Tax and Legal news Deloitte Czech Republic. September 2016

Transcription

1 Tax and Legal news Deloitte Czech Republic September 2016

2 Beware of Instructions to the Income Tax Return 2 Following the Ministry of Finance s instructions on how to fill the income tax return could waste a part of deductible tax loss. Corporate income tax payers are entitled to deduct a tax loss that they incurred and were assessed for one of the previous taxation periods (or its part) from their tax base in their tax return. At present, the loss can be deducted in this manner for the maximum of five taxation periods directly following the taxation period for which the loss was assessed. Although this construction may seem simple, in practice, its interpretation and application are still a source of difficulty, as evidenced by the text of the instructions issued by the Ministry of Finance on how to fill in the corporate income tax return. What does the law say? Complications for the deduction of tax loss from the tax base stem primarily from the fact that, for corporate income tax payers, the law knows not only the taxation period (Section 21a), but also the period for which tax return is filed (Section 38ma) but which is not a taxation period. The Tax Code also provides for other cases when the obligation arises to file a tax return only for a part of the taxation period, in relation to the dissolution of a corporate income tax payer and insolvency proceedings. After all, the electronic tax return form distinguishes 14 different time periods (types of tax return) for which the tax return can be filed. For some corporate income tax payers, it is therefore not enough to simply count five calendar years since the end of the taxation period or its part when they incurred and were assessed a tax loss and thus determine the last period when they can deduct this loss from their tax base. What is the administrative practice? The existence of the two above-mentioned types of period for which tax returns are filed and tax is assessed naturally leads to the question of how to approach the periods that the law does not label as taxation periods when deducting tax loss from the tax base.

3 3 In 2005 already, the Ministry of Finance accepted the opinion of tax advisors that periods that the law does not consider taxation periods but for which there is an obligation to file a tax return should not be included in the five taxation periods for which tax loss can be deducted from the tax base. In tax returns filed for these periods, the loss or its part can still be deducted from the tax base just as in tax returns filed for taxation periods. However, this does not lower the total number of taxation periods when tax loss can be deducted. This conclusion was later incorporated into the instruction of the General Financial Directorate on the unified approach for the application of certain provisions of Act No. 586/1992 Coll., on Income Taxes, as amended (Instruction D-6, now Instruction D-22). A practical example A corporate income tax payer used the fiscal year as the taxation period (i.e. a period of twelve consecutive months starting on the first day of a month other than January) and had incurred and been assessed a tax loss for the taxation period of the 2010/2011 fiscal year. According to the law, the tax payer can deduct this tax loss from the tax base for the following five taxation periods. If the tax payer continued to use the fiscal year as the taxation period, the last time they could deduct the tax loss would be the tax return for the taxation period of the 2015/2016 fiscal year. The tax payer deducted a portion of the tax loss from the tax base for the taxation periods of 2011/2012 and 2012/2013 (i.e. two taxation periods). In 2013, the tax payer decided to change the taxation period to the calendar year, starting from 1 January The tax payer was obliged to file a regular tax return for the period from the end of the 2012/2013 fiscal year to 31 December 2013, which is not a taxation period. The tax loss or its part could be deducted from the tax base in this tax return as well. Subsequently, the tax payer could continue deducting the tax loss in the three following taxation periods, i.e. 2014, 2015 and During 2016, the tax payer switched back to using the fiscal year (from 1 July 2016 to 30 June 2017) as the taxation period. The tax payer had to file a regular tax return for the period from 1 January to 30 June 2016, but this does not constitute a taxation period. The tax loss or its part could

4 4 be deducted from the tax base in this tax return as well. The last (fifth) taxation period when the tax payer can deduct the lax loss assessed for the 2010/2011 fiscal year from the tax base will therefore be only the 2016/2017 fiscal year. Theoretically, the tax payer could thus deduct the tax loss assessed for the 2010/2011 fiscal year from the tax base in tax returns filed for a total of seven periods (five taxation periods and two periods for which tax return is filed). What do the instructions on filling in the tax return say? In relation to the deduction of tax loss from the tax base, the instructions on how to fill in the corporate income tax return state that the taxation period or period for which a tax return is filed started in 2015 will be the last period when the tax loss incurred in and assessed for the taxation period or period for which tax return is filed started in 2010 can be used as an item deductible from the tax base. According to the instructions, it is therefore not possible to deduct the tax loss assessed for a taxation period started in 2010 from the tax base in the next taxation period (i.e. a period started in 2016). As follows from the above, however, this information is only correct for tax payers whose taxation period in was exclusively and continuously the calendar year or the fiscal year. If, however, these periods were interrupted by one or more periods for which a tax return is filed but which are not taxation periods, the last taxation period when the tax loss can be applied is deferred. The instructions are therefore incorrect for such a case and could cause the tax payer to needlessly fail to deduct a part of the tax loss that they are entitled to use. For the same reason, the information that the tax loss assessed for a taxation period started in 2009 can no longer be deducted in a taxation period started in 2015 (i.e. the 2015 calendar year or a fiscal year started in that year) can be incorrect. Similarly, the same applies for instructions related to the corporate income tax form for the years What to do about it? If a tax payer who experienced the situation described in the practical example followed the instructions of the Ministry of Finance on how to fill in the corporate income tax return, they would not deduct the remaining portion of the loss assessed for the 2010/2011 fiscal year in the tax return filed for the 2016 taxation period, or

