Tax Grace Summer 2023

The bill on the extraordinary waiver and extinction of certain tax arrears, approved by the government at the end of January this year, began to be discussed in the Chamber of Deputies at the end of May.
At present, the legislative proposal is after the second reading and, taking into account only minor (possibly cosmetic) amendments, the final form of the so-called tax grace summer is basically known.

Who will be able to apply for the waiver? Which arrears are affected by the tax grace summer? And how will the extraordinary waiver process work? I will try to answer all these questions.

The aim of the 2023 tax grace summer is to build on the previous, relatively successful grace summers I and II, and to give taxpayers the opportunity to rid themselves of outstanding penalties, interest and other tax liabilities. This brings me to what arrears will be eligible for a one-time waiver. Primarily, these will be selected tax accessories, namely: (i) interest on late payment; (ii) interest on arrears; (iii) penalty; (iv) penalty for late claiming of tax; (v) costs of proceedings, including execution costs. On the face of it, it is obvious that the list (of all the incidental tax) is not complete. For example, the penalty for failure to declare exempt income is missing.

There are basically two conditions without which the remission of the collected tax cannot take place. The key to the waiver is that the taxpayers have paid the principal amount of tax due. The deadline for payment is proposed to be 30 November 2023. The proposal also foresees the possibility of spreading the payment of the principal over several instalments. The second condition is in the administration of the whole matter - the submission of an application for extraordinary remission. The application will have to be submitted during the "decisive period", by which the law means the period from 1 July to 30 November 2023. To avoid the risk of speculation with deliberate non-payment of tax arrears from the moment of the publication of the planned tax grace summer, the remission of the principal amounts incurred until 30 September 2022 will be waived. An exception to the possibility of extraordinary remission is made for tax assets that are recovered by a bailiff or under the Act on International Assistance for the Recovery of Certain Financial Claims. 

In addition to the accessory tax, the law also provides for the possibility of extraordinary remission of the tax itself. These arrears will be extinguished without further delay (automatically) on the date of entry into force of this bill. However, it should be noted here that these are only insignificant amounts of tax principal, namely arrears not exceeding CZK 30 in the case of real estate tax or CZK 200 in other cases. The tax grace summer does not bring a mass tax amnesty, but only an opportunity to "cleanse" the existing arrear for the tax administration authorities by the part that is not required a priori by the state budget.

In addition to what tax arrears can be exceptionally waived, it is also worth adding who can actually apply for a waiver. Tax debtors eligible to apply are divided into two categories, depending on the type of tax arrear for which they will apply for extraordinary remission. In the case of the aforementioned collected tax arrear, only an individual can apply for a waiver. The extraordinary extinguishment of minor tax arrears will affect all taxpayers without exception (i.e. also legal entities). On the one hand, I understand the desire to help sole traders eliminate "unnecessary" debts in the form of tax accessories or execution costs, as they are directly and undoubtedly more intensively affected by these debts than, say, legal persons. On the other hand, a number of sole traders today are in fact doing business "on their own" through one-person limited liability companies in which they are the sole owner and managing director. I dare say that even these entities should have been affected by the extraordinary waiver, since such sole traders also feel the pressure in the form of tax arrears directly.

The application can be submitted in all standard ways (electronically and in writing). In addition to these, it is proposed to allow the possibility of submitting the application by means of an electronic copy of a document bearing a handwritten signature via e-mail. Following the pattern of applications relating to the compensation bonus, this formally more relaxed way of applying for remission is therefore also in play.

It is worth adding a fiscal estimate of this measure. According to the Ministry of Finance, on the one hand, there will be a negative impact on public budgets in the order of hundreds of millions of crowns. On the other hand, this shortfall should be proportionately offset by the hundreds of millions of crowns collected in the form of reimbursement of outstanding tax principal. According to the Ministry, the overall impact could thus be neutral.

In conclusion, I would like to add that the tax grace summer of 2023 is, in my opinion, coming somewhat late. Businesses certainly would have welcomed a similar mechanism in the economically difficult Covid years or immediately afterwards. At the same time, I believe that the list of entities eligible to apply for remission of the tax collected could have been broadened at least to include single-member LLCs (partner and managing director in one person). This would not be historically unprecedented.