Law on top-up taxes approved by the Chamber of Deputies

The Chamber of Deputies approved the draft Act on the Top-up Tax for Large Multinational Groups and Large Domestic Groups (the "Top-up Tax Act") on 27 October 2023 in its third reading. While the Top-up Tax Act is now awaiting consideration by the Senate, its smooth passage can be expected.
Effective from 31 December 2023, the Top-up Tax Act introduces two completely unique taxes on profits: the Czech top-up tax and the assigned top-up tax. It will apply only to companies (or their permanent establishments), not to individuals.
The aim is for large multinational/national groups to pay a tax on profits for each country where they do business through subsidiaries or permanent establishments such that their effective tax rate is 15%.
The calculation will apply to all companies of the group in that country (including their permanent establishments).

A group qualifies as a large multinational/national group if, in two of the four tax years preceding the period under review, the consolidated revenue recognised in the consolidated financial statements of the ultimate parent company is at least EUR 750 million.
The obligation to pay the top-up tax for a given country lies primarily with the ultimate parent company if it is in a country where the so-called qualifying top-up tax rules are in place. In this case, the parent company will pay the tax in its own country. However, if the country in which the subsidiaries are located wants to collect the top-up tax for its own country, it must impose its own domestic top-up tax. In the case of the Czech Republic, this obligation will arise on 31 December 2023.
As an example, consider a situation where a German parent company (the ultimate parent company) has a subsidiary in the Czech Republic. As the Czech Republic imposes a Czech top-up tax, if the Czech subsidiary does not reach the 15% effective tax rate, it will pay the top-up tax. If the same parent company has a subsidiary in Slovakia, the parent company in Germany will pay any top-up tax for Slovakia. This is because Slovakia has decided to postpone the effective date of the top-up tax rules and therefore no domestic top-up tax will be introduced as of 31 December 2023.

Effective tax rate
The calculation of the effective tax rate will be based on the financial statements. Simply put, it will be the ratio of the aggregate of adjusted taxes included (i.e. taxes payable and deferred) to the aggregate of qualified profits (reduced by qualified losses, if any) for all companies in a given country. However, the input data will need to be carefully reviewed and adjusted according to the rules of the Tax Compliance Act (which will be linked to the OECD model rules and the EU Directive). Primarily, the financial data used for the consolidated financial statements prepared by the ultimate parent company should be used. Assuming that a subsidiary is not included in the consolidated financial statements, for example due to its immateriality or its planned sale outside the group, it will still need to be included in the calculation of the top-up tax.
Safe harbours (permanent and temporary)
Before calculating the effective tax rate, it will be useful to check whether the group meets the safe harbour conditions in the country in question to avoid paying the top-up tax. This will involve an administrative exercise in which the group must notify the tax authority that it is opting for this safe harbour and must do so in a timely manner.
One of the basic exceptions is the small-scale exception. Both conditions must be met for it to apply, namely:

  • 1. the average of the qualifying receipts of all member entities from the state in question for that tax year and the two immediately preceding tax years does not exceed EUR 10 million;
  • 2. the average of the group's jurisdictional qualifying gains or losses in that state for the taxable year and the two immediately preceding taxable years is a loss or is less than an amount equal to EUR 1 million.
Initially, however, it will be much more advantageous to use transitional safe harbours based on the information contained in the country-by-country report (CbCR), which can be used for a transitional period, between 2024 and 2027 if the group has a calendar year as the accounting period for which it consolidates (or no later than 31 August 2028 in the case of a financial year). However, this temporary port will have to be chosen no later than for the first tax year. This applies in the following situations, which are always considered for the entire group in a given country and for a given tax year (calculated based on the CbCR and financial statement data):
  1. the qualifying country report shows a revenue of less than the equivalent of EUR 10 million and a profit before tax of less than the equivalent of EUR 1 million; or
  2. the simplified effective tax rate of the group is at least the transitional tax rate for that tax year (e.g. 15% for 2024); or
  3. the amount of pre-tax profit reported in the qualifying country report is the amount of profit before tax that is equal to or less than the profit excluded on group basis attributable to member entities that are treated as being from that country for the purposes of the automatic exchange of information to which the country reports are subject.

What is the perceived advantage of these temporary ports? The figures for meeting them are based on the country reports that the group already compiles, even without taking into account the newly introduced top-up tax. While the data cannot be fully adopted without further adjustments, these adjustments will be much less demanding, as the purpose of these temporary ports is to facilitate the implementation of the top-up tax. 
The above information is simplified for the purposes of this article, as the issue of the top-up tax is very complex. We will therefore address it regularly and gradually clarify the most important areas of this new tax topic.