5 5 for a part of 2016 and the 2016/2017 fiscal year after switching back to the fiscal year. This error can, however, be remedied by filing a supplementary tax return for the relevant part of 2016 for which a regular tax return has already been filed, no later than by the end of the month following the month when the error was discovered. For taxation periods started before 1 January 2015, the unused part of the loss can be utilised in a supplementary tax return only if it does not lower the last known tax and if at the same time, the newly assessed tax base is at least CZK 1,000 higher than the tax base from which the last known tax was calculated. If a tax payer followed the instructions on how to fill in the corporate income tax return for the taxation period of 2015 and made an error in filling in the information about the portion of tax loss that can still be deducted from the tax base in following taxation periods (section E of no. 1 to section II of the tax return), i.e. put in zero, they did not lose the right to deduct the remaining portion of the tax loss that the relevant legal provisions and administrative practice allow to be deducted in the next taxation period. The information related to future taxation periods that has no impact on tax in the taxation period for which the tax return is filed can be corrected in the supplementary tax return, but the tax payer is under no obligation to do so.

6 Tax Authorities Review Private Life Insurance 6 As the deadlines for filing ordinary personal income tax returns for the 2015 taxation period have expired, we have seen increased activity on the part of tax authorities. This is because as of 1 January 2015, the conditions applicable to tax benefits for private life insurance or the deduction of contributions from the tax base and for the exemption of employer contributions to policies from tax - have become stricter. As of the 2015 taxation period, it is not possible to apply tax benefits to insurance policies permitting extraordinary withdrawal over the insurance term (payment of proceeds that do not constitute insurance proceeds and do not thus result in the termination of the insurance contract). The payment of proceeds from extraordinary withdrawal has been added to the list of scenarios that cancel tax benefit entitlements and give rise to the obligation to additionally tax deductions from the tax base formerly applied to contributions; in addition, as of 2015, taxpayers must additionally tax employer contributions to insurance that had been, upon payment, exempt from tax. Tax authorities are thus currently calling on individual insurers to provide them with information on the clients that fulfilled the conditions for the above described additional taxation in the period for which tax may still be assessed (ie generally between 2013 and 2015). The reviews also focus on the legitimacy of deductions from the tax base applied in respect of insurance contributions. Until the end of 2014, entitlement to tax benefits in the form of deductions of contributions from the tax base did not apply only to taxpayers the insurance proceeds of which were paid out prior to the expiry of 60 calendar months from the conclusion of the policy or before reaching 60 years of age due to the early termination of insurance or an additional reduction of the insurance term. As of 1 January 2015, this benefit does not also apply to taxpayers making an early extraordinary withdrawal. Personal income tax payers for which any of the above stated events has occurred are obliged to declare, in the ordinary tax return for the taxation period in which the event occurred, the aggregate amount of insurance contributions deducted from the tax base in the past 10 years as their other income. If their employer contributed to their insurance policy, the taxpayers must also disclose the aggregate amount of insurance contributions received from the employer in the previous 10 years in

7 7 the tax return as income from dependent activities. They are also obliged to notify their employer that the contributions received will no longer be exempt from tax on income from dependent activities in the future. The notification must be given by the end of the calendar month in which the reason for terminating the exemption occurred. In terms of insurance policies concluded until the end of 2014, the obligation for additional taxation relates only to the employer contributions made since 1 January If proceeds are paid out from these policies as extraordinary withdrawal after 1 January 2015, the obligation for additional taxation relates only to the contributions deducted from the tax base in the 2015 taxation period and later. The obligation for additional taxation shall not apply if proceeds are paid out when the entitlement to retirement pension or third-grade disability pension has arisen or if the person insured acquires a thirdgrade disability or passes away, and it will neither apply in respect of insurance policies from which proceeds or surrender value are not paid out and where, at the same time, a reserve, capital value or surrender value are directly transferred to another private life insurance contract meeting the conditions for applying deductions of contributions from the tax base. If the tax authority finds out (for example based on information from an insurer), after the assessment of a tax, that additional taxation had not been reflected in the ordinary tax return or a contribution had been unjustifiably deducted from the tax base, resulting in tax evasion, it will call on the taxpayer to file an additional tax return. We recommend responding to the call duly and in time as the taxpayer will thus avoid the obligation to pay a fine from additionally assessed tax. They will only be ordered to pay default interest (currently 14.05% p. a.). If the taxpayer does not respond in a due manner, the tax authority can, ex officio, additionally assess tax for them and (besides default interest) additionally increase the tax additionally assessed by a 20% fine.

