Last week, the Czech Republic’s Senate approved a proposed amendment in respect of a Windfall Profits Tax (WFT).
The WFT is based on the related Regulation of the Council of the European Union. However, the Czech Republic’s version differs from the European legislation in some key areas.
Significantly, for the period in which the measure is engaged, it will introduce a 60% tax rate on ‘extraordinary profits’ as opposed to the 33% rate recommended by the EU.
For those that meet the relevant conditions, this new 60% rate will apply for the period 2023 to 2025. This is on top of the standard corporate income tax (CIT) which is currently 19%.
Extraordinary profits would be defined as the general income tax base exceeding the average of tax bases or tax losses for taxable periods beginning and ending between 1 January 2018 and 31 December 2021, plus 20%.
This tax base would be subject to the 60% additional rate.
The taxpayer will likely to be within the corporate income tax and generating income within the windfall profits tax of at least CZK 50 million in a taxable period falling at least partially within the “windfall profits tax application period” from 2023-2025.
There are three categories of taxpayers subject to the windfall profits tax.
We will look at each, in turn, below.
Firstly, taxpayers who have income from the ‘relevant activities’ that include:
This is provided that the income qualifying for WFT from these activities for the first accounting period ending on or after 1 January 2021 accounted for at least 25% of their annual total net turnover.
Taxpayers generating income from the following activities:
In the windfall profits tax application period the taxpayer is part of a corporate group. Here, they will be within its scope where the sum of the relevant income of all taxpayers within the group for the first accounting period ending on or after 1 January 2021 of at least CZK 2 billion.
Alternatively, an entity records income qualifying for the windfall profits tax of at least CZK 2 billion for the first accounting period ending on or after 1 January 2021
The income qualifying for the Windfall Profits Tax is net interest income.
Where net interest income for the first accounting period ending on or after 1 January 2021 exceeds CZK 6 billion while meeting the general precondition of having generated net interest income for the relevant taxable period of at least CZK 50 million, then they are within the scope of WFT.
The first payments of WFT should be made in the latter half of 2023. These payments will be based on the estimated tax reported for the last taxable period ending before 1 January 2023.
This report must include information they would have recorded in their windfall profits tax return and use this information to determine what payments are required.
The report should be submitted by 3 July 2023 at the latest.
If you have any queries about the Czech Windfall Profits Tax or Czech tax matters more generally, then please do not hesitate to get in touch.
The content of this article is provided for educational and information purposes only. It is not intended, and should not be construed, as tax or legal advice. We recommend you seek formal tax and legal advice before taking, or refraining from, any action based on the contents of this article