Building Foundations Legal News Update on recent legislative amendments in the Czech Republic Issue: December 2014 www.roedl.cz Contents: Law > Selected legislative changes > Selected additions to collection of laws > Effective dates of selected laws and regulations Taxes > Tax law amendments > Judicial decisions > Briefly > Selected legislative changes Short-Time Work Scheme Vojtěch Hrdlička, Rödl & Partner Prague At its November meeting, the Government agreed to grant its support to the short-time work scheme (in the Czech environment referred to as kurzarbeit), a program aimed at helping employers in distress occasioned by an economic recession or a natural disaster. Negotiations are still pending about the exact terms of this scheme, although a consensus has been reached about the principal outline of the scheme. The Government intends to take up the obligation to assist employers in need. Once the Government has declared emergency, employers will be able to apply for a subsidy at the local Labour Bureau; the Government will then assess each application based on its merits and in view of its individual circumstances, and approve or decline the application accordingly. The individual assessment approach was pushed through by Andrej Babiš, the Minister of Finance. The Government plans including the short-time work scheme in the upcoming amendment bill to the Employment Act, which could be promulgated as soon as in the first six months of the next year. To put it briefly, the short-time work scheme is a program whereby the Government grants a temporary support to businesses that decide to cut down their production as a result of a slump in revenue. The employees get shorter working hours in exchange for about 70% of their average wage (20% of which will be subsidized by the Government) while still being able to keep their jobs. The basic idea behind this scheme is that it is more expedient for the Government budget to subsidy wages than to pay unemployment benefits. The maximum amount of the subsidy is still undecided, but estimates range from ten to twenty percent of the national average wage, i.e. about 2,481 to 3,721 Czech korunas. The subsidy would be granted for up to six months; extension will be approved only in exceptional circumstances. It should be noted that even today employers may reduce the working hours of their employees and cut down their wages to sixty percent under the existing Labour Code; however, they are currently not entitled to any Government subsidy if they do. Amendment Bill to the Seizure of Proceeds and Instruments of Crime Act Kateřina Knytlová, Rödl & Partner Praha The Chamber of Deputies passed in the first reading an extensive amendment bill to the Seizure of Proceeds and Instruments of Crime Act, which is now ready to be presented for a debate to the Committee on Constitutional and Legal Affairs. According to the statement of reasons that accompanies the bill, the principal object of the amendment is to improve the efficiency of handling the assets seized in the course of criminal proceedings and to allow for the sale of the seized assets even without the consent of the defendant, particularly when it comes to assets that substantially diminish in value over time, such cars or electrical appliances. According to the official statistics, only a small fraction of assets thus seized is sold, largely because the defendant does not consent to the sale. The bill also opens up the possibility to seize offender s assets in order to pay a pecuniary fine. This should improve the enforceability of the punishment, and the victim s ability 1
Law Source: Archive of Rödl & Partner to recover the loss, as it will it make possible to seize the defendant s assets before the initiation of criminal proceedings whenever there exists a probable cause or reasonable suspicion that the defendant will attempt aggravating or precluding the satisfaction of the crime victim s proprietary claims. The seizure of the assets will be subject to the submission of evidence about the defendant s intention or attempt, successful or not, to sell, hide or otherwise hinder the confiscation of assets. Introduction of the Territoriality Principle in Distraint and Enforcement Proceedings End of Predatory Competition? Monika Štýsová, Rödl & Partner Praha It almost seemed for a while that the long and hard disputes about the proposal to apply the territoriality principle on distraint and judicial enforcement officers were finally coming to an end and that a consensus had been reached on this controversial topic. The recent debates focused rather on the mere technicality how to put the idea into practice and when. But now the discussion was stirred again by the Office for the Protection of Competition with its new arguments against the application of the principle. At the time being, the territorial jurisdiction of distraint and judicial enforcement officers is not subject to any limitations. A creditor from Liberec is free to choose a distraint officer from Prague to enforce his claim the choice is left fully to each person s discretion, and distraint and judicial enforcement officers may pursue their engagements anywhere in the Czech Republic. This would change with the introduction of the territoriality principle, and that is the sticking point recently pointed out by the Office for the Protection of Competition. According to the Senate s amendment bill to the Judicial Enforcement Proceedings Code, under the territoriality principle, the