Donations to help Ukraine 

Decreasing the tax base by the value of the donation

The rules for applying the value of a donation as an item decreasing the tax base are set out in the Income Tax Act. In the context of the ongoing war in Ukraine, the Czech government approved an amendment to the Income Tax Act, which expands the range of donated persons, the purpose of donations and the new possibility of applying the value of a non-monetary donation as a tax-deductible expense. Although the amendment is not yet effective, the tax administration authorities are already proceeding in accordance with the amendment and therefore donations made in 2022 are already assessed according to the new rules. 

The donation can be given to anyone, it is up to the discretion of the donor. However, if the donor wants to take advantage of the tax benefits and decrease his tax base by the value of the donation and thus his tax liability, he must consider to whom, for what purpose and in what amount the donation is made.

To whom?

The currently valid wording of the Income Tax Act stipulates that the tax base may be decreased by the value of a donation made to – especially - municipalities, regions, legal entities in the territory of the Czech Republic or legal entities that organise public collections under a special law. As regards the purpose of the donation, the donation should be for charity purposes (e.g., humanitarian, medical, social, etc.). By the current law, the donation recipients are limited to the territory of the Czech Republic or the European Union countries.

However, according to the current wording of the law, some donations to support Ukraine already meet the conditions for claiming a deduction from the tax base. For example, if the donations are made through organizations that organize public collections to help Ukraine, or donations to a municipality that provides facilities for citizens of Ukraine.

In order to extend the possibilities of assistance to those who have remained in Ukraine, the aforementioned amendment to the Income Tax Act extends the circle of donation recipients to include the State of Ukraine, a territorial-government unit(s) of the State of Ukraine, and legal entities with their registered seat in the territory of the State of Ukraine. Thus, it is now possible to donate, for example, to a Ukrainian embassy, etc.

As far as individuals are concerned, it is possible to donate a tax-deductible gift to an individual residing in the Czech Republic. The amendment here extends the possibility of providing a tax-advantaged donation also to an individual residing in Ukraine.

For what?

As for the purpose of the donation, the donation should be for purposes humanitarian, medical, social, etc. However, the amendment also extends the purpose of the donation; thus, it is now possible to deduct from the tax base also the value of a donation made in support of the defence efforts of the State of Ukraine (e.g., military material, weapons, ammunition, military equipment for military personnel or volunteers).

However, the purpose of the donation is very limited for recipients who are individuals. A donation can only be made to an individual if the individual is a provider of health services, runs schools and educational facilities and facilities for the care of stray or abandoned animals, and to persons who are disabled; however, it is only possible for the purchase of medical devices.

How much?

There are lower and upper limits on the donations or – better said – the value of donations that can be deducted from the tax base. The minimum donation limit for legal entities is set at CZK 2,000 per donation. If a company makes two donations worth CZK 1,000, the limit is not met, and the donation cannot be deducted from the tax base. The upper limit for deduction of donations is standardly 10% of the tax base. However, for tax periods ending between 1 March 2020 and 28 February 2023, this upper limit is increased to 30% of the tax base.

For individual donors, the limit is set as the aggregate value of donations exceeding 2% of the tax base or at least CZK 1,000 per calendar year. If an individual person provides, for example, 2 donations worth CZK 500 that meet the statutory conditions, these donations can be deducted from the tax base because it totals CZK 1,000.

As the limit for tax-effective donating is dependent on the amount of tax base (not a tax loss), the donation will not be claimed by those who declare a tax loss in the relevant tax year.

Value of a non-monetary donation as a tax expense

For entrepreneurs and companies, the provision of a donation is a tax ineffective expense, which means that the value of the donation, whether monetary or material, must be excluded from the company's tax base, resp. the tax base must be increased by the value of the donation. However, if the statutory conditions are met (the person of the recipient, the purpose of the donation, the limit of the donation), the tax base can be again decreased by the value of the donation, i.e. the value of the donation can be deducted from the tax base again.

However, the aforementioned amendment to the law comes with a novelty, when it is now possible to include a non-monetary donation (e.g. in the form of providing toiletries, food, transport etc.) directly in tax-deductible costs.

According to the tax administration, in this case, unlike the deduction of a donation from the tax base, the donation can be given directly to an individual or a legal entity without limitation. This means that the condition of the specification of the donation recipient as stipulated by law (e.g. municipality, region, state of Ukraine, organizer of a public collection, etc.) does not have to be met. It is however important to fulfil the purpose of the donation.

Another advantage of this approach is that there is no need to watch the donation value limit and the value of the donation can be applied even if a tax loss is recognised.

Proving the actual provision of donation

To prove the donation, it is important to have evidence that the donation meets the legal requirements. In particular, it is necessary to prove that the donation was demonstrably made (in the case of a financial donation, e.g. a bank statement, in the case of a material donation, e.g. a handover protocol), for what purpose the donation was made, to whom the donation was made etc. The most appropriate document is a donation contract, in the case of material donations accompanied by an invoice for the purchase of the donated goods, etc.

Donations and VAT

If a VAT payer makes a donation in a non-monetary form, e.g. purchases goods for the purpose of the donation, he is not entitled to deduct VAT on this purchase because the supply will not be used for the economic activity of the taxpayer.

However, if the taxpayer has claimed the VAT deduction when purchasing the goods, the provision of the donation constitutes a taxable supply and the taxpayer is obliged to pay output VAT on the value of the donation, even if the donation is exported to Ukraine. The only exception where the obligation to pay VAT on the donation is waived represents a situation when the donation is provided (delivered) domestically and the recipient of the donation is a humanitarian or charitable organisation that sends or transports the donation from the territory of the European Union to a third country as part of its activities. In this case, the donation is exempt from VAT in the Czech Republic. This means that the donor is entitled to deduct the purchase of the donation and is not obliged to pay output VAT on the value of the donation. However, it is very important to have evidence to prove that the donation was actually transported by the relevant organisation to a third country as part of a humanitarian, charitable or educational activity. It is therefore crucial for the VAT exemption that the donation is made to the relevant organisation by which it is subsequently exported from the EU.

Lex Ukraine

The amendment to the Income Tax Act related to the extension of the application of donations to Ukraine is still awaiting its effectiveness. However, in connection with the situation in Ukraine, the so-called Lex Ukraine, a set of three laws aimed at facilitating and simplifying the stay and employment of Ukrainian citizens in the Czech Republic, has already entered into force in March 2022. We informed you about Lex Ukraine in our earlier edition of Crowe News, which can be found here.

Finally, we would like to bring you a summary of the webinar that took place on 21 April 2022, which focused on the relocation of business from Ukraine to the Czech Republic. The topic was discussed by our Crowe tax manager Jiří Šindelář and tax consultant Lucie Šutovská together with our partner colleagues from Crowe Ukraine and legal expert Denisa Nováková from CEE Attorneys Czech Republic. The webinar focused on issues related to company registrations as well as employee-related issues. The Czech tax system and possibilities of tax optimization were also described as well as the application of transfer pricing rules. More information about this event can be found here.

Should you wish to discuss any of the above mentioned or any other tax topic, feel free to contact us.