8 Taxation of Pensioners with Higher Income Contradicts 8 The Plenum of al Court complied with the motion of a group of senators and invalidated the provisions of Section 4 (3) of the Income Taxes Act that stipulate the taxation of regularly paid pensions of pensioners with higher income. Pursuant to the invalidated provisions, pensioners with additional income in the amount of at least CZK 840 thousand per year were obliged to additional taxation of the whole amount of pensions paid. Income to be calculated in the limit of CZK 840 thousand included income from the employment, income from business activities net of related expenses and also income from lease net of expenses. According to al Court, taxation of pensions itself does not contradict. However, the invalidated provisions break the equality principle as the taxation rate in case of pensioners with similar income, in which case income of one of them does not exceed CZK 840 thousand, will not be comparable. Also, the provisions do not take into consideration other income ie income from the sale of securities, interests or dividends. Provisions of Section 4 (1) (h) of the Income Taxes Act, regarding restrictions of the tax exemption with regularly paid pensions, however, remain valid: this exception is limited to 36-fold of the minimum wage in the respective taxation period (in 2016 therefore up to a maximum of CZK 356,400). Anything exceeding this limit in total remains subject to a 15% tax rate.

9 Electronic Records of Sales Recent News and Selected 9 The first segment of businesses (catering and accommodation services) will be required to record their sales from 1 December Despite the efforts of the Chamber of Tax Advisors, government opposition and the Chamber of Commerce to postpone the implementation, the Financial Administration insists upon keeping the original schedule. Based on the estimates of the Financial Administration, the electronic records of sales (elektronická evidence tržeb hereinafter EET ) should increase the state budget by CZK 15 billion after the first year of operation; in the following years, up to CZK 18 billion is expected from EET. The following overview summarises the main milestones that have occurred in relation to EET and those that are expected to occur before EET is launched: On 13 June, a testing environment for IT developers, the so-called playground, was launched. It helps develop software for cash terminals that will be used for recording sales. At the end of June, representatives of the Association of Small and Medium- Sized Enterprises and Crafts of the Czech Republic negotiated with the Minister of Finance and other representatives of the Ministry of Finance and Financial Administration concerning the possibility of simplification of the EET conditions. The Association of Small and Medium- Sized Enterprises and Crafts of the Czech Republic has managed to negotiate an exception for online stores. If a messenger of a delivery company delivers goods from an online store to a customer, the customer pays in cash and the payment is then sent by the delivery company to the online store s account, the receipt of the cash will not be considered a recorded sale. On 1 August, a call centre regarding the electronic records of sales was opened by the Financial Administration and it answers questions from businesses as well as the general public. On 2 August, an EET course for developers took place, focusing on the technical documentation and testing environment. On 2 August, Andrej Babiš stated for Hospodářské noviny that despite the request of the Chamber of Commerce, EET will not be postponed and will indeed be launched on 1 December. Additionally, he stated that at the beginning of EET s introduction, the sanctions for nonobservance (up to CZK 500,000 based on the Act on EET) will be significantly milder and will be focused exclusively on

10 10 intentional attempts to circumvent the law. Additional matters under consideration include the reimbursement of costs of the necessary equipment for microbusinesses in rural areas with ten or less employees, which would be compensated in the form of a grant for the time being, negotiations are ongoing between the Ministry of Finance and the Ministry for Regional Development in order to find a suitable grant programme from among European funds. By the end of August, the Financial Administration should prepare a methodology focusing on some of the unclear provisions of the Act on EET. From 1 September 2016, businesses will be issued authentication data to log into EET. Starting from that date, businesses will also be able to ask the tax administrator for authorisation to fulfil the records obligation in the so-called simplified mode. From 16 to 17 September 2016, the Ministry of Finance, the Financial Administration of the Czech Republic and the Czech Confederation of Commerce and Tourism will hold a two-day conference called Records of Sales in Practice, where they will provide up-to-date information and practical advice for businesses. Trial operation of EET for businesses is expected to start on 1 November The model of the introduction of a receipt lottery in relation to EET is currently under consideration and its launch is expected in March 2017 at the earliest. What will happen if a business is not able to send the information about a recorded sale, for example due to a malfunction of the cash terminal, is still being heavily discussed. If this situation occurs and the business is unable to send information about the recorded sale to the tax administrator and issue a receipt for the customer, the business is under Section 30 (3) of the Act on EET not responsible for the administrative offence if it has made (and is able to prove it) every possible effort to prevent a breach of legal obligations from occurring. The business has to send the information about the recorded sales to the tax administrator after the sources of the problem have been eliminated. At present, a methodology is being prepared that would make it possible under specific circumstances to send the required information about recorded sales in the form of one aggregate sum.