distraint and judicial enforcement officers should operate only in their home districts. According to the Office for the Protection of Competition, the application of the territoriality principle in such situation would act as an artificial market allocation scheme and as a limitation of natural competition that could cause a stagnation of competition on the market. The objection that naturally comes to mind is whether distraint and judicial enforcement officers can really stand comparison with competing undertakings. Technically, this certainly should not be the case. Distraint and judicial enforcement officers are not supposed to act as eager or even predatory business entities. They should be unbiased officers of law who dependably enforce judicial rulings. The opinion expressed by the Office for the Protection of Competition also does not appear to reflect the view shared by other EU Member States; except for the Czech Republic, Slovakia and the Netherlands, distraint and judicial enforcement officers of all other Member States pursue their tasks in accordance with the territoriality principle. The application of this principle in practice has also gained broad support from distraint and judicial enforcement officers themselves, which is equally important. Last but not least, the idea has also enjoyed a warm reception from the general public, which perceives the application of the territoriality principle as a vital safeguard and guarantee of the independence and impartiality of distraint and judicial enforcement officers. Planning to Launder the Money? Even That May Become a Crime! Kateřina Knytlová, Rödl & Partner Praha The legalization of the proceeds of crime, or moneylaundering, is a well-known criminal offence. The liability (enforceable by the associated criminal punishment) comes to arise when an offender accomplishes the elements of the offence as described in section 216 of the Criminal Code. The mere preparation and planning of money laundering currently does not constitute a punishable offence. But this may soon change with a recent Government bill. As defined in s. 216 CC, money laundering is a conduct that includes disguise or other effort aimed at substantially aggravating or precluding the ascertainment of the source of property or other assets derived from criminal activity ( ). According to the new bill, the offence may soon entail facilitating the concealment, disguise, or other effort aimed at substantially aggravating or precluding the ascertainment of the source of property or other assets derived from criminal activity ( ). This change is motivated by the need to meet international standards and the requirements laid down by the European Union, which include in the official definition of money laundering the participation, association or attempt to commit, and aiding, abetting, counselling and facilitating the commission of such conduct. Typically, in our jurisdiction, the preparation for, or rather the facilitation of the commission of a criminal offence entails (rather accurately specified) overt actions such as gathering or preparing tools and means with the intent to commit a crime. However, concerning money laundering, the law remains very vague about the exact elements of such facilitation. This is a major and a regrettable legal gap, because it brings about a risk that the broad definition 2
Law / Taxes Issue: December 2014 of facilitation will become a welcome target of arbitrary or perhaps even wanton interpretation on the part of investigating, prosecuting and adjudicating bodies. The important thing to remember regarding the liability for inchoate crimes is that the facilitation must be performed with a wilful intent; mere negligence does not suffice here. Another potential problem of the bill is that it appears, at least to some extent, to be an attempt to circumvent some of the underlying principles of liability for crime preparation established in the Czech law. To constitute a criminal offence, the act of preparing for a crime normally has to satisfy two conditions. First, preparation for a crime is an inchoate offence only with respect to the most serious felonies. Second, the criminal liability for the preparation stage of a crime must be directly incorporated in the applicable provision of the Criminal Code, namely through the expression preparation is a criminal offence. The Government bill does not satisfy either of those conditions; in fact, in the absence of the first condition, the second one can hardly be satisfied anyway. Naturally, to comply with the international and the European requirements in particular, the law will have to be modified sooner or later. The question remains whether to proceed with the change at any cost, and whether the price of dangerously vague definitions and an apparent evasion of law is not too high to pay. Purposes in the Czech Republic (Safety Material Handling Act), as amended by Act No. 64/2014 Sb. > Effective dates of selected laws and regulations 260/2014 Sb., effective from 19 November 2014 ACT of 23 October 2014 to modify Act No. 239/2013 Sb., which modifies Act No. 56/2001 Sb., On Conditions for Operating Vehicles Cars on Road Communications, and to modify Act No. 168/1999 Sb., On Vehicle Liability Insurance and modification of some related laws (Vehicle Liability Insurance Act), as amended by Act No. 307/1999 Sb., as amended, and some related laws. 228/2014 Sb., effective from 7 November 2014 ACT of 23 September 2014 to modify Act No. 121/2000 Sb., On Copyright and Other Related Rights, and on modification of some other laws (Copyright Act), as amended, and Act No. 151/1997Sb., On Appraisal of Property and modification of other laws (Property Appraisal Act), as amended. Your contact for additional info: > Selected additions to collection of laws 19.11.2014 Collection: 254/2014 Chapter: 107/2014 ACT of 22 October 2014 to modify Act No. 108/2006 Sb., On Social Services, as amended, Act No. 111/2006 Sb., On Aid to the Destitute and Indigent, as amended, and Act No. 73/2011 Sb., on Labour Bureau of the Czech Republic and modification of some related laws, as amended. 