DIRECT TAX SYSTEM:
CORPORATE INCOME TAX
(EVIDENCE FROM THE CZECH REPUBLIC)
Taxation – Lecture 4
Content
• Corporate income tax (CIT)
• Depreciation
• Mergers and acquisitions
• Appendix: tax evasion in context of PIT and CIT
• Literature
Corporate income tax (CIT)
• The second income tax in the Czech Republic is the corporate
income tax regulated together with the personal income tax in the
Income Taxes Act (ITA).
• This direct tax, especially tax rate, is very important for all
entrepreneurs and investors from abroad.
• Income from all activities and from the management of all types
of property is liable to tax. There are just a few incomes that are
not liable to tax and several exceptions.
Corporate income tax (CIT)
Corporate income tax (CIT)
• Exemptions from corporate income tax:
 membership fees,
 income from collections in churches,
 income of state funds,
 income received in connection with the performance of
volunteer activities,
 incomes of the Central Bank of the Czech Republic,
 income from the operation of lotteries and similar games of
chance,
 interest on mortgage bonds,
 income from inheritance or legacy,
 etc.
Corporate income tax (CIT)
• The taxpayers are entities such as:
 companies (limited partnerships, limited liability companies,
public limited companies and co-operative societies)
 civil corporations, political parties,
 interest corporations, foundations
 banks, insurance corporations, exchanges,
 municipalities, state corporations,
 investment corporations and investment funds, state
funds, pension funds,
 churches, organizational components of state,
 public beneficial companies (the main activity is not
business, but public beneficial activities)
 etc.
CIT - calculation
• The way to calculate the tax of corporate income and income from
self-employment is quite similar.
• The taxpayer can read the economic income (it means incomes
reduced by the expenses incurred to generate, assure and
maintain income) from the bookkeeping. This is the tax base
which is not final, it shall be reduced by items deductible from
the tax base.
• Expenses ineligible to generate, assure and maintain income
according to ITA:
 representation expenses (treat, entertainment, gifts),
 personal expenses of the taxpayer,
 expenses on non-alcoholic beverage provided to
employees by the employer at the workplace,
 penalties, penalty interest and fines,
 shortages and damages beyond compensation,
 expenses beyond limits determined by the ITA
CIT - calculation
• The tax base shall be reduced by using items deductible from
the tax base:
 tax loss which was recorded and assessed in five previous
taxable periods,
 100% of costs for R&D,
 110% of costs for the acquisition of assets for vocational
training, if the assets are used for the training of more than
50% of the time of its operation in three consecutive tax
periods,
 50 % of costs for the acquisition of assets for vocational
training, if the assets are used for the training between 30%
and 50% of the time of its operation in three consecutive
tax periods.
• The tax base reduced by items deductible from the tax base
should be taxed by the tax rate.
• In the Czech Republic corporate income tax rate is 19%.
CIT - calculation
• This tax is not final, the taxpayer can use several options of tax
reductions:
 18 000 CZK for every disabled employee,
 60 000 CZK for every severely disabled employee,
 other tax reductions for the taxpayer of personal income tax.
• The tax administrator is the Financial Office determined by the
location of the registered office of the taxpayer.
• The taxpayer must submit his tax return at the latest three
months following expiry date of the taxable period (usually 31st
March). If the tax return is prepared and submitted by the tax advisor
or barrister, the tax return shall be filed latest six months following
expiry date of the taxable period. Before the 31st March, a power of
attorney authorizing such representation must be submitted.
CIT - calculation
• The taxpayer of corporate income tax can choose, whether he
will use a calendar year or an economic year (which must begin
on the first day of any month and must be twelve months long)
as a taxable period.
CIT – depreciation
• According to the Accounting Act the owner must set up the limit of
input price for classification the asset as tangible or intangible
fixed asset.
• For each asset, the owner has to determine the operational and
technical function period.
Accounting depreciation (amortization) =
input cost / determined number of years
• Tax depreciation (amortization) has to be considered in the tax
return of income (personal => self-employed, or corporate).
