Tax relief and other state support to companies affected by the coronavirus
People and companies in the Czech Republic have been affected by the second (autumn) wave of COVID-19, which among other things brings economic risks for all businesses. The aim of this article is to briefly present the options that can help companies in at-risk sectors overcome the difficult lockdown period. I will primarily discuss tax reliefs, both those introduced in connection with the second wave of the pandemic and those that have been in place for some time and which can also be used to reduce the economic burden.
Tax reliefs received in connection with the second wave of COVID-19
As closed or significantly reduced branches of business increased over time (first by banning certain branches from 14 October, followed by a stricter ban on almost all branches of business operating in establishments from 22 October), the number of businesses with the option of drawing tax relief increased proportionally.
At present, businesses that are unable to carry out their activities in their premises as a result of government measures, if they meet the following conditions, can automatically benefit from tax relief in the form of: (i) deferral of VAT, (ii) waiver of income tax advance and remission of the advance on road tax, (iii) remission of VAT on gratuitous supplies related to the use or production of protective equipment against COVID-19. The individual reliefs will be described in more detail below.
A necessary condition for the possibility of drawing relief is that the predominant part of the income from the period from 1 June 2020 to 30 September 2020 stems from activities that were banned or severely restricted by government regulation from 14 October 2020 or further, from 22 October 2020. The purpose of this measure is primarily to help those affected entities that have lost a significant source of their income as a result of the government measures. If a business has lost its predominant income due to the closure of its establishment and intends to use the tax benefits in question, it must notify the tax office that it is one of the affected entities and that it meets the condition of losing most of it income due to the government measures. It is, in principle, a form of solemn declaration. Notification can be done either via the data box or for many businesses in a simpler way: by e-mail.
1) Deferment of VAT payments
The collective deferral of VAT payments applies to the tax periods from September to November 2020, i.e the third quarter of 2020. If a tax entity pays VAT for the tax periods in question by 31 December 2020 at the latest, it will not accrue interest on arrears, which is always associated with late payment of tax. This is not a complete exemption from the obligation to pay VAT or a postponement of the tax due for individual tax periods. There is only a period created during which businesses will not be sanctioned by the late interest in question for late payment (I repeat again, no later than 31 December 2020). Related to this is the fact that if VAT has already been paid for September 2020 or for the third quarter of 2020, it is not possible to demand payment of this tax back from the tax administrator.
I would like to draw your attention to one essential aspect associated with the default interest waiver regime applied. If the taxpayer pays VAT for the tax periods in question after the due date (e.g. VAT for October 2020 will not be paid until 15 December), it will not be forced to pay interest on arrears. However, by law it has not fulfilled its obligation to pay the tax due. Although this de jure infringement does not have the effect of creating tax accessories, it may constitute a breach of the conditions in the case of a standstill regime, or it may have a negative effect on the application for debt-free status. Therefore, as a precaution, I recommend that businesses, to which the automatic waiver of default interest would apply and which report high amounts of VAT in their tax return, formally request that this tax be deferred, for example by 31 December 2020. In the deferral regime, they will not be regarded as tax debtors.
For the sake of completeness, I would add that nothing changes with respect to the obligation to file VAT returns for the given tax periods in due time. The same applies to control reports.
2) Waiver of advances on income tax and road tax
The second tax measure follows from the first (VAT deferral). It primarily aims to strengthen business cash flow. Again, there is no complete waiver of the tax liability as such, only a waiver of the advance payment in 2020.
The exemption from income tax advances applies to both natural and legal persons, namely advances due in the period from 15 October 2020 to 15 December 2020. The exemption from road tax advances applies to advances for the entire tax period of 2020 (advances due by 15 April, 15 July, 15 October and 15 December).
Unlike the deferral of VAT, if the business has already paid an advance on income tax due in a specified period, or an advance on road tax, the tax administrator can request a refund. In the case of advances on road tax, all advances for the whole year 2020 are waived, i.e. businesses can apply for a refund of advances that they may have paid in April, July or October this year. They are thus able to strengthen their cash flow by 31 January 2021, i.e. by the due date for filing a tax return for road tax.