19.11.2014 Collection: 256/2014 Chapter: 107/2014 ACT of 22 October 2014 to modify Act No. 48/1997 Sb., On Public Health Insurance and Amendment and Modification of Some Related Laws, as amended, and other related laws. 19.11.2014 Collection: 261/2014 Chapter: 108/2014 ACT of 23 October 2014 to modify some financial market laws. 19.11.2014 Collection: 262/2014 Chapter: 108/2014 ACT of 23 October 2014 to modify Act No. 235/2004 Sb., On Value Added Tax, as amended, and other related laws. 19.11.2014 Collection: 266/2014 Chapter: 108/2014 ACT of 23 October 2014 to modify Act No. 229/2013 Sb., On Handling Property Used for Defence and Security Mgr. Monika Štýsová Attorney-at-law/Senior Associate Phone: +420 236 163 760 E-mail: monika.stysova@roedl.cz > Tax law amendments Tomáš Zatloukal, Rödl & Partner Prague Lawful Origin of Assets The Ministry of Finance has drafted a new bill to help combat tax evasion Lawful Origin of Assets Bill. The main purpose of the bill is to amend the Income Tax Act by adding new sections 38x to 38ze, and the Criminal Code, by adding subsection 277(2). The new law is expected to be promulgated on 1 January 2016. According to the Bill, whenever a tax administrator comes to a conclusion that there exists a justified concern that a taxpayer s income does not match the increase in his wealth by more than CZK 5 million, he may ask the person to prove the lawful origin of his wealth. What this means in 3
Taxes practice is that the tax administrator will send the taxpayer a request for an explanation about the origin of the income and other facts related to the increase in wealth. If the taxpayer fails to explain the facts mentioned in the notice to the tax administrator s satisfaction and the income tax in excess of CZK 2 million cannot be determined by appropriate evidence, the tax administrator may assess the tax at his discretion by a reasonable estimate. If the taxpayer fails to submit persuasive evidence and the tax has to be assessed at a tax administrator s discretion, the tax administrator will be able to impose a fine on the taxpayer set at 50% or 100% of the tax liability, depending on the taxpayer s cooperation in the assessment or the lack of it. The tax administrator may also ask the taxpayer to submit personal wealth statement if the taxpayer fails to establish the facts identified in the tax administrator s request, if there exist no other means of acquiring the information and the estimated value of the taxpayer s wealth exceeds CZK 10 million. The bill also aims to add a new offence to the Criminal Code and the punishment for the refusal, evasion or submission of grossly misrepresented or false information in the personal wealth statement under the Income Taxes Act, namely a sentence of imprisonment from 1 to 4 years, a pecuniary penalty or a disqualification from exercising a profession. Applicants for Excise-Related Authorisations Will Have to Establish Their Financial Stability In response to an amendment bill to the Excise Tax Act currently pending in the Chamber of Deputies, the Government plans adopting an implementing regulation to regulate the identification and assessment of criteria of financial stability, as one of the conditions for obtaining certain authorisations related to excise taxes (such as the tax warehouse keeper authorisation). The tax administrator will evaluate the criteria by means of a financial analysis, i.e. by analyzing profitability, liquidity, financial stability, activities and productivity of labour (the Source: Archive of Rödl & Partner relevant formulas are enclosed as a schedule to the Government regulation), and the figures disclosed in the annual financial statements (individual and consolidated), annual reports, tax returns, auditor s reports and other documents and records presented to the tax administrator by the applicant; recently incorporated entities will have to submit opening balance sheet, and their quantified business plans for the current and upcoming year. The criteria will be evaluated over time and compared to recommended values or industry averages (depending on the company s principal business activity) published by the Czech Ministry of Industry and Trade in its regular financial analysis of the corporate sector. The tax administrator will review two fiscal periods immediately preceding the fiscal year in which he prepares the financial analysis; for newly formed business entities, the tax administrator will analyse the current and the subsequent fiscal period. New Income Tax Return Schedule Will Disclose Info About Transfer Prices The corporate income tax return for the tax year 2014 is to include a new schedule through which companies will have to disclose info about their related-party transactions. The schedule will have to be completed by all entities subject to a compulsory audit of accounts (i.e. having total