General tax-deductibility rules
General requirements for an expense to be treated as tax deductible are:
- the expense must be incurred to 'generate, assure and maintain taxable income'
- the expense can be deducted only in the correct taxation period to which it relates, and
- the taxpayer must be able to prove that the expense is tax deductible.
There are special rules regarding tax deductibility of special types of expenses (e.g. tax depreciation and amortisation, interest expenses).
Depreciation and amortisation
Methods of tax depreciation are prescribed by tax legislation and are independent from depreciation methods for accounting purposes. Tax depreciation is calculated on an asset-by-asset basis, applying the straight-line or accelerated basis methods of depreciation at statutory rates. Under both methods, depreciation expense in the first year is lower than for subsequent years. The company may choose which method to apply to a new asset, but once the choice is made, it cannot be altered. All assets are classified into six groups, which determine the number of years over which the asset will be written off, as follows:
|Depreciation group||Assets||Minimum depreciation period (years)|
|1||Office machines and computers, tools||3|
|2||Engines, motor vehicles, machines, audio-visual equipment||5|
|3||Elevators, escalators, turbines, air conditioning equipment, electric motors, and generators||10|
|4||Buildings made of wood and plastic, long-distance lines, and pipes||20|
|5||Buildings (except for those listed in groups 4 and 6), roads, bridges, tunnels||30|
|6||Administrative buildings, department stores, historical buildings, and hotels||50|
‘Tangible assets’ (i.e. assets that are subject to tax depreciation) are defined by tax legislation generally as assets with economic useful lives greater than one year and acquisition prices higher than CZK 80,000 for assets acquired after 31 December 2020 (up to the end of 2019 the threshold was set at CZK 40,000; in 2020, taxpayers have a choice between CZK 40,000 and CZK 80,000 for assets acquired in that year). Certain assets, such as buildings, are always considered tangible assets.
Taxpayers are generally not obligated to depreciate a tangible asset for tax purposes every year. Depreciation may be interrupted in any year and continued in a later year without a loss of depreciation potential.
Tangible assets are generally depreciated by the taxpayer with ownership title. Certain exceptions apply, for instance, technical appreciation of a rented asset carried out by a tenant or a subtenant may be depreciated by that tenant/subtenant, subject to certain conditions.
Depreciation can start only once the assets are put into use and comply with the requirements of specific laws.
Certain assets have special depreciation methods (e.g. moulds are depreciated based on expected life or number of products).
The value to be used as the basis for tax depreciation depends on how the asset is acquired, for example:
- Acquisition cost (construction and equipment costs, architect fees, legal fees, notary’s fees, etc.) if the asset is acquired for consideration.
- Internal costs incurred if the asset is acquired or produced internally.
From 2021, ‘intangible assets’ were abolished as a separate asset category for income tax purposes for newly acquired property. From 2021 onwards, accounting amortisation of intangible assets will be treated as tax deductible cost. For assets acquired prior to 2020, `intangible assets" are a separate asset category for tax purposes defined as software, valuable rights, intangible results of research and development (R&D), and other assets regarded as assets for accounting purposes, provided that they:
- were acquired from a third party or developed internally for the purpose of trading with them
- have an acquisition price of more than CZK 60,000, and
- have a useful life of greater than one year.
Pre-2020 intangible assets are amortised for tax purposes based on the number of years that the taxpayer has a licence for the assets if the licence is for a limited number of years. Otherwise, amortisation for tax purposes will vary depending on the type asset acquired prior to 2020 (e.g. audio-visual work is amortised over at least 18 months, results of R&D and software are amortised over at least 36 months).
For intangible assets acquired in 2020, the taxpayers have a choice of following the old or new tax treatment.
Certain changes are envisaged to be introduced in 2021 to mitigate the financial impact of COVID-19.
Goodwill and revaluation difference
Czech accounting regulations recognise two valuation options for allocating the purchase price for the purchase of the business (or its part) as a going concern: (i) revaluation difference (assets/liabilities are individually revaluated to fair market values) and (ii) goodwill (net book value of the assets/liabilities are taken over to the opening balance sheet). Both the revaluation difference and goodwill must be depreciated equally over 180 calendar months for tax purposes. Any other goodwill/revaluation difference (e.g. arisen within a merger) is disregarded for tax purposes.
Start-up expenses are directly deductible.
Interest as accrued and duly accounted for under Czech generally accepted accounting principles (GAAP) is generally tax deductible, with the following exceptions:
- Interest disallowed based on the thin capitalisation restriction (please refer to Thin capitalisation in the Group taxation section).
- Interest disallowed based on the ATAD interest stripping restriction (please refer to ATAD interest stripping rules in the Group taxation section).
- Interest disallowed based on the ATAD hybrid mismatch rules (please refer to ATAD hybrid mismatch rules in the Group taxation section)
- (please refer to ATAD interest stripping rules in the Group taxation section)
- (please refer to ATAD interest stripping rules in the Group taxation section)
- Interest disallowed for its relation to income that is tax exempt or taxed outside the standard tax base.
- Interest disallowed due to its relation to holding a subsidiary.
- Profit-dependent interest.
Doubtful or bad receivables that have not yet become statute-barred may be provisioned for under special rules. Generally, provisions may be created for trade receivables overdue for more than 18 months. Provisions of 100% may be created for debts overdue for 30 months. For receivables, banks, insurance companies, and defined financial institutions have their specific system for provisioning.
Certain charitable donations are deductible. The minimum deductible donation is CZK 2,000 and the maximum deductible donation is 10% of the tax base.
Travel expenses and meal allowances
Payments for travel expenses and meal allowances that are made to employees may generally be tax-deductible.
Fines and penalties
Contractual fines and penalties are generally tax deductible on a cash basis. Non-contractual fines are not tax deductible.
Road tax, real estate tax, and most other taxes, with the exception of income taxes, are deductible, as are social security contributions paid by an employer with respect to employees.
Other significant items
Fees paid to members of other statutory bodies of companies (i.e. board of directors of joint stock companies and cooperatives) for their services are deductible for tax purposes.
Net operating losses
Losses incurred in a tax year may be carried forward to offset taxable profits generated in the following five tax years. There is no limitation as to the amount of the tax losses that can be carried forward. From 2020, tax losses may also be carried back for two years. The maximum amount of the loss that can be carried back is CZK 30 million.
Payments to foreign affiliates
Generally, deductions may be claimed for royalties, management service fees, and interest charges paid to foreign affiliates, provided such amounts are at arm’s length and the Czech company is able to prove that these payments meet the general rules for tax deductibility.