SUPERCEDED

VI.   Business Income Tax

Corporate income tax and income tax for the self-employed have the following in common:

Taxable income is the income of the entity per the financial statements prepared in accordance with double-entry bookkeeping regulations. Taxable income does not include income that has had tax withheld at the source (interest, dividends and royalty payments). Accounting income is adjusted for specific items which are not deductible for tax purposes. Expenses incurred to earn or maintain income are generally deductible.

SOME DEDUCTIBLE EXPENSES

• Real estate transfer tax, real estate tax, road tax
• Medical examinations, if required by legislation
• Losses caused by third parties if the culprit is unknown (police statement is required)
• Actual auto expense or for employees statutory "mileage" rate
• Natural disasters, the loss must be verified by an expert or an insurance company.
• Small promotional gifts are tax deductible if it bears a corporate name or trademark and is not subject to excise duty.
• Losses resulting from delivery shortages, inventory shortages or shrinkage may be deductible. There must be a company standard for shrinkage (it is subject to approval by the tax authorities).
• If ownership title of assets is assigned to a creditor (as a collateral for a loan), the original owner (i.e., the borrower) can continue to depreciate the assets if they (the borrower) have a contractual right to use the property at no charge.
• The cost basis or Net Book Value of certain assets can be deducted only against the proceeds from their sale, any losses on the sale of such assets are not deductible. These certain assets include: Intangible assets acquired without consideration contributed into an entity's equity, land, works of art, ownership interests (except for shares), bills of exchange and options.
• Acquisition price (cost basis) of shares when sold up to the amount of income from sale. Losses can be carried forward for the next 3 years and off-set against profits from the sale of shares.

SOME SIGNIFICANT NON-DEDUCTIBLE EXPENSES ARE:

a) Losses on receivables sold at less than book value (after bad debt provisions)

b) Net book value of lessee's real property improvements, at the lease termination (after allowance for reimbursement from the lessor).

c) Director's and supervisory board's fees

d) Expenses above the statutory limits (for example travel reimbursements in excess of statutory amounts)

e) Penalties and fines, excluding contractual fines

f) Entertainment expenses

g) Expenses incurred in generating tax-free income or income not included in the adjusted gross income

h) Inheritance tax, gift tax, personal and corporate income taxes, and similar taxes paid abroad with some exceptions

i) Provisions to reduce inventory valuations to the lower of cost or market

j) Bad debts

k) Dividends (or profit shares)

l) Transfers to some reserve funds

m) Social security and health contributions withheld from employees' salaries only if paid by the 31st of January following year.

n) Social security and health insurance payable by an employer only if paid by the statutory deadline for submission of the corporate tax return.

DEDUCTIBILITY OF BAD DEBTS

General rule. All bad debts are deductible in the following cases:

1.On the completion of bankruptcy proceedings, or when a bankruptcy is rejected for lack of assets. In this case there is no requirements to enter into legal proceedings.

2.If the debtor dies (and the receivable cannot be collected by making a claim on the debtor's heirs), or the company (the debtor) is dissolved without legal successor (and the debtor was not a related party). 

Debts may be proportionally deducted depending on the overdue status, except::

• subscription for equity or partnership interests, loans, and advances,
• related companies (defined as more than 25% of equity interest),
• related individuals

Calculation of related party interest is calculated by taking ownership at the end of each month of the tax period (or its part for which the tax return is filed) and dividing it by the number of months of the tax period (or its part).

There are special regulations for banks.

There are some limits on the deductibility of bad debts when the debts were contributed as equity.

• If a company is a legal successor (e.g. on transformation of a s.r.o. to a.s.). Tax deductibility of bad debts by the successor is treated as if the old entity still existed.
• In other cases, the company cannot expense the bad debt (unless the debt was contributed before June 30, 1996).

INTEREST ON LOANS TO RELATED PARTIES

• Interest on loans to related parties (entities who own more than 25% of the company) is non-deductible for the amount of interest on the portion of the loan which is in excess of four times the capital (registered capital + accumulated earnings + statutory reserve fund). If banks or insurance companies receive loans from related parties, interest is not deductible for the amount of interest on the loan which is in excess of six times the capital (registered capital + accumulated earnings + statutory reserve fund).

However, deductibility of interest from related party loans is unlimited for the first 3 calendar years after the formation of a company.

INTEREST ON LOANS TO FOREIGN UNRELATED PARTIES

Interest from loans provided by foreign unrelated parties is partly non-deductible (see below), if the loans are in excess of:

• 15 times the capital (registered capital + accumulated earnings + statutory reserve fund) in 1997
• In prior years, the multiple was; 1994 - 30 times the capital, 1995 - 25 times the capital, and 1996 - 20 times the capital.

If the loans provided by foreign unrelated parties are in excess of the above amounts, the non-deductible interest on the foreign non related party loans is the interest on the portion of the loans which is in excess of 10 times the capital (registered capital + accumulated earnings + statutory reserve fund).

Again, deductibility of interest from loans provided by unrelated foreign parties is unlimited for the first 3 calendar years after the formation of a company.

The non deductible portion of the interest will be regarded as a deemed dividend by the lending party subject to the dividend withholding taxes. However, there is an exception that applies to Czech entities or those entities with a registered office in the Czech Republic . The treatment of the non deductible portion of the interest as a dividend applies only for individuals who are domiciled abroad or to companies with a registered office abroad.

TRANSFER PRICES

Transfer prices between related parties which differ from the usual market price and cannot be satisfactorily documented are to be replaced with the market price. Related party definition includes ownership of 25% of the shares.

CAPITAL IMPROVEMENTS

Capital improvements (technical improvements) are limited to accumulated amounts in excess of the statutory limit. Capital expenses under those amounts are correctly deductible as small assets.

ITEMS DEDUCTIBLE FROM THE ADJUSTED GROSS INCOME:

• Losses brought forward.
• The statutory allowance based on a percentage of cost of certain fixed assets can be deducted from adjusted gross income. It specifically excludes tangible assets acquired by donation and assets located abroad (or used abroad for more than 183 days). The deduction is subject to recapture if the asset is disposed (except due to natural disaster) or rented within 3 years after claiming the deduction.

TAX ALLOWANCES:

• For disabled employees.
• Legal entities who employ a staff of which 50% consists of disabled individuals can reduce their tax liability by half.
• Half of the tax withheld from dividends or shares of profit is deductible for legal entities.