assets over CZK 40 million, net annual turnover over CZK 80 and average number of employees over 50). The extent of the disclosure will depend on individual circumstances of the reporting entity: > Taxpayers that pursue cross-border related-party transactions will be asked to disclose only transactions with their foreign parent, subsidiary and affiliated companies. > Taxpayers that report tax loss and investment incentive recipients will be asked to disclose info about all relatedparty transactions, i.e. with both inland and foreign related parties. In the schedule, the taxpayer will be obliged to report costs and revenues, purchase prices from transactions involving tangible and intangible fixed assets or financial assets, inventories, services, license fees, interests etc. The schedule will also contain information about the distribution or collection of dividends or gratuitous performance, and the balance of short and long-term receivables and payables with related parties, including the data from previous periods. The data will have to be disclosed individually about each related party. The new schedule attests to the tax administration s increasing interest in transfer-pricing information, following the questionnaire sent to selected taxable persons earlier this year, whose completion at that time was still voluntary. 4
Taxes Issue: December 2014 > Judicial decisions Burden of Proof in Related-Party Transactions Carried by Investment Incentive Recipients Investment incentive recipients may not raise their tax base by any intercompany transaction that would violate the arm s-length principle. Failing that, they forfeit the applicable income tax credit. The burden of proof as to whether the prices agreed between related parties comply with the transfer-pricing principles is primarily carried by the tax administrator. In the case at hand, during the last year of a tax incentive scheme, a company sold medical aids of its own manufacture to an associated enterprise for a price that was substantially higher than the price for which it subsequently purchased the goods back from the related party. In selling the goods to its customers, it generated a 171.45% gross profit margin, although the fair market margin of comparable entities in the same period ranged from 28.40% to 80.60%. Through this transaction, the company managed to raise its total sales margin three to fourfold when compared to preceding years. The tax administrator managed to convince the court that the transaction at issue did not match the criteria of a standard commercial transaction, and thus transferred the burden of proof to the company. The company failed to submit a persuasive explanation as to how it would have achieved such an extraordinarily high profit margin with a non-associated enterprise. Neither did the company satisfy the court by its argument that the trade activities at issue were so closely interrelated and interdependent as to deserve the same treatment as a transaction pursued by the company as a whole. Ultimately, the Supreme Administrative Court dismissed the judicial review appeal. Refund of VAT Assessed in Connection With a Restoration of a Building Subsequently Sold In October, the Supreme Administrative Court ruled in a case involving the right to a refund of the VAT assessed in connection with the restoration of a building that was subsequently sold. A building was restored by an owner who reclaimed VAT in the years 2007 to 2009 on goods and services purchased in connection with the restoration works, acting on the assumption that he would eventually lease the property and charge the value-added tax on output. The building was sold in 2009 before being completely restored as a taxexempt supply under s. 56 of the VAT Act. It is important to note that at that time, the VAT Act did not contain the existing section 77 that calls for the compensation of the reclaimed VAT whenever the business assets, on which the taxpayer reclaimed the VAT, are used within 3 years for purposes other than those exercised originally to reclaim VAT. Under the current legislation, reclaimed VAT is compensated for by the taxpayer in the year of the change of purpose for which the assets are used. The same argument was brought forward by the complainant, who reasoned that in years 2007 to 2009, the VAT Act did not incorporate any statutory instruments that would require the taxpayer to pay a compensation for the tax reclaimed. But the tax administrator assessed all reclaimed taxes as arrears and imposed a fine on the company (today referred to as late payment interest); in the tax administrator s opinion, the complainant s right to reclaimed VAT ceased to exist when he sold the tax-exempt property. More importantly, the right ceased to exist ex tunc, i.e. from the onset. Both the regional court and the Supreme Administrative Court upheld the tax administrator s opinion. In the absence of the compensatory mechanism in the relevant period, the company s right to reclaimed VAT was dismissed retrospectively. Interest from Retained Excess VAT Refund In this landmark decision, the Supreme Administrative Court ruled in favour of the argument that in a long-lasting tax evidence review proceedings (under the current legislation referred to as doubt elimination proceedings ) involving the value-added tax, in which a taxpayer prevails, the taxpayer is entitled to the interest accrued on the entire refundable tax overpayment. In the case at hand, a tax administrator did not admit