However, accounting depreciation (amortization) reflects the
actual condition of the real assets much better.
CIT – depreciation of tangible FA
• The tangible fixed asset is asset, which has its acquisition cost
higher than 40 000 CZK and has the operational and technical
function exceeding one year.
• Land, pieces of art and cultural heritage are not depreciated.
• The tangible fixed assets is depreciated by the owner.
• In the first year the depreciator classify the asset into one of these
depreciation groups (see next slide).
• According to the ITA there are two possible ways for depreciation of
tangible fixed assets: linear or accelerated.
CIT – depreciation of tangible FA
Tax depreciation periods for tangible assets
Depreciation group Depreciation Period Examples of Assets
1 3 years
bicycles, computers, tools,
breeding animals
2 5 years
furniture, guns, cars,
motorcycles, music
instruments, books
3 10 years
greenhouses, bridges,
elevators, boats, trains
4 20 years
buildings, swimming
pools, power stations,
5 30 years
motorways, roads,
aqueducts,
fountains, wells, tunnels
6 50 years
building of museum,
library, hotel, church, mall
CIT – depreciation of tangible FA
Annual depreciation = input costs * relevant annual rate
Depreciation rates for tangible FA under straight-line method (in %)
where the depreciation rate for the first three groups are increased by 10%
in the first year:
Depreciation
group
Annual rate in
1st year of
depreciation
Annual rate in
other years of
depreciation
Annual rate for
increased input
costs
1 20 40 33,3
2 11 22,25 20
3 5,5 10,5 10
4 2,15 5,15 5
5 1,4 3,4 3,4
6 1,02 2,02 2
1 30 35 33,3
2 21 19,25 20
3 15,4 9,4 10
CIT – depreciation of tangible FA
Accelerated method:
Annual depreciation in 1st year =
input costs / coefficient for 1st year
Annual depreciation in 1st year =
2 * amortized cost) / (coefficient for other years – n)
where n = number of years in which the tangible fixed assets were
depreciated
CIT – depreciation of tangible FA
Annual depreciation = input costs * relevant annual rate
Depreciation coefficients for tangible FA under accelerated method
Depreciation
group
Annual rate in
1st year of
depreciation
Annual rate in
other years of
depreciation
Annual rate for
increased input
costs
1 3 4 3
2 5 6 5
3 10 11 10
4 20 21 20
5 30 31 30
6 50 51 50
CIT – depreciation of tangible FA
• Example: Calculate linear and accelerated depreciation of
Lamborghini, input price 2 000 000 CZK.
CIT – depreciation of tangible FA
• Example: Calculate linear and accelerated depreciation of
Lamborghini, input price 2 000 000 CZK.
Linear depreciation
Year
Input
Price
Annual Rate
(%)
Depreciation
Amortized
Cost
1 2 000 000 11 220 000 1 780 000
2 2 000 000 22,25 445 000 1 335 000
3 2 000 000 22,25 445 000 890 000
4 2 000 000 22,25 445 000 445 000
5 2 000 000 22,25 445 000 0
CIT – depreciation of tangible FA
• Example: Calculate linear and accelerated depreciation of
Lamborghini, input price 2 000 000 CZK.
Accelerated depreciation
Year
2 * Amortized
Cost
Coefficient - n Deperciation
Amortized
Cost
2 3 200 000 6 - 1 640 000 960 000
3 1 920 000 6 - 2 480 000 480 000
4 960 000 6 - 3 320 000 160 000
5 320 000 6 - 4 160 000 0
Year Input Price Coefficient Depreciation
Amortized
Cost
1 2 000 000 5 400 000 1 600 000
CIT – depreciation of intangible FA
• The intangible fixed asset is asset, which has its acquisition cost
higher than 60 000 CZK and has the operational and technical
function exceeding one year.
• The intangible fixed assets is amortized by the owner.
Annual amortization =
input costs / number of years (months) for which the owner has
the right to use
• Other cases:
 audiovisual work – 18 months
 software and intangible results of research and development –
36 months
 formation expenses – 60 months
 other intangible fixed assets – 72 months
CIT – M&A
• Acquisition – a corporate action in which a company buys most (if
not all) of the target company's ownership stakes in order to
assume control of the target firm.
