On 16 August 2023, the Cabinet approved a bill on a top-up tax, the result of efforts to prevent the shifting of profits to tax havens. The bill is now being debated in the Chamber of Deputies. It is based on a European Directive that Member States have committed to apply from the beginning of 2024 and that sets the conditions for the taxation of large companies. All companies operating in the EU that are part of groups with consolidated revenue of EUR 750 million or more will have to pay a minimum 15% effective income tax from the start of the new year. The directive will increase the tax rate in the European Union as a whole and bring revenue into public budgets. For the Czech Republic, the Ministry of Finance estimates that this will amount to CZK 4 to 6 billion per year and will affect up to 3,000 companies (of which 150 to 350 companies will pay the top-up tax).
The relevant bill, based on the European Directive, introduces a new obligation for the primary parent companies of large multinational and national groups to pay a 15% top-up tax in accordance with the rules of the Organisation for Economic Co-operation and Development (OECD). For each jurisdiction in which the group is located, this tax will be paid regardless of whether it is a country that has implemented the European Directive or has joined the OECD rules.
Individual countries are then free to apply their own local top-up tax. However, if a country does not introduce a local top-up tax, the minimum tax is paid by its parent company in its jurisdiction or shared by the other companies in the group. The Czech government does not intend to deprive itself of this additional source of tax revenue and plans to introduce a local top-up tax in the forthcoming law on top-up taxes.
The law thus introduces two completely new taxes with their own rules, which are different from the rules for personal and corporate income tax set out in the Income Tax Act.
First, it introduces the so-called domestic top-up tax. The taxpayer will always be Czech companies (Czech tax residents or a permanent establishment of a foreign company) that are members of a large multinational or national group (see below). The law also introduces the so-called assigned top-up tax, which will be paid in the Czech Republic by Czech parent companies or, under certain conditions, by Czech companies of a large multinational group. As the name of both taxes implies, this is a so-called top-up tax. This means that the calculation of both taxes will first take into account the corporate income tax that Czech companies have in their costs (after certain adjustments required by the OECD/Commission rules).
Who is subject to the tax obligation?
How does a Czech company determine whether it will become a minimum taxpayer in the Czech Republic? The basic requirement is that it must belong to a group of companies whose annual revenue exceeded EUR 750 million, equivalent to more than CZK 18 billion (in two of the four preceding tax years). The annual revenue is determined from the consolidated financial statements prepared by the ultimate parent company. Whether this limit is reached will be largely influenced by the rules governing the preparation of the consolidated accounts by the ultimate parent company or the parent company one level below it.
Calculation of the domestic top-up tax
If the Czech company belongs to a large multinational or national group, the next step will be to find out what the effective tax rate is for the whole group in the Czech Republic.
Its calculation will be very complex. Under certain conditions, it will be possible to rely on financial statements prepared in accordance with Czech accounting rules (i.e. different from the accounting rules under which the consolidated financial statements of the ultimate parent company were prepared). If the effective tax rate for the entire group in the Czech Republic is less than 15%, it will be necessary to further test the effective tax rate for each Czech company separately. If the Czech company achieves an effective tax rate below 15%, it will be liable for the domestic top-up tax.
If Czech companies include income taxpayers who benefit from tax credits under investment incentives or, for example, deductions for science and research, the domestic top-up tax may significantly cancel out any tax savings.
The calculation of the effective tax rate will be based on tax payable and deferred tax, but it will not be possible to simply take the figures reported in the financial statements. On the contrary, the calculation will be very demanding. As a rule, it will have to be based on the values entered in the consolidated financial statements prepared by the ultimate parent entity (before adjusting for intercompany transactions). These values will need to be further tested according to the complex rules for calculating the top-up tax.
The domestic top-up tax is first calculated for the entire group in the Czech Republic and then apportioned among those Czech companies whose effective tax rate is below the minimum of 15%, based on the proportion of their profits determined in accordance with the comprehensive top-up tax rules.
Tax returns and other administrative tasks
Every Czech company belonging to a large multinational or national group will be obliged to file a separate information report and tax return (in case it will pay the domestic top-up tax) and will be obliged to register for this tax within 15 days of becoming a taxpayer of the top-up tax (i.e. some companies already by 15 January 2024 under the current bill).
This tax will be administered by the Specialised Tax Office. The top-up tax will be payable on the date the tax return is filed.
Cooperation across the group will be necessary to correctly determine the minimum tax liability in the Czech Republic. This will require excellent knowledge not only of Czech accounting regulations but also of the regulations under which the consolidated financial statements of the ultimate parent company are prepared (IFRS, US GAAP, etc.). The OECD model rules will also be a useful source of information.
The law on top-up taxes is expected to come into force at the beginning of next year, as required by the European Directive. Companies therefore have little time to prepare for this rather complex and administratively demanding change.