Authors: David Krch, Kateřina Havlínová, Jan Macháček
In connection with the conflict in Ukraine, we have prepared a tax summary of how charitable support in the form of monetary and non-monetary donations is currently treated from the perspective of both companies and individuals, especially for the purposes of the correct application of tax deductions.
Early this week, the Ministry of Finance of the Czech Republic presented a draft amendment to the Income Tax Act, which is intended to ensure more favourable tax treatment for a wider range of recipients and purposes of donations, including a higher percentage of possible deductions. The amendment should be applicable for 2022, even retroactively for donations already made. Thus, individuals can claim donations in the tax return filed for 2022, while companies can claim donations in respect of their respective taxable periods provided that the donation was provided in 2022. The proposed temporarily effective amendment to the Income Tax Act will also allow tax residents of Ukraine to claim the deduction if they prove that their income from the Czech Republic constitutes at least 90% of their taxable income.
If you choose to make a donation as a company or individual, whether in the form of money or other material gifts, the value of the donation cannot be deducted as an expense for income tax purposes. However, under certain conditions, you can reduce your income tax base and therefore "save" on the resulting tax, or potentially increase the amount of support provided by the value of tax saved.
If the conditions for the recipient of the support and its purpose are met, you can still reduce your tax base as a company up to 10% of the tax base in aggregate (the value of the donation must be at least CZK 2,000), as an individual (citizen) up to 15% of the tax base (the value of the donation must be at least 2% of the tax base or at least CZK 1,000). Temporarily, for the year 2022 (and for the tax period ending between 1 March 2022 and 28 February 2023 in the case of companies respectively), the amendment will reintroduce the possibility of a deduction of up to 30% of the tax base.
The proposed amendment also extends the application of the income tax exemption to the recipient of the donation, including for situations where the donation is received in support of the defence efforts of the State of Ukraine; up to now, the narrowly defined conditions for obtaining the exemption had to be met for humanitarian and charitable reasons. The above is also important from the perspective of the donor, who would otherwise have to apply withholding tax under the current legislation (which would be complicated to calculate in the case of many non-monetary donations).
The amendment to the Income Tax Act should also introduce the possibility of direct tax deductibility of the cost of a non-monetary donation made in support of the State of Ukraine and its citizens in connection with the armed conflict on its territory, the type of recipient will not be restricted provided that the condition that the donation is made for the same purpose as mentioned above is met. This may pose a certain simplification in the calculation of any pro rata share of expenses that are otherwise non-tax deductible, and at the same time, if the donor reports a tax loss for the taxable period, it can generally (subject to other conditions) carry it back in the two previous taxable periods or carry it forward to the five subsequent taxable periods, and thus effectively apply the value of such a non-monetary donation to the tax base and reduce the tax liability at a different tax period than claiming a deduction in respect of the donation.
If you provide charitable support as a VAT payer, it is important not to forget about the related tax liabilities. Monetary support provided does not relieve VAT liabilities. If other non-monetary aid is provided to Ukraine (assuming that it is provided “free”, without any consideration), if you claimed a VAT deduction upon procuring such aid, such deduction will continue to be claimable only if the aid is used for humanitarian and charitable organisations and supplied in the Czech Republic, and such organizations will send or transport it to Ukraine as part of their activities outside the EU. In order to prove this case, we recommend concluding at least an agreement or other similar document with the organisation in question, in which both parties declare the purpose of the aid provided and the commitment of the relevant organisation to deliver the material aid to Ukraine for that purpose.
Finally, we would like to summarize the unchanged conditions for proving a donation. The relevant proof should always show the recipient, the value, the subject matter, and the purpose and date of the donation. In this context, we would like to remind you that the date of the donation is the date of the physical transfer of the funds or non-monetary support, not the date indicated on the donation agreement.
Please do not hesitate to contact us with any questions you may have. We will be happy to assist you in assessing whether the relevant conditions are met from a tax perspective.