• Merger - the combining of two or more companies, generally by
offering the stockholders of one company securities in the acquiring
company in exchange for the surrender of their stock.
CIT – M&A
• After the Czech Republic joined the European Union, Council
Directive no. 90/434/EEC on the common system of taxation
applicable to mergers, divisions, transfers of assets and
exchanges of shares concerning companies of different Member
States, significantly affected the Czech tax legislation.
• The Directive regulates tax neutrality of mergers. Taxation in the
Member States have no impact on the decision by the merger.
• Due to the fact that the mergers relate to trading companies they
are subjected to the corporate income tax.
• The defunct company in the merger has the obligation to file a
tax return for the period (resp. part of the period) preceding the
decisive day.
• The acquiring company has to submit a tax return for the period
preceding the decisive day, as well as for the period starting
from that date.
CIT – M&A
• The decisive day is defined as the date from which the
transactions of defunct company are considered (for accounting
purposes) as act of the acquiring company.
• Defunct company closes the accounts on the day preceding the
decisive day.
• For the tax period from that date until the merger is registered in
the Companies Register (dissolution of the company) generally
there is no obligation to file a tax return.
• Acquiring company has two possibilities for submitting a tax
return depending on the decisive day:
 If the decisive day is the 1st day of a calendar or an
economic year, the company submits the tax return
according to normal rules for submitting the tax return of
corporate income tax.
 otherwise the company must submit tax return of
corporate income tax for a period ending on the day
CIT – M&A
preceding the decisive day by the end of the month
following the month with the decisive day.
• If the merger is registered in the Companies Register by the end
of the year with the decisive day, the taxable period does not
exceed 12 months. If the merger is registered in the Companies
Register in the next year after the year with the decisive day, the
taxable period exceeds 12 months.
• Items such as tax provisions, tax reserves, tax depreciation and
amortization, tax loss, tax deductible items that have not yet
been claimed and others are transferred from the defunct
company to the acquiring company.
• Acquiring company continues in depreciation and amortization
of assets.
Appendix: Tax evasion
• Effective tax policy is not simply a matter of deciding on the taxes
that people should pay, but also of ensuring that they actually do
pay what they should. The practical operation and enforcement
of the tax system is every bit as important as the structure and
rates of tax in ensuring that revenues are raised efficiently and
fairly. To a significant extent, good tax compliance is what
distinguishes well functioning states from chaotic and
ineffective ones. Greece and Germany, for example, employ many
of the same taxes. The most significant difference in the functioning of
their tax system is the extent of evasion.
Appendix: Tax evasion in PIT - opportunities
• Most tax evasion takes place in a context where taxpayers individuals
or firms - are required to report income or spending
to the tax authorities. Often this takes the form of an annual tax
return, which has to be completed with details of relevant income
or sales during the preceding year together with other
information relevant to their tax liability, and filed (submitted) by
a particular deadline. The opportunities for tax evasion principally
arise through the scope to make false or incomplete statements in the
tax return without prompting a successful challenge by the revenue
authorities. This can be done through:
 underdeclaration of incomes received - the taxpayer
declares a lower income than they actually received, or for a
sales tax, a lower level of sales.
 false or exaggerated claims for deductions or allowances
against tax
 if an income tax system allows the cost of donations to
Appendix: Tax evasion in PIT - opportunities
charity to be deducted from gross income, before tax is
computed, then a taxpayer may try to reduce their tax
payment by exaggerating the amount of money they
have donated to charitable causes.
 If the cost of mortgage interest, children’s schooling, or
commuting expenses can be offset against income tax,
taxpayers can claim a higher level of costs than they
have in fact incurred.
• In each case, however, the basic sequence of events is the same:
the taxpayer provides misleading information which would reduce
their liability to tax, and keeps their fingers crossed that the
revenue authorities cannot spot the lie.