3) Exemption from VAT on gratuitous transactions related to the production of protective equipment against COVID-19
Businesses can continue (this measure was already in force in spring 2020) to donate material for the production of protective equipment against COVID-19 to persons who are authorised for this production, without being obliged to pay output VAT on this free supply. Benevolence also applies to the donation of protective equipment itself to components of the integrated rescue system. The decision of the Minister of Finance precisely defines the goods for which this regime can be used. Therefore, I recommend businesses that intend to help in this way to always check that the donated material is included in the exhaustive list. If it is not, the payer will be obliged to pay output VAT on the gift in question (free delivery of goods).
Other tax reliefs already in force
In addition to the reliefs mentioned above, which are now in force with the second wave of the pandemic, there are others that are able to deal with the crisis situation just as effectively. Unlike the aforementioned measures, which can be used primarily by directly affected businesses, the ones I will discuss below apply to all business entities that have lost their customers as a result of government measures, or are otherwise economically affected by the situation.
Delay mode, distribution of tax payment into instalments
Any taxpayer who has been indirectly economically affected (e.g. by a failure of demand, a failure of supplies of materials or goods) is entitled to ask the tax administrator to delay the tax liability or to spread it in instalments. If the application is accepted, the tax administrator will provide the tax subject with a longer time interval for the payment of the tax due. Even in this case, it is not a definitive tax exemption (a tax exemption based on an individual application is not even permitted by law). The delay mode has several advantages. The tax subject is not listed as a debtor (the tax administrator is not entitled to recover the arrears, the tax subject can apply to be debt-free), at the same time interest on arrears of 14% plus the repo rate does not run for the delay, but only interest on arrears, which reaches half the amount of interest on arrears. Until 31 December 2020, interest on arrears even arises due to the decision of the Minister of Finance. The taxpayer thus de facto borrows free of charge until the end of the year. In the case of payment in instalments, it is necessary to ensure the punctuality of repayment. Late payment of even one instalment means the automatic end of the set regime and the "payment" of the rest of the tax arrears.
As there is no legal claim to the application, the tax administrator will assess each application individually. It must necessary be duly substantiated and supported by evidence upholding that reasoning. I believe that in light of the current difficult economic and social situation, the tax authorities will take a friendly approach to applications. An application for delay is normally subject to an administrative fee; however, it is waived for all applications submitted by the end of 2020.
Forgiveness of advances
You can also use the individual waivers of advances (e.g. on income taxes or road tax). Unlike the automatic waiver for directly affected businesses (see above), the tax administrator will again, as in the case of a request for delay, assess specific circumstances and make individual decisions. As in the case of a request for delay, it will depend on how well the request for a waiver of advances is justified, including substantiating the relevant evidence. The advance can be perceived as an early repayment of tax liability incurred in the future, while its calculation does not reflect the economic result of the current tax period. Therefore, if the business expects that 2020 will not be as successful as 2019, or will be a loss-making year, the tax administrator should comply with the application for a waiver of the advance. I recommend that the application document the current economic results in the form of the most up-to-date statements possible.
Retroactive application of tax loss
Another way to "fight" against the unfavourable economic situation is to ask the tax administrator for a refund of already paid income tax liability for the previous two tax periods, provided that the tax period of 2020 will be loss-making (until now in the years following the loss). This is the institute of the so-called retroactive application of tax loss. If the business already expects a loss for 2020, it will be able to offset this loss with the tax liability for the two previous tax periods and ask the tax administrator to refund the tax already paid. The whole process should be fast, from the application to the disbursement of funds. At first glance, this is an interesting assistance tool (mainly cash-flow), but I would point out two pitfalls that are associated with it. First, it is necessary to take into account that the so-called preclusive period for the previous tax period, for which the tax administrator will return the paid tax, can be significantly extended, and therefore the period for which the administrator is authorised to carry out a retroactive inspection. Second, there is a risk that the amount of the tax loss incurred will be incorrectly estimated compared to the reality (reported in due time in the tax return for 2020). If the business overshoots its estimate (the tax loss will in fact be lower than it estimated), it will be forced to return the difference, including interest on arrears.
We are all aware that today's economic reality is not very favourable. Tax and other measures seek to maintain the level of employment and cash flow of companies. Some of them apply to businesses automatically; for others the entities must be active. Therefore, if you are an affected group and are running out of liquidity, contact your advisor, who will find a solution.