the entire tax refund claimed by a taxpayer and the taxpayer appealed; the Financial Directorate upheld the appeal, and granted the taxpayer the entire sum of the tax refund claim, plus the interest accrued on the refundable amount in the period between the date of the Tax Office s original decision to end the tax evidence review proceedings until the payment of the full refund. However, the taxpayer came to believe that he was entitled to interest on refundable overpayment for the period starting from the first day of the tax evidence review proceedings. The Regional Court dismissed the taxpayer s action. Ultimately, though, the Supreme Administrative Court ruled in favour of the taxpayer, and granted him the interest for the period starting from the fourth month after the end of the tax period reviewed in the initial tax evidence review proceedings (at the CNB s repo interest rate + 14% p.a.). For completeness sake, it is worth noting that the recent amendment to the Tax Procedure Code, effective from 1 January 2015, already allows for cases such as this one, granting an interest on refundable tax overpayment at the CNB s repo rate + 1 percentage point (i.e. 1.05% p.a. as of today) starting after the fifth month from the initiation of the doubt elimination proceedings. 5
Taxes The question remains how the Supreme Administrative Court will approach similar cases after 1 January 2015 in view of the recent Tax Procedure Code amendment. > Briefly New VAT Return Form Virtually Unchanged The tax administration published on its official website the information that the structure of value-added tax return will remain, for all practical intents and purposes, essentially unchanged even in the upcoming year. The taxable supplies subject to 15% and 10% tax rate will be reported in the same lines. Taxpayers are expected to start using the new form in the tax month of January 2015 (or Q1 2015). Guideline on Instruction D-288 (Deduction of R&D Expenses) The Ministry of Finance published in its Financial Bulletin 4/2014 a guideline on instruction D-288 regarding the uniform approach to the application of deduction of research and development expenses under s. 34(4) and 34(5) of the Income Taxes Act, particularly with a view to the amendment effective from 1 January 2014. The guideline provides details about the amended sections of the ITA, and may be used for the tax period started in year 2014. Protocol to Double Taxation Avoidance Agreement with Kazakhstan On 24 November 2014, the Czech Republic and Republic of Kazakhstan signed the Protocol to Double Taxation Avoidance Agreement of 1998. The Protocol will take effect as soon as it has been approved by both countries legislature. Acts Promulgated in the Collection of Laws This November, several important laws were published in the Collection of Laws with significant consequences in the field of tax law, including, but not limited to: > Act 267/2014 to amend the Income Taxes Act, > Act 247/2014, on Child-Care Services in Children s Groups, which introduces, for example, a new individual income tax discount (pre-school fee discount), and > Act 262/2014, which introduces a second reduced VAT rate, set at 10%, for goods such as baby formulas and paper books. Meal Allowance for Foreign Business Trips in 2015 The Ministry of Finance issued Regulation 242/2014 Sb., to regulate the basic meal allowance rates for foreign business trips for the year 2015; compared to year 2014, the actual figures remain unchanged. Your contact for additional info: Ing. Tomáš Zatloukal, LL.M. Tax advisor/partner Phone: +420 233 111 261 E-mail: tomas.zatloukal@vorlickova.com Building Foundations Our experise and experience lay the foundations for our advisory services. On those foundations we build, together with our clients. Rödl & Partner Our unique human towers needs a strong and solid foundation Castellers de Barcelona Each and every person counts to the Castellers and to us. Human towers symbolise in a unique way the Rödl & Partner corporate culture. They personify our philosophy of solidarity, balance, courage and team spirit. They stand for the growth that is based on own resources, the growth which has made Rödl & Partner the company we are today. Força, Equilibri, Valor i Seny (strength, equilibrium, valour and common sense) is the Catalan motto of all Castellers, describing their fundamental values very accurately. It is to our liking and also reflects our mentality. Therefore Rödl & Partner embarked on a collaborative journey with the representatives of this long-standing tradition of human towers Castellers de Barcelona in May 2011. The association from Barcelona stands, among many other things, for this intangible cultural heritage. Imprint: Legal News December 2014 Published by: Editorial board: Translation: Rödl & Partner, advokáti, v.o.s. Platnéřská 2, 110 00 Praha 1 Phone: + 420 236 163 111 www.roedl.cz Mgr. Monika Štýsová Ing. Tomáš Zatloukal Ing. Jana Švédová Mgr. Martin Mikolajek, Bc. Lenka Sternal This document is only intended for your information. The information is not advice and should not be treated as such. If you have to deal with a specific problem, we recommend consulting the issue on a case-by -case basis to allow for an evaluation of your individual circumstances. Rödl & Partner, advokáti, v.o.s., disclaims liability for any inaccuracies in this document or for any damage caused by following the information contained in this document. Layout/Typeset by: Rödl & Partner publikace@roedl.cz