Introduction - Czech Windfall Profits Tax
Last week, the Czech Republic’s Senate approved a proposed amendment in respect of a Windfall Profits Tax (WFT).
Czech Windfall Profits Tax - What is it?
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%.
What are extraordinary profits?
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.
Taxpayers within the Czech Windfall Profits Tax
There are three categories of taxpayers subject to the windfall profits tax.
We will look at each, in turn, below.
Category one – special activities
Firstly, taxpayers who have income from the ‘relevant activities’ that include:
- Mining of hard coal
- Extraction of crude petroleum and natural gas
- Production of coke oven products
- Manufacture of refined petroleum products
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.
Category two – general category
Taxpayers generating income from the following activities:
- Production, transmission, and distribution of electricity except for the combined production of electricity and heat in a ratio of electricity produced to heat supplied of less than 4.4
- Gas production; distribution of gaseous fuels through networks
- Wholesale of liquid fuels and related products
- Wholesale of gaseous fuels and related products
- Transportation by oil pipeline
- Transportation by gas pipeline
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
Category three – banks
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.
When is the Czech Windfall profits tax paid?
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