11 11 Businesses will still be financially compensated for the introduction of EET in the form of a tax relief for sales records. This relief amounts to CZK 5,000, but to no more than the positive difference between 15% of the partial tax base from independent activities and the basic taxpayer relief. This relief can only be applied in the taxation period when the business first recorded a sale subject to EET. We will address the topic in greater detail in an upcoming webcast on 30 August.

12 Change in Customs Inspections after Release of Goods has brought about many changes in customs legislation. We have already informed you about many of these changes. Today, we will focus on the changes in the area of inspections after the release of goods, concerning primarily importers and their customs representatives. Guidance on customs inspections is provided primarily in the Union Customs Code (effective from 1 May 2016) and the new Czech Customs Act, which came into force on 29 July The new Customs Act has been adapted to the valid EU legislation and adjusts and specifies some legislative areas of the Union Customs Code to ensure their compliance with the Czech legal context. What changes in post-clearance inspections has the new Customs Act brought? The changes concern primarily the following areas: Initiation and termination of the inspection; Introduction of the institute of fictional delivery; Solidarity responsibility in case of an additional assessment of customs duty; and Changes in sanctions related to an additional assessment of customs duty. Let s have a closer look at the individual points: Initiation and termination of the Inspection The inspection is initiated upon the delivery of the notice of inspection initiation where the subject and extent of the inspection is specified. The inspection is terminated upon the delivery of the notice of inspection termination, which also includes a tax review report. The inspection report will no longer be discussed with the inspected entity. However, the possibility to comment on the results of the inspectional finding has been maintained and we continue to perceive it as one of the most crucial moments of the inspection, when the inspected entity has the possibility to comment on the evidence submitted by the customs administration and to raise any arguments in its favour. If the post-clearance inspection is related to imports in which the recipient of goods

13 13 was represented by an indirect customs representative, the inspection will be initiated and carried out only for one of the participants (recipient of goods or customs representative) and the participant to be inspected is selected at the customs administration s discretion Fictional delivery All documents related to the customs inspection (e.g. notice of inspection initiation, result of the inspectional finding etc.) will be delivered only to the entity that is/ will be the subject of the post-clearance inspection (recipient of goods or indirect customs representative). However, delivery to the data box of the inspected person (e.g. the indirect customs representative) will be considered to represent also the delivery to the data box of the other participant (recipient of goods). Solidarity responsibility If an additional customs duty is assessed as a result of the inspection, it is assessed to all entities responsible for the customs duty jointly and severally, i.e. in the case of indirect representation to both the representing and the represented party. Sanctions for an additionally assessed customs duty A penalty of 20% of the additionally assessed customs duty as per the Tax Code will no longer be charged. The sanction will be calculated as default interest, starting from the day when the duty should have originally been paid. At the same time, it can be expected that the customs administration will begin customs offence proceedings, where sanctions of up to CZK 4 million could be imposed. What is new is the possibility to impose a ban on activity for up to two years if a financial penalty is deemed insufficient. As follows from the above, the fictional delivery and solidarity responsibility could bring unpleasant consequences for the represented entity. It is therefore necessary to pay increased attention to the contractual relations between the represented and the representing party. The contract with the representative should comply with the currently valid legislation and should define the obligations of the representative in relation to customs inspections. The contract should also include provisions about the obligation to inform the represented entity of all documents delivered in relation to the inspection. Additionally, we recommend clearly defining the responsibility for any potential additionally assessed customs debt and related sanctions who pays what and under what conditions.

14 14 The majority of inspections after the release of goods and subsequent sanctions concern errors in the tariff classification of goods, so it is important to focus on this area as well. The success rate of the customs administration in this type of inspection is approximately 80% and it is likely that their number will increase, given the customs administration s changing role. We acknowledge that the provisions regarding contractual relations according to the new legislation and correct tariff classification of goods can be difficult, just as it is difficult to know and correctly apply all the legal means if a customs inspection is initiated. For these reasons, we would like to offer you our assistance. How can we help you? As follows from the above, the area of inspections after the release of goods should not be underestimated. We have provided assistance to our clients during inspections after the release of goods many times, helping them eliminate potential adverse consequences. Additionally, our reviews of tariff classification identified the potential for the reclassification of some goods to a customs tariff code with a lower customs rate, which had a positive impact on the lowering of import duty charges. If you wish to be certain that your representative does not transfer all responsibility for the negative impact of a post-clearance inspection solely on you or you need help with an ongoing customs inspection, we would be happy to provide our assistance. We believe that our services could be particularly beneficial to you in the following areas: Assistance during customs inspections; Review of contracts concluded with customs representatives, including a review of the extent of powers of attorney; and Review of the tariff classification of goods.

