Tax and Legal News – June 2023

What hasn’t been (much) talked about

In its proposed austerity measures, the Czech government has introduced, among other things, a tax package offering a nice brief summary of changes planned as of January 2024. Dozens of discussions on a few selected topics were held in the media, and experts assessed the impacts. A draft of a revised version of the tax package has been subject to a short external comment procedure. And on first reading, it’s clear there are many more proposed changes and even more related issues.

Let's take a look at selected (previously undiscussed) tax developments, and let's just say the tax package has more than a few potentially problematic areas.

The first unexpected surprise is the abolition of the exemption for exchange gains on the exchange of money in an account. A seemingly small thing can easily turn into both a nightmare and a nice exercise in providing evidence. The exchange gain on such an exchange of money will continue to be exempt only if, together with all other "unclassified" other income, it falls within the annual limit of CZK 50,000. So if you have a euro account, you buy euros now at the current favourable exchange rate of, say, 20,000 euros for 23.50 CZK/EUR, and in a few years, when the euro/crown exchange rate rises again, say to 27 CZK/EUR, you will need to exchange it back into crowns and will realise an exchange rate gain of CZK 70,000. You will have to recognise this exchange gain in your tax return. However, you will also have to tax a much lower exchange rate gain if, in addition to the exchange rate gain, you also have income from occasional activities and in total this income exceeds CZK 50,000 for the tax year.

The second change will limit the amount of exempt income from the sale of securities or shares after three or five years from the acquisition to CZK 40 million per tax year. As the saying goes, the devil is in the details. In this case, the transitional provisions or rather the lack thereof. The very broad exemption for income from the sale of securities was already changed in the past in the form of an extension of the time test from 6 months to 3 years. At that time, however, the transitional provisions made it clear that the time test for securities acquired before the effective date of the amendment would be assessed under the old provisions. However, the proposed amendment does not contain anything similar, i.e. from January 2024 the limit will apply to all income from the sale of securities and shares, regardless of when they were acquired. It should be added, though, that the draft text of the amendment allows for income from the sale of securities or shares acquired before 31 December 2023 that exceeds the exempt CZK 40 million to deduct as a cost either their actual acquisition price or the market value determined in accordance with the law governing the valuation of property at 31 December 2023.

Next up are bottles of still wine. Newspaper articles have been flooded with reflections on the excise duty on still wine and the (in)correctness of its (non-)introduction. However, the revised version of the Income Tax Act amendment contains a completely different "bombshell" – it abolishes the deductibility of the costs of a gift of still wine up to the value of CZK 500. While the impact on the state budget revenue is debatable, the impact on winemakers' pre-Christmas sales may be noticeable.

The fourth rather convoluted change concerns meals for consumption in the workplace. The government's intention is clear – to set the same rules for meal vouchers/meals and meal allowances. However, the draft wording generally limits the exempt value of meals for consumption in the workplace. Thus, if an employee receives a free sandwich and doughnut in addition to the maximum exempt meal allowance at a meeting, tax and insurance premiums should technically be paid on the value of those two meals. I'm looking forward to seeing how employers prove who ate what.

The government's efforts to increase tax revenues are commendable. The question is whether, in the current situation, it would not be better to focus on a few well-thought-out changes that will have a big impact on budget revenues instead of trying to suddenly solve all the non-conceptual exemptions and exemptions that have accumulated in the tax code over the years.