New instruction of General Financial Directorate No. D–59 on the Income Tax Act

Conditions for the tax exemption of income from the sale of real estate for individuals

In cases where a building is considered part of the land under the Czech Civil Code, both the original and the new instruction stipulate that the decisive date for meeting the time test for tax exemption of income from the sale of real estate is the date of acquisition of the land itself, not of the building on it. However, the new instruction adds that this does not apply in cases where the building historically existed as a separate immovable property before the Czech Civil Code came into force and the income from its sale was already tax-exempt, i.e., where the building had not yet been merged with the land on which it is situated.

The new instruction also addresses the change regarding the length of ownership of the immovable property that is critical to the possibility of its tax exemption. We have already covered this topic in a previous article and the new instruction does not bring any new development in this area.

Application of interest on a loan as a deductible item from the tax base

As of 1 January 2021, there has been a change in claiming the interest on loans for housing needs as an item deductible from the tax base, where the maximum limit has been reduced from CZK 300,000 to CZK 150,000. This change applies only to housing needs (apartments, houses, etc.) acquired after 1 January 2021. The acquisition of housing need occurs as of the date of registration of the taxpayer's ownership right in the public register (Real Estate Cadastre). For more information on claiming the tax deduction for interest on housing needs, see our previous article.

In the case of a combination of old and new loans, the total maximum limit for the application of interest is set at CZK 300 000. However, no more than CZK 150 000 in aggregate may be counted towards the maximum limit on new loans, and this applies even if the interest is shared between all parties to the loan agreement.

Instruction D-59 also specifies how to proceed if the taxpayer wishes to claim in his tax return interest on a loan granted for the maintenance or alteration of a family house, but the said taxpayer is not the owner of the such family house and is therefore unable to prove that he is entitled to deduct the loan interest by an extract from the Real Extract Cadastre. In order for a party to a loan agreement to be entitled to such a claim, it is necessary to prove the relationship to a housing need, i.e., that the family home is used for permanent residence. This can be done in several ways, e.g., by means of a rental agreement or via a statement confirming payment of utility and water bills.

Employees benefits

New for 2022 is a reduction in the amount representing non-cash income of employees from the provision of a motor vehicle for private and business purposes free of charge by the employer, namely in the case of low-emission vehicles where the amount is 0.5% of the entry price of such vehicle (instead of 1% in the case of other vehicles). The new instruction further states that if the employer agrees with the employee a consideration for the provision of a vehicle for both business and private use, the employee's non-cash income is the difference between the amount specified and the amount of the employee's reimbursement if the consideration agreed is less than that amount.

A quite common benefit provided by employers to employees is the provision of goods or services of a health, medical, sanitary, or similar character. In order for this benefit to be tax-exempt income on the part of the employee, it must be demonstrably related to goods or services purchased from healthcare facilities that are registered in the National Register of Health Service Providers. If these health services or goods are purchased from a non-healthcare establishment, this means that the value of these goods or services is taxable on the employee's side and forms part of the basis of assessment for health and social security contributions. However, this does not apply if the medical devices are purchased on prescription.

Exemption from royalties and interest

In order to apply for the exemption from withholding tax on royalties and loan interest paid by legal entities that are tax residents of the Czech Republic to legal entities that are tax residents of other EU or European Economic Area states, a decision on granting the tax exemption of income from royalties and the loan interest is a necessary condition for the exemption. According to instruction D-59, this exemption (decision) can be applied retroactively for a period for which the tax assessment period has not yet expired. This provision applies only where the relevant double taxation treaty allows for taxation of this type of income in the Czech Republic.

Provision of gratuitous benefits

The value of gratuitous benefits (typically gifts) may be deducted from the corporate income tax base in the taxable year in which they were demonstrably provided. In determining the minimum value of the gift, the way of provision is made must be taken into account. If a taxpayer donates CZK 200 each month in one tax period (the donated amount is in total CZK 2 400), this means that there are 12 autonomous donations in total; therefore, it is not possible to deduct these transactions from the tax base, as the statutory condition of the minimum value of an individual donation, which is CZK 2 000, is not met. The difference arises when the taxpayers donate the amount of CZK 2,400, which they divide into instalments (12 instalments of CZK 200) on the basis of a commitment to the organisation concerned. In this case, it is recognized as one donation and this amount can be deducted from the tax base.

Depreciation of assets as of the start of trial operation

Instruction D-59 sets out the conditions that a building must meet in order for tax depreciation to begin. These conditions can be met by a building where the building authority allows or orders a trial operation, i.e., the building is completed according to the design documentation and the trial operation is performed only to verify the functionality and characteristics of the completed building and then its permanent use will be allowed. However, the conditions are not fulfilled by a building for which the building authority allows early/preliminary use, i.e. in cases where the building is not yet fully completed.

Finally, we would like to point out that instruction D-59 is not legally binding, it is an interpretation prepared by the tax administration. However, since this instruction is issued by the General Financial Directorate, which is superior to other tax authorities in the organisational structure, it is reasonable to expect that the tax administrator will follow its wording.

The above list of changes and additions is not exhaustive, so if you have specific questions about whether there have been changes in areas that specifically affect you, please do not hesitate to contact our experts.