15 Intrastat Reporting Changes 15 As of 29 July 2016, the following changes in reporting data for Intrastat purposes come into effect: Foreign exchange rate the exchange rate for the translation of foreign currencies into CZK has been unified. For Intrastat reporting purposes, the exchange rate used from now on will be the one used by reporting entities for translating the value of goods in terms of value added tax, i.e. the exchange rate announced by the Czech National Bank or the European Central Bank. Corrections of reported information if the misstated, incorrect or missing data refers to information other than the amount or value of goods, the report does not have to be corrected if the value of the goods the information relates to does not exceed CZK 10 thousand. This amount has therefore been increased from CZK 1 thousand to CZK 10 thousand. Statistical attribute the list of selected goods for which an additional statistical attribute is given will be set by the Czech Statistical Office in a notice published in the Collection of Laws. The list of selected goods will therefore no longer be part of a governmental decree (as was the case until now). In view of the transition to the new legal regulation, we note that in order to translate foreign currencies in relation to information concerning the reference period of July 2016, the customs exchange rate should be used according to the original rules, and the exchange rate for VAT purposes should be used from the reference period of August 2016 onwards.

16 Amendment to the VAT Act 16 The amendment to the VAT Act that shall become effective (with only one exception) on 29 August 2016 is undoubtedly the greatest news in VAT. The amendment has introduced a broadly-applicable reverse charge regime for the sale of goods to a tax-payer if the sale is realised by a person not established in the Czech Republic and not registered as a VAT payer in the Czech Republic. Under certain circumstances, foreign entities registered as VAT payers will be able to deregister provided they realise only supplies that would otherwise be subject to the reverse charge regime. Discussions between the Chamber of Tax Advisors of the Czech Republic and Financial Administration are currently in progress in order to clarify the conditions for the deregistration. Foreign entities registered as VAT payers in the Czech Republic will have to adjust to another newly introduced change by which they will newly be subjected to the local Tax Authority competent for the Moravian-Silesian Region. The process should start on 1 September 2016 and all the concerned tax payers should be informed by their relevant tax administrators about the date on which the changes regarding their local authority shall become effective. A further and relatively significant change is the revocation of the special status of free zones. From 29 August 2016, free zones shall be considered a standard area of the Czech Republic where the common tax regime is applicable. Entities that have been using the possibility of excluding transactions realised within free zone from VAT payment will have to find new ways of optimising their cash flows with respect to VAT. The amendment has also clarified that VAT in respect of receivables from debtors in insolvency proceedings may only be corrected if the receivables existed for longer than six months prior to the court declaring the bankruptcy. The last area that has been amended is the possibility of exemption from a fine for delayed submissions of VAT Control Statements. The tax administrator will be able to remit certain low value penalties, whereby certain low value penalties will not be imposed at all.

17 The ruling of the Court of Justice of the EU in case 17 In this case, the Court of Justice implicitly confirmed that the period of three years for claiming VAT deductions stated by the VAT Act is in compliance with European laws. What is important for Czech taxpayers is the court s decision that the claim for tax deduction may only be conditioned by substantive requirements, ie tax deduction should not be hindered by the failure of the tax payer to meet certain formal obligations.

18 OECD Guidane on CbC Reporting 18 On 29 June 2016 the OECD took a new step in its continuing efforts to boost transparency in international tax matters with the release of Guidance on the Implementation of Country-by-Country (CbC) Reporting. The OECD and G20 countries have committed to implementing CbC reporting, as set out in the BEPS Action 13 Report Transfer Pricing Documentation and Country-by-Country Reporting. Countries have agreed that implementing CbC reporting is a key priority in addressing BEPS risks, and the Action 13 Report recommended that reporting take place with respect to fiscal periods commencing from 1 January Recognising the significant opportunities that CbC reporting can offer to a tax administration in undertaking high level risk assessment of transfer pricing and other tax risks, a number of non- OECD/G20 countries have also committed to implementing CbC reporting, including developing countries. OECD has further committed to continue in supporting the consistent and swift implementation of CbC reporting among the countries involved. Hence the newly issued OECD Guidance on the Implementation of CbC Reporting is intended to assist in this regard. The guidance mainly covers the following issues: Transitional filing options for MNEs that voluntarily file in the Parent jurisdiction; Guidance on the application of CbC reporting to investment funds; Guidance on the application of CbC reporting to partnerships; and The impact of exchange rate fluctuations on the agreed EUR 750 million filing threshold for MNE groups. In addition, the OECD will provide information on country specific aspects of CbC implementation, including the effective dates of CbC legal frameworks, local filing and surrogate filing mechanisms, and identifying the agreements for the exchange of CbC reports that are in effect. Given that CbC Reporting is one of the BEPS s minimum standards, a peer review of the implementation of CbC reporting will be conducted to ensure that the implementation of jurisdictions domestic legal frameworks is timely and in accordance with the Action 13 Report. For further information about the OECD s work on CbC reporting, see: www. oecd.org/tax/beps/country-by-countryreporting.htm.