• More rarely in most developed countries, tax evasion can take the
form of completely hidden activity which lies entirely out of view
of the revenue authorities. It may be possible for individuals to work
or to trade as a business without the revenue authorities being aware
Appendix: Tax evasion in PIT - opportunities
of their existence at all – so-called ‘ghosts’, in the jargon used by
some tax authorities.
• Not all taxes offer equal opportunities for evasion to every
individual taxpayer. The scope for income underdeclaration by
employees is often very limited:
 Many tax systems require employers to report the amount of
income they have paid in wages to each individual
employee, and the authorities can use this information to
crosscheck the figures that the taxpayer puts in their tax
return.
 Many tax systems require the employer to withhold tax from
wage payments, and to remit this directly to the revenue
authorities. Except in very small firms, long-term collusion
between employers and employees to make coordinated
false reports of wage payments is unlikely - it would only
require one disaffected employee to ‘blow the whistle’ on
such an arrangement.
Appendix: Tax evasion in PIT - opportunities
 The opportunities for employees to evade tax on their wage
income are then limited to making exaggerated claims for
deductions and allowances, and the scope for this may also
be limited if the tax system confines deductions to those
where there is scope for independent reporting and
verification.
 Many countries also use systems of reporting to crosscheck
taxpayer declarations of investment incomes - bank
interest, etc. Often, the only scope that taxpayers have to
evade tax on investment income is to hide their
investments abroad, beyond the scope of direct
surveillance by the tax authorities. But such arrangements
can come dramatically unstuck if information comes into the
possession of the revenue authorities. Recently a number of
European countries have been offered computer disks
containing details of their taxpayers who hold undeclared
accounts in Liechtenstein and Swiss financial institutions.
Appendix: Tax evasion in PIT - opportunities
Using this data windfall, some European countries have been
vigorously investigating and prosecuting evaders.
• By contrast, nearly all tax systems are much more exposed to tax
evasion by the self-employed – people working on their own
account, or the owners of small unincorporated businesses. Part of
the reason for this is that the self-employed are in much greater
control of the information to be reported; they do not have an
employer who may separately report their income to the authorities. In
addition the definition of income for the self-employed is more
complex and far less clear cut than for employees, requiring an
element of judgment about which different people could reasonably
reach different views. Since the boundary between true and false
income is imprecise, self-employed taxpayers have scope to
exploit the ambiguity.
 For example, most tax systems allow people working in a
self-employed capacity to deduct from their gross income
Appendix: Tax evasion in PIT - opportunities
the costs of the equipment and materials they have used in the
course of their business activity, and an individual’s tax
liability can be reduced by exaggerating these costs. The
boundary between the costs of a business and the individual’s
own consumption can be very blurred indeed. For example,
when someone runs a business from home, how much of
the cost of their home, their furniture, their telephone bill,
their car, and other spending should count as part of the
cost of the business? When the boundary is blurred in this
way, there is probably a long way that taxpayers can push
things, before the revenue authorities can seriously challenge
the judgments they are making.
Appendix: Tax evasion in CIT - opportunities
• With corporation taxes, revenue losses through outright fraud
and evasion are probably less significant than two distinctive
categories of revenue loss. Both of these come under the heading of
tax avoidance rather than evasion. While tax evasion is clearly
illegal, avoidance is less easily defined. It involves organizing
the taxpayer’s affairs, within the boundaries set by the ruling tax
legislation, so as to minimize the taxpayer’s tax liability. In
principle, therefore, it lies wholly within the letter of the law - if not
the spirit, since much avoidance exploits contrived situations,
undertaken with the primary purpose of avoiding tax.
• Substantial corporate tax revenues are lost through the
aggressive exploitation of loopholes, blurred boundaries, and
ambiguities in the tax system. Businesses that engage in
aggressive tax planning of this sort can often make a huge return
on the resources they invest in fighting legal
Appendix: Tax evasion in CIT - opportunities
cases, and they know that in many cases the tax authorities will be
unable or reluctant to match their legal weaponry. The problem for
society is that such battles are wasteful of potentially productive
resources. Instead, lawyers have to be engaged, not in producing
something of real value, but in shifting, or contesting the shifting, of
resources from the public sector to the pockets of firms. Tax
authorities have to make a difficult judgement of how much
public money to devote to fighting such cases, when there are
easier, and less wasteful, ways of raising additional revenues.
