Income tax report

In connection with the expected entry into force of the new Act on the Top-up Tax, which will apply to companies belonging to multinational groups with a turnover exceeding EUR 750 million, a document referred to as the Country by Country Reporting ("CbCR") is often mentioned.  With effect from 1 January 2024, the information in the CbCR on income tax payable could be made available to the public, either on the website of the ultimate parent entity or on the websites of one of the European subsidiaries or branches belonging to a multinational group where the ultimate parent company is established outside the EU.

The basic format of the CbCR was provided in the past by the OECD Transfer Pricing Directive. According to it, this publicly unavailable document, together with a document describing the general activities of the group companies as a whole (the so-called MASTER FILE) and a document describing the transactions of a specific local entity in a given jurisdiction with other entities in the group (the so-called Local File), form a recommended documentation package that should be submitted to the tax administrations of OECD countries in the event of a tax audit as evidence that transfer prices in the group were set in accordance with the arm's length principle.

Currently, OECD tax administrations can obtain a CbCR without initiating a tax audit of the group companies by means of an automatic exchange of information with the tax jurisdiction in which the ultimate parent entity that is obliged to prepare and file such a report with its tax authority is established. The possibility of mutual exchange of information between tax administrations is provided for in double taxation treaties, while the scope of the information to be exchanged is regulated by the countries concerned under local regulations such as the Czech Act on International Cooperation in Tax Administration.

The new obligation for European entities to publish an income tax information report stems from European Directive 2013/34/EU of 24 November 2021. The European Parliament sees the publication of information as an effective tool that will lead to the necessary increase in transparency and strengthen public control over income taxes paid by multinational companies in connection with their business activities in the European Union.

The EU Directive was to be implemented into the Czech legal system through a new Accounting Act whose provisions would address situations where the ultimate parent company is not obliged to prepare and publish an Income Tax Report or where this document is not available and the group includes companies or branches operating in the Czech Republic. These companies and branches could then be obliged to publish the Income Tax Report.

The new Accounting Act was originally planned to come into force on 1 January 2024. The final format of the Czech Income Tax Report would then most likely be determined by a decree of the Ministry of Finance. However, since the draft Accounting Act is in the post-completed comment procedure and has yet to be discussed by the Chamber of Deputies, its effectiveness will more than likely be postponed. Nevertheless, the obligation to publish an Income Tax Report should become mandatory for European companies from 1 January 2024.

If your company is part of a group with a turnover exceeding EUR 750 million, we recommend that you check in which jurisdiction the reporting entity with the obligation to prepare and file the CbCR is established. If there has been a change in this entity, you are required to report this change to the Specialised Tax Office via the EPO application.

We will continue to monitor the development of legislation requiring Czech companies to publish an Income Tax Report.

Lenka Lopatová