19 19 Czech Republic Highlights As a first step in CbC practical implementation, the Czech Republic signed on 27 January 2016 a Multilateral Competent Authority Agreement on the Exchange of Country-by-Country Reports, which has so far been signed under the OECD initiative by a total of 32 countries. The signing of the international agreement further assumes the adoption of related legislation at the local level that will enable the Czech tax authorities to collect CbC reports from the covered taxpayers. The expected date of such legislation release has not yet been announced, although the Czech tax authorities have unofficially indicated in the past that they still plan on adopting it in We will address the topic in greater detail in an upcoming webcast on 30 August.

20 Real Estate Acquisition Tax Amendment Published 20 On Friday, 5 August 2016, an amendment to the Senate s Ordinance, on Real Estate Acquisition Tax, was published in the Collection of Laws under No. 254/2016. As its effectiveness is determined to start at the first day of the third month following the day of its publication in the Collection of Laws, the Amendment becomes effective on 1 November The effective day for the implementation of the amended wording of the Ordinance is the day on which tax liability arises (ie the day of acquisition of the ownership title to the real estate). Therefore, changes in the Amendment will impact cases in which the ownership title is acquired following 1 November In most cases, the ownership title to real estate recorded in the Cadastre (transition on the basis of a purchase or an exchange contract) is acquired on the day on which the legal impacts of the record in the Cadastre becomes effective. With real estate that are not to be recorded in the Cadastre, the effective day is the day on which the contract becomes effective. As we have already informed you in previous dreport issues, the principal change stipulated by the amendment is unifying the tax payer such that the acquirer of real estate is always the tax payer. The current legal regulation determines the transferor as the tax payer and gives all involved parties the right of choice to determine the acquirer as the tax payer in a purchase agreement. As compared to the current status, the possibility to choose who the tax payer will be is eliminated, and so is the institute of the acquirer s guarantee if the transferor of real estate was the tax payer. Another significant change is a more accurate definition of utility networks that are subject to acquisition tax. The previous regulation was ambiguous, giving rise to numerous difficulties in practice; the more accurate definition clarifies which utility networks/their components are subject to acquisition tax and which are not. According to the amendment, only a purchase of the ownership title (or a part thereof) to a building under the Cadastral Act should be taxed. Also, acquisition of the ownership title to a real estate by territorial self-governing units or voluntary associations of municipalities is exempt from tax. In these cases, territorial self-governing units and voluntary associations of municipalities are not obliged to file tax returns.

21 21 Other changes include expanding the definition of the acquisition of ownership title to include the extension of the period for establishing construction right, the removal of a transfer of assets to a partner from the transactions excluded from tax, the expanded use of the guide value or a provision regarding the tax exemption of the first acquisition of new buildings in return for payment. Provisions regarding tax exemption of new units have been changed as well. From now on, the first acquisition in return for payment of a new finished as well as used building/unit within five years from its termination or from the beginning of its use are exempt from tax. With regard to an exchange, the determination of the agreed price is simplified. Newly, the value of an asset disposed of will not be taken into account if it is subject to real estate acquisition tax. In relation to the Amendment becoming effective, the Financial Administration published on its website Information on the Amendment to the Czech Senate s Ordinance on Real Estate Acquisition Tax. We will address the topic in greater detail in an upcoming webcast on 30 August.

22 Providing Evidence of Income and Asset Declaration 22 Currently, the Senate is debating an Amendment to the Income Taxes Act related to providing evidence of the origin of assets. According to the proposed provisions, the tax administrator will be entitled to ask the tax payer to provide evidence of the origin of income and further facts relating to the increase of his assets, consumption or other expenditures in case the tax administrator has doubt whether the tax payer s declared income corresponds to the increase in his assets or consumption and when, following a preliminary assessment, the tax administrator concludes that a difference between the income and the increase in assets or consumption exceeds CZK 7 million. When the tax payer fails to provide evidence of the requested facts following a call for proving income in the given period, the tax administrator determines the tax by using aids, ie he determines the income the tax payer must have had in order to earn the increase in assets or consumption. Subsequently, the tax is determined from the difference of the thusly assessed income and the income the tax payer has declared. Furthermore, the tax payer will be obliged to pay a fine amounting to 50% of the additionally assessed tax, or 100% in case the tax payer does not cooperate with the tax administrator. Also, the tax administrator will be enabled to ask the tax payer to submit an asset declaration in case the tax payer does not provide evidence of the facts required in the call for proving income and the tax administrator cannot find out about the balance of the assets by other means which were not difficult for the tax administrator at the same time, or in case the tax payer s asset exceeds CZK 10 million after the preliminary assessment of the tax administrator. Concurrently, the related amendment to Section 227 of the Penal Code stipulating penalties for abusing the responsibility to declare assets, is being debated as well. The upper limit of a custodial sentence should rise from the current one year up to three years.

