Amendment to the Top-Up Tax Act

According to the explanatory memorandum accompanying the government proposal, the amendment to the Top-Up Tax Act responds to Administrative Guidance issued within the framework of the OECD, which could not be incorporated into the Top-Up Tax Act prior to its initial adoption. The nature of this guidance is essentially binding, and without it, the top-up tax system could not function properly and comprehensively in the Czech Republic. This justification is consistent with the OECD Model Rules, Council Directive (EU) 2022/2523, and the Top-Up Tax Act itself, all of which state that national legislation should be aligned with the issued Administrative Guidance.

Although this amendment is primarily a technical, refining already established terms and procedures, we would like to highlight the several provisions whose changes we consider significant.

Undoubtedly, the most important and anticipated change introduced by the amendment is the extension of the deadlines for submitting the information return and the tax return related to the Czech top-up tax. For the initial reporting period, the original deadline for submitting the Czech information return has been extended from 10 months after the end of the reporting period to 18 months. For all subsequent periods, the deadline has been set at 15 months. This change aligns the deadline with applicable deadline to the information return for the allocated Top-Up Tax. A similar alignment has occurred with respect to tax returns. The original deadline for submitting the Czech top-up tax return (QDMTT), 10 months after the end of the reporting period, has now been unified with the deadline for submitting the allocated top-up tax return. The new deadline for all reporting periods is 22 months after the end of the reporting period.

It will newly be possible to fulfil the information obligation related to the Czech top-up tax through the information return submitted for the allocated top-up tax, including cases where the information return is filed abroad (Globe Information Return). This applies provided that the information contained in the information return is sufficient for the tax administration of the Czech top-up tax, i.e. the information return includes all data required under the Top-Up Tax Act. If this or any other exemption from the obligation to file an information return in the Czech Republic is applied, it must be duly notified to the tax authority within the statutory deadline for its submission.

The amendment further introduces provisions concerning the submission of corrected and supplementary information returns, including situations in which the submission of a supplementary return is not required (e.g. where a change in the top-up tax arises due to an additional assessment of income tax, such change shall be reflected in the reporting period in which it occurred). Additionally, the tax authority is now granted the power to issue a request for the submission of an information return.

The Top-Up Tax Act has also been supplemented with provisions addressing cases where the accounting period of a constituent entity does not align with the reporting period, i.e. the accounting period of the ultimate parent entity. In such cases, the accounting period of the constituent entity must be aligned with the reporting period of the ultimate parent entity, based on the procedure used for the preparation of consolidated financial statements. The amendment also clarifies that, for purposes of the top-up taxes, the tax period shall be understood as the reporting period.

Originally, the Top-Up Tax Act referred to the Income Tax Act (ITA) for currency conversion rules. However, this reference has been removed due to the amendment to the ITA, which now includes provisions on the currency used in accounting when the main currency is not Czech crowns. The Top-Up Tax Act now explicitly defines which exchange rates are to be used for currency conversions. Adjustments have also been made in the area of rounding calculations.

A key priority emphasized by the Ministry of Finance throughout the amendment is to ensure the status of a Czech Qualified Domestic Minimum Top-Up Tax (QDMTT), for the purpose of securing recognition as a permanent safe harbour. When a domestic top-up tax is considered qualified in accordance with the OECD Model Rules, the amount of the allocated top-up tax may be reduced accordingly by the QDMTT.

In the area of safe harbours, the amendment clarifies the permanent rule based on the QDMTT (QDMTT Safe Harbour). Furthermore, a switch-off rule has been introduced, which limits the applicability of the permanent safe harbour in cases where a jurisdiction deviates from the OECD Model Rules in its implementation of the QDMTT.

In connection with the definition of immaterial constituent entities, a new permanent safe harbour has been introduced specifically for such entities. This safe harbour applies to constituent entities that are excluded from the auditor-verified consolidated financial statements due to their small size, immateriality, or because they are held or controlled for the purpose of sale. However, entities with revenues exceeding the threshold of EUR 50 million are not considered immaterial constituent entities unless the consolidated financial statements are prepared in accordance with an acceptable or approved financial reporting framework. This newly introduced safe harbour consists of three tests, i.e. the routine profit test, the de minimis test, and the effective tax rate test. The legislation also allows the use of simplified calculations in applying these tests.

Transitional safe harbours have also been revised to ensure alignment with OECD materials (specifically the document “Safe Harbours and Penalty Relief” and the Administrative Guidance issued in December 2023).

Further amendments affect investment entities and joint ventures. The scope of taxpayers subject to the Czech top-up tax has been clarified (with the inclusion of transparent entities, selected permanent establishments, and groups of joint ventures). A new definition has also been introduced for the domestic top-up tax subgroup. Additionally, provisions have been added for situations where a group becomes subject to a QDMTT before being subject to the allocated top-up tax. Transitional rules have also been introduced for mixed taxation regimes applicable to Controlled Foreign Corporations (CFCs).

In accordance with the transitional provisions, the amendment applies to reporting periods beginning on or after 31 December 2023.

For completeness, we note that we have previously covered the topic of top-up taxes here.

Authors:

Eliška Stránská, Tax Department Manager

Luboš Brigant, Senior Manager, Tax Department