Income Tax Act – Limit for exemption of income from sale of shares

As of 1 January 2025, an amendment to Act No. 586/1992 Coll., on Income Taxes (hereinafter referred to as the “ITA”), passed as part of the consolidation package of October 2023 (Act No. 349/2003 Coll.), which introduces into the ITA a limit for the exemption of income from the sale of shares in business corporations and securities, will take effect.  A new paragraph 3 has been inserted into Section 4 of the ITA, which sets the limit for the exemption of the annual aggregate income from the sale of shares and quotaholdings at CZK 40 million..  Specifically, this is the aggregate of income exempt under paragraph 1(q) of the ITA (sale of quotaholdings) and income  exempt under paragraph 1(u) of the ITA (sale of shares) generrated in one taxable year.

In relation to this, the new paragraph 9 in Section 10 of the ITA defines the method of determining the expenses deductible for the purpose of taxation of the non-exempt part of income as follows

The expenditure may be:

Acquisition price or, optionally, if preferable, market value

• as of 31 December 2024, determined in accordance with the law governing the valuation of property if the transfer took place in 2025 or later; or
• on the date of the transfer for consideration if it took place before 31 December 2024,

plus expenses related to the transfer for consideration.

Furthermore, what counts towards the exemption limit in one taxable period is the sum of actual income received in that taxable year from sale of shares or quota-holdings. The amount deductible in calculation of the tax base for taxation of the income “above the limit” is determined according to the date of the transfer so that it is either the actual acquisition price or, if preferable, the market value ascertained as of the date of the transfer in case of transactions realised before 31.12.2024, or the market value ascertained as of 31.12.2024 for transactions realised after 31.12.2024.

Amendment to Act No. 235/2004 Coll., on Value Added Tax, currently under discussion in the Senate

On 30 October 2024, the Chamber of Deputies of the Parliament of the Czech Republic approved an amendment to the Value Added Tax (VAT) Act, bringing changes with different effects for 2025, 2026 and 2027, some of which are listed below:

• The Act will bring changes to the regime for small businesses as of 1 January 2025, for example, the possibility to use the exemption from VAT registration obligation in other EU Member States. Reciprocally, this will also apply to Czech small businesses that carry out taxable transactions in other EU Member States. The condition for using the cross-border regime for small businesses is registration with the local tax administrator, under which a special identification number for the purposes of the regime for small businesses with the ending “EX” will be assigned. Once registered for the scheme, quarterly reports are due, indicating the value of transactions carried out in all Member States during the calendar quarter, regardless of whether or not the business uses the scheme in that Member State.
• As of 1 January 2025, the calculation of turnover for VAT registration will change. Turnover will be tracked for a calendar year, not for the last 12 consecutive months. Small businesses that exceed a turnover of 2 million EUR will be subject to VAT. CZK, will be taxable only from 1 January of the following calendar year, or from the second day after exceeding the turnover, if they so choose. If the turnover exceeds CZK 2,536,500 (EUR 100,000), they will become liable for VAT the very next day.
• As of 1 January 2025, the maximum turnover for quarterly VAT returns will be increased to CZK 15 million (from the previous CZK 10 million), i.e. taxpayers with an annual turnover of up to CZK 15 million. They will be able to file VAT returns quarterly and will become monthly payers only after exceeding this increased limit.
• Supply of selected immovable property – from 1 July 2025 onwards, there is a fundamental shift where only the first supply of selected immovable property after completion or substantial alteration will be subject to taxation within 2 years of completion or substantial alteration. As before, all supplies made before completion of the selected immovable property as part of its first construction will be subject to tax.
• Adjustments in the area of tax base correction from 1 January 2025 – This includes, for example, the refinement of the provisions of Section 42(1) of the Value Added Tax Act (correction of the tax base), the extension of the time limit for tax base correction to 7 years after the calendar year in which the obligation to declare the tax on the original taxable supply arose, or the introduction of the obligation to correct the tax base also for persons who are no longer taxpayers or identified persons at the time of tax base correction. The extension of the time limit for correction of the tax base is due to the fact that the current 3-year time limit according to Section 42(8) of the Act does not correspond to the current practice – specifically, e.g. in the case of real estate transfers, where, as a result of withdrawal from contracts due to non-fulfilment of conditions by the buyer, price corrections occur even much later than after 3 years. Furthermore, e.g. also in the construction industry, the length of the warranty period for claims commonly used is in the range of 60 months or longer.
• Change in the time limit for deduction of tax from 1 January 2025 – the current time limit for claiming the deduction regulated in Section 73(3) of the Act of 3 years is shortened to 2 years.
• So called Lex Ferrari, i.e. limitation of VAT deduction on purchase of a passenger cars to a maximum of CZK 400,000 will continue to apply until the end of 2026.
• The taxpayer/debtor who fails to pay the liability within 6 months after its due date will be obliged to reduce the tax deduction for the unpaid liability from 1 January 2025 according to Section 74b of the Act to the extent of the tax corresponding to the amount of the unpaid liability.
• Refund of unjustified tax paid under Section 81 of the Act from 1 January 2026 – The taxpayer will now be entitled to a refund of unjustified tax paid under Section 81 of the Act. This will apply in case the recipient of the transaction invokes the amount of tax paid without justification.  If the conditions set out in Section 81(1) of the Act are met, the tax authority will reimburse the recipient of the supply for the tax that was incorrectly claimed by the supplier.   This procedure is possible only if the standard procedure under Section 43 of the Act for correcting the amount of tax cannot be followed.

Amendment to Act 563/1991 Coll., on Accounting, Parliamentary Print 783 – has not yet been discussed in the Chamber of Deputies, and therefore it cannot be expected that there will be changes of this Act as of 1 January 2025. Among the anticipated changes are:

• The amendment regulates the obligation to report non-financial information – i.e. sustainability reporting (ESG reporting). As of 1 January 2024, this obligation already applies to a narrow set of the largest accounting units, and in the following years it should also apply to other accounting units (as of 1 January 2026, it should also apply to small and medium-sized accounting units that are issuers of investment securities admitted to trading on a European regulated market; however, as mentioned above, the amendment has not yet been approved and its effectiveness is likely to be delayed).
• The draft amendment provides for the unification of the procedures for accounting for the valuation difference so that it will be recognised in intangible assets as goodwill and will be amortised over a specified period by decree.
• The amendment introduces the possibility to keep accounting in a functional currency: from 1 January 2024, if the conditions are met, accounting can already be kept in EUR, USD and GBP.
• The subsidy will not reduce the value of the assets acquired, but the subsidy received will be accounted for as deferred revenue and thus dissolved into revenues in the periods specified in the subsidy terms for the use of the subsidised assets.
• Long-term leases and rentals (over 1 year) will be reported as acquisitions of assets or “rights to use”.
• The amendment to the Act will introduce new present value valuation methods, i.e. valuation at the value of the discounted future cash flows. The specific methods of valuation of assets and debts will be further specified in a separate decree.
• All assets and debts will be reported at present value or at so-called fair value. Fair value will be specified in accordance with International Accounting Standard IFRS 13.

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This material is for general information on current topics only, it is not advice. It does not take into account any special circumstances, financial situations or special requirements of the addressees. Recipients should therefore always seek appropriate professional services for the information provided. Notwithstanding the careful compilation of this material, bpv Braun Partners, its partners, associates or co-operating solicitors and tax advisers cannot guarantee the accuracy or completeness of the information contained herein and accepts no responsibility for acting or refraining from acting on the basis of the information contained in this material.