procedure. This obligation is likely to be ultimately repealed this year.
Automated exchange of information about transactions made via digital platforms
One year ago, DAC 7 was adopted at the EU level. It amends the Directive on International Administrative Cooperation in the Field of Taxation and newly imposes a reporting obligation on digital platform operators through which selected types of activities including the provision of real estates (lease, accommodation services) are being offered. Starting from 2023, digital platform operators will be obliged to report information concerning entities selling via the respective platform to their local financial authorities once a year. The report will also include the number of transactions and volume of revenue achieved by individual sellers via the respective transport and also, in the case of real estate providers (landlords, accommodation facilities), detailed information such as the address of the provided property and the number of days for which it was leased in the given year. Tax authorities within the EU will then automatically exchange and share that information, and this should increase tax transparency of the digital space and provide for proper collection of income taxes on sales of goods and services via these digital sales channels.
Although the primary obligations will be imposed on the respective platform operators, it will have an indirect impact also on sellers using these platforms who will be obliged to provide the respective information to the operator as part of their collaboration; if the seller fails to provide the information, the platform provider will be obliged to suspend the seller’s access to his/her user account or to retain payments from customers, the collection of which the provider arranges for the seller. Financial sanctions proposed for non-compliance with the reporting obligation by the platform operators are quite significant.
DAC 7 must be implemented into the national laws of the Member States by the end of this year. Landlords and accommodation service providers who offer their services on on-line platforms will have to get ready for increased administrative demands and information requirements from their cooperating platforms.
Directive against the use of “shell” corporations
The EU’s efforts to prevent companies from benefiting from tax advantages without sufficient economic substance are also very pertinent. In December 2021, the European Commission published the first proposal for a directive that should impose an obligation on the companies meeting certain criteria to prove compliance with the minimum requirements for their “physical presence” to tax authorities in their respective states of residence.
If for the last two years, 75% of the company’s income was passive income (dividends, interest, real estate lease etc.), most of its income is from cross-border transactions or the company pays most of its income abroad and, at the same time, the company administration and management are being outsourced, the company will be regarded as a risk, and it will have to prove its actual physical presence namely by the existence of premises which are solely at the company’s disposal, the existence of a bank account in the EU and a sufficient share of qualified employees – residents of the respective state, to tax authorities in its respective state.
Failure to prove compliance with the minimum requirements for physical presence means the company will run the risk of not being recognised as a full-fledged tax resident in the country where it is headquartered, meaning it would not be able to benefit from advantages under double taxation treaties or EU directives, which might have a crucial impact on the company’s tax-efficient operation. At the same time, in accordance with the current proposal, the individual Member States would be exchanging information about the identified companies without economic substance.
Although the finalisation and approval of the directive at the EU level, followed by the implementation into the national legislation, might take some time yet (the current proposal expects these rules to be applied as of 2024), it is advisable to be mindful of and to start preparing for the impacts of the new regulation already now.
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