In response to the current developments regarding the war in Ukraine, we are providing brief information on the tax deductibility of donations. The aim of the article is to illustrate how making a donation to a charity can reduce a taxpayer's income tax base and to highlight the different VAT regimes which may play a role in deciding the amount and form of such a donation. We would also like to draw attention to some of the associated pitfalls.
a. Income tax
Currently, donations are regulated in Section 20(8) (for donors who are legal entities) and Section 15(1) (for donors who are natural persons) of the Income Tax Act. Here we are particularly interested in:
- the beneficiary entity (qualified entity);
- the purpose of the gift (qualified purpose);
- the lower and upper limit of the amount of the gift.
For example, a donation made to legal entities that are organisers of public collections under a special law for, among other things, medical, ecological, humanitarian and charitable purposes may be deducted from the tax base. It is also possible to deduct donations made to legal entities or natural persons with their registered office or residence in the territory of another Member State of the European Union (EU) or a state forming the European Economic Area (EEA), not only the Czech Republic, if the recipient of the donation and the purpose of the donation meet the conditions set out in the Income Tax Act.
Since Ukraine is not a member of the EU or EEA, the Financial Administration currently recommends that legal entities that are organisers of public collections and have their registered office in the Czech Republic be used to provide donations in support of Ukraine.
Under the current Income Tax Act, donations to individuals for humanitarian and charitable purposes cannot be deducted from the tax base.
The donated resource in this case is most often cash, but any items or services can be donated too. The following deductions from the tax base apply to both monetary and non-monetary gifts.
In the case of individuals, in 2022, the maximum donation may amount to 15% of the tax base if the total value of all donations is at least CZK 1,000. For legal entities, the maximum donation may amount to 10% of the tax base if the minimum value of the donation is CZK 2,000.
In the case of non-monetary gifts, the question of the value of the gift arises. An individual donating part of his "private property" may deduct the market value of the non-cash gift. In the case of a sole trader and a corporation, this is the tax depreciated value of the property.
Approved amendment to the Income Tax Act
In connection with the events in Ukraine, the Ministry of Finance recently approved a lightning amendment to the Income Tax Act. The subject of this amendment is as follows:
1. Expanding the range of entities to which a donation can be made:
In addition to the above-mentioned entities, the amendment extends the possibility to deduct from the tax base the value of the gift that was provided:
a) directly to the State of Ukraine
b) to a territorial unit of the State of Ukraine
c) to a legal entity established in Ukraine
d) to a natural person residing in Ukraine
However, the recipient of the gift must still meet the conditions set out in Section 15(1) or Section 20(8) of the Income Tax Act (see the introduction to this article).
2. Expanding the range of purposes for which a donation can be made
In addition to the existing enumerated purposes, it is now also possible to deduct from the tax base the value of a donation made to support the defence efforts of the State of Ukraine. This means, for example, arms, ammunition, military equipment and anything else that can assist Ukraine in its defence.
Here, too, the circle of beneficiaries listed in the law (including this amendment) is a condition.
3. Extension of the range of entities that can deduct the donation from the tax base
There is a new possibility to deduct gifts (for individuals) also in the case of residents of Ukraine. There is a condition to prove that the total income from the Czech Republic constitutes at least 90% of the total taxable income (excluding income subject to withholding tax).
4. Increase of the limit for deduction of donations up to 30% of the tax base
The amendment allows the restoration of the upper limit of 30% of the tax base as the maximum possible amount of the application of gifts.This limit was valid in 2020 and 2021.
The increase concerns:
a) tax year 2022 (the taxpayer is an individual)
b) tax periods that ended from 1 March 2022 to 28 February 2023 (the taxpayer is a legal entity)
Furthermore, the extension of the exemption of the donation received by the recipient also applies to donations provided in 2022 for the purpose of supporting the defence efforts of the State of Ukraine, i.e. not only for a public collection or for a humanitarian or charitable purpose, as was the case until now. Thus, no withholding tax will be required on such donations.
b. Value added tax
The provision of a gift is generally not subject to VAT (Section 2 of the VAT Act). However, if the gift is provided by a VAT payer who has acquired the gift as part of their economic activity and has claimed the right to deduct input VAT on its acquisition, according to the VAT Act it is a supply of goods or services, and the VAT payer is thus obliged to pay output VAT on the normal price of the gift in most cases.
In recent days, the Financial Administration has issued summary information on VAT relief options. See the following examples to learn more:
In the examples we will focus on VAT.
We use the examples provided on the website of the Financial Administration of the Czech Republic, which we have simplified for the purposes of this article:
1. Supply of goods for consideration by a domestic payer to a humanitarian or charitable organisation which sends them to a third country (Ukraine) as part of its humanitarian, charitable or educational aid
- in this case the tax exemption can be applied with the right to deduction according to Section 68(15) of the VAT Act
- this method of delivery is reported on line 26
2. Provision of financial donations
- donations made in cash or in kind are not subject to VAT
- not included in the VAT return
3. Provision of material gifts
- the acquisition of goods for the purpose of donation does not give rise to a tax deduction and the subsequent donation is not subject to VAT in this case
- where the taxpayer donates goods originally acquired for economic activity (and has claimed a deduction), the following situations must be distinguished:
- donation to a charitable organisation that subsequently transports it to Ukraine – its provision is exempt from tax with the right to deduction under Section 68(15) of the ITA – see point 1) above
- donation provided in the Czech Republic to persons other than charitable organisations – the payer is obliged to pay output VAT pursuant to Section 13(4)(a) and (5) of the ITA, e.g. furniture, clothing, etc.
- donation to a third country (Ukraine) - the payer is obliged to pay output tax also according to Section 13(4)(a) and (5) of the ITA
If you are interested in this issue and need more information, do not hesitate to contact us.