23 Applications filed at the Czech Embassy in Bratislava 23 In the past, foreigners could request an exemption from participation at the Czech Embassy in Bratislava (the Embassy ) when applying for an employee card, shortterm or long-term visa. Our experience indicates that the Embassy upheld the vast majority of such requests to grant the exemption from participation. Therefore, it was not necessary for foreigners to travel to Bratislava as the application for the above-mentioned residence authorisations could be filed via a representative based on a power of attorney. Nevertheless, based on our information it is no longer possible to request an exemption from participation when applying for a short-term visa as the Embassy introduced mandatory capturing of biometric data (especially fingerprints) for foreigners. Moreover, the presence of foreigners is also required when applying for a longterm visa for business purposes as foreigners must personally participate in an interview and cannot be represented by another person. However, the opportunity to request an exemption from participation in case of applying for a long-term visa, aside from a long-term visa for business purposes, and an employee card is only applicable to citizens of selected foreign nationalities. For this reason, we recommend contacting the Embassy directly for more information. In this context, the Embassy informed us about its intention to introduce the mandatory participation of foreigners regarding any application for residence permits in the future. We will continue to monitor the situation for you.

24 Notification Obligation to the Employment Office 24 Section 87 (1) of Act No. 435/2004 Coll., on Employment, as amended (the Act on Employment ) stipulates that in case of employing a European Union citizen, a family member of a European Union citizen or a citizen of the Czech Republic, a foreigner with free access to the market listed under Section 98 a) through e), j) through r) of the Act on Employment, ie a foreigner with free access to the labour market (the foreigner ), the employee must inform (in writing) the respective regional branch of the Employment Office about this fact no later than on the date of employment commencement. A written notice must include data the records of which the employer is obliged to maintain pursuant to Section 102 (2) of the Act on Employment, such as the type of work, place of work and period over which the employment is to be performed (the data ). In line with Section 87 (2) of the Act on Employment, the employer must also inform the respective regional branch of the Employment Office about any change in the data within 10 days from the date when the change occurred, or from the date when the change was identified by the employer. Change in the type of work performed by the foreigner The Ministry of Labour and Social Affairs (the Ministry ) usually keeps records on the type of work in the form of the relevant CZ-ISCO code which in practice does not always correspond to the type of work specified in the foreigner s employment contract. In practice, the scope of the type of work arranged by the employment contract may be narrower than the profession defined under the CZ-ISCO code (eg the type of work manicurist is categorised under CZ-ISCO manicurists and pedicurists) or wider (eg the type of work labourer may be classified under CZ- ISCO: 93122, 93123, 93130). This results in uncertainty of employers with respect to meeting their notification obligation to the Employment Office as appropriate. The information available to us indicates that employers are obliged to inform the Employment Office on a change in the type of work performed by the foreigner only if the change in the type of work performed by the foreigner results in a change in the CZ-ISCO code as compared to the CZ-ISCO code specified in the original notification which was sent to the Employment Office regarding the foreigner s commencement of employment.

25 25 Change in the place of work performed by the foreigner Changes in the place of work may relate to narrowing the original place of work reported to the Employment Office (such as narrowing from the entire Czech Republic to a single town), or a transfer of the place of employment within one town (such as a change in the employer s registered office within a town). In this context and based on available information we believe that the foreigner s employer must inform the Employment Office, as part of its notification obligation, when the place of work performed by the foreigner is different than the one specified in the original notification to the Employment Office regarding the foreigner s commencement of employment. Therefore if the place of work was specified as a town in the original notification to the Employment Office and the change in the place of work was realised within this town, the employer would not be obliged to inform the Employment office on such a change.

26 Change in the Foreigner s Job Title 26 Section 42g (7) of Act No. 326/1999 Coll., on the Residence of Foreign Nationals in the Czech Republic and on Amendments to Some Other Acts, as Amended (the Act on the Residence of Foreign Nationals ) stipulates that a change in the employer or job title of the employment card holder or employing the foreigner at another work position or at another employer is subject to prior approval by the Ministry of the Interior (the Ministry ). Nevertheless, the term job title is not specified in detail by legal regulations. We believe that with respect to the legal definition of notification of and keeping records on vacancies to be staffed by employment card holders, the term job title must be construed in relation to the type of work. The job title thus designates the functional and organisational classification of the employee at his/her employer and is subordinate to the term type of work. Nevertheless, we have not encountered any situation in practice where the type of work specified by the employment contract remained unchanged but it was unclear whether a change in the job title occurred. The information available to us indicates that the Ministry relates the term change in job title to the change in the CZ-ISCO code as part of classification of employment. If a change in the foreigner s job title results in a change in the respective CZ- ISCO code for which an employee card was issued, such a change is subject to a prior approval by the Ministry. Nevertheless if a change in the foreigner s job title does not result in a change in the respective CZ-ISO code, this change is not subject to a prior approval by the Ministry. For instance, where a foreigner works for an employer as a labourer and, due to a unilateral change in the job title, his/ her job responsibilities expand to include management and supervision of a group of other employees of the employer without changing the type of work specified in the employment contract, the foreigner is not obliged to ask for a prior consent to the change in the job title.