Undoubtedly, the world would be a better place without aggressive tax
planning and speculative litigation, but since these activities are
essentially legal, it is difficult to see how they can be prevented.
It can help if tax legislation is clear and leaves few loopholes to
exploit, but this is easier said than done.
Appendix: Tax evasion in CIT - opportunities
• Massive revenues, too, are lost through international corporate
tax avoidance. Multinational companies have opportunities to
structure themselves in a way that minimizes their liability to
taxes in countries where they conduct their business, and instead
to shift the profits they earn to lower taxed jurisdictions and tax
havens where they may pay no tax at all. Profits can be shifted
through a number of mechanisms, in particular through transfer
pricing - manipulation of the prices at which the business
charges its internal transactions between subsidiaries in
different countries - and through charges for the use of the
business’s intellectual property - rights, patents, and the like. In
both cases, a business unit in a high-tax country can be charged
high prices for these internal transactions, reducing the profits
earned in the high-tax country, and enabling the profits to be
relocated elsewhere in the organization, in places where they will
be taxed less.
Appendix: Tax evasion – risks and gains
• What determines whether an individual taxpayer decides to
evade tax, given the opportunity, and by how much? Some
insights can be obtained from a simple economic framework, in which
individuals decide whether to evade tax, and how much tax to
evade, based on a comparison of costs and benefits - weighing
up, on the one hand, the gains from evasion in terms of unpaid
tax, and, on the other hand, the risks of being caught and
penalized.
• Example: An individual faces an opportunity to be honest or
dishonest about the receipt of a particular one-off payment, for
example, of EUR1,000. In the absence of any moral considerations,
the individual might weigh up the consequences of dishonesty, which
amount to the tax saving they would make if they were successful in
evading tax, and, if they were unsuccessful, the penalty they would
face. If we suppose the tax rate to be 20 per cent, and the penalty for
evasion to be twice the level of the tax, plus payment of the tax due,
Appendix: Tax evasion – risks and gains
then evasion offers a benefit to the individual in the form of a tax
saving of EUR 200 if they are undetected, and a cost of EUR 400 if
they are caught and fined. In both cases these amounts are
measured against the alternative, which is honestly paying the tax
that is due. It will be clear that a crucial element in the calculation of
the consequences of evasion will be an assessment of the risk of
being detected and punished. If the probability of detection is
sufficiently high, the potential evader may think that the potential
tax saving is not worth the risks involved.
• If the only reason that individuals comply is fear of detection and the
penalty that would be levied, then the actual rates of investigation
and penalties are insufficient to explain what appear to be
relatively high levels of tax compliance across the population as
a whole. Why do so many people pay their taxes, when the risks
of noncompliance are so small?
Appendix: Tax evasion – risks and gains
 Many taxpayers are very risk-averse and prefer the certainty
of tax compliance against the risky gamble of evasion.
 Taxpayers overestimate the risks involved in tax evasion.
They believe that the tax authorities are more all-seeing than
they actually are, or that the punishments for evasion are much
more drastic.
 Significant moral and psychological elements in tax
evasion decisions. Some taxpayers may comply, not because
they fear detection and punishment, but through a sense of
moral obligation or ‘civic duty’, while others may comply
because they care about their reputation in the community, or
their own self-image.
Literature
• MCGEE, Robert W. The philosophy of taxation and public finance.
Boston: Kluwer Academic Publishers, 2004. viii, 313.
ISBN 1402077165.
• RADVAN, Michal. Czech Tax Law - 3rd ed. 3. vyd. Brno: Masarykova
univerzita, 2010. 65 s. Fac. of Law Publ. no. 4 (Edition of textbooks).
ISBN 978-80-210-5269-7
• SMITH, Stephen. Taxation: A Very Short Introduction. Oxford
University Press, 2015.