27 The Fast Track Project Full Capacity 27 The Accelerated procedure for intracorporate transfers and localisation of foreign investors employees and statutory bodies project which is referred to as Fast Track and which is intended to achieve time savings in application proceedings for foreign employees residence permits, has reached full capacity in recent months. In this context, please note that intra-corporate transfers of employees to companies based in the Czech Republic may be more time-intensive. While application proceedings for residence permits filed through Fast Track should not exceed 30 days, resolutions on residence permit applications filed outside of Fast Track are issued within statutory periods. In terms of the employee card, the proceedings may take 60 to 90 days. As the project administrator, the Ministry for Industry and Trade, has stated, the capacity of the Fast Track project will continue to be increased; however, only by about 10 requests a month.

28 Special Regime for Employees from Ukraine 28 As the information available to us shows, as of 1 August 2016, the Association of Small and Medium-Sized Enterprises and Crafts of the Czech Republic, the Economic Chamber of the Czech Republic, the Confederation of Employees and Entrepreneurs Unions of the Czech Republic, the Confederation of Industry of the Czech Republic and the CzechInvest (the administrators ) started accepting applications from local employers for inclusion in the Special Treatment Regime for Qualified Employees from Ukraine (the Ukraine Special Regime ). The Ukraine Special Regime is directed at qualified employees from Ukraine who intend to perform jobs in the Czech Republic classified under the main classes 4 8 of the CZ-ISCO classification pertaining to production, services or the public sector. The Ukraine Special Regime is intended primarily for technical positions. Highly qualified employees are treated on an individual basis under the Pilot Project: Special Procedures for Highly-Qualified Employees from Ukraine, which we have informed you about previously. Applications for inclusion in the Ukraine Special Regime may be filed with one of the administrators primarily by employers that have conducted business in the territory of the Czech Republic for a minimum of two years, that are tax residents of the Czech Republic, that are registered in the Czech Republic as payers of social security and health insurance, that have settled all their liabilities towards the state and that have employed at least 10 people in the territory of the Czech Republic in the two years prior to filing the application. If the local employer meets the above stated conditions and if one of the administrators includes them in the Ukraine Special Regime, the respective foreign national will be subsequently approached directly by the General Consulate of the Czech Republic in Lviv (the Consulate ), which will provide the foreign national with the closest available date for filing an employee card application. The employee card application will be processed in a standard manner and within standard deadlines in line with the Act on the Residence of Foreign Nationals. If the Ministry of the Interior decides to grant the employee card, the Consulate will issue a long-term visa for the foreign national so that they may collect the employee card. After arrival in the Czech Republic, the foreign national must present himself or herself at the Ministry of the Interior s office in order to have their biometric data taken. Based on a confirmation that they have met the conditions for issuing an employee card, the foreign national will be entitled to start working and will be subsequently issued the employee card itself.

29 New legal framework for personal data transfers from 29 In response to the annulment of the Safe Harbor decision, the European Commission adopted on 12 July 2016 a new legal framework for personal data transfers from the European Union to the United States called EU-US Privacy Shield. The EU-US Privacy Shield brings stricter conditions and more stringent surveillance over personal data transfers from the EU to the US, hand in hand with the conditions under which the US Government can access the transferred data. The Commission s decision on the EU-US Privacy Shield adoption was announced to the EU Member States on 12 July 2016 and, as of that date, it entered into force for the Member States. The decision shall be published in the Federal Register of the US, and once the US companies have updated their compliance accordingly, the companies will be able to certify with the US Department of Commerce starting from 1 August The first proposed wording of the decision about the EU-US Privacy Shield was submitted by the Commission on 29 February The European Data Protection Authorities, the European Data Protection Supervisor and the European Parliament expressed their critical opinions on the initial proposed wording and the European Commission amended the EU-US Privacy Shield accordingly. The amended changes consisted mainly in: (i) a requirement for companies to delete personal data that no longer serves the purpose for which it was collected; (ii) a requirement that third party companies processing data on behalf of companies that have signed up to the EU-US Privacy Shield must guarantee the same level of protection as the EU-US Privacy Shield companies themselves; (iii) clarifications from the US side about conditions of the surveillance and that such surveillance will be accompanied by additional safeguards to minimise the amount of data collected and subsequent access to the collected data; (iv) clarifications on the Ombudsperson Mechanism in order to make sure that such an ombudsperson would lack sufficient independence and adequate powers. The new rules shall provide the EU citizens with greater transparency of personal data transfers to the US and provide them with an easier and cheaper way of defence. EU citizens who find that their privacy rights have been violated may file complaints with national data protection authorities, who will then forward them to the respective US authorities (i.e. Department of Commerce or the Federal Trade Commission), or as