Upcoming amendment to the Act on Top-Up Taxes: New Safe Harbours and Procedural Changes

 

What new safe harbours the amendment introduces and when they can simplify the calculation of top-up tax for groups 

How the transitional CbCR Safe Harbour, deferred tax rules and related calculations are changing 

What procedural changes companies can expect in relation to notifications, filing tax returns and the transfer of tax liability 

The Ministry of Finance has submitted a draft amendment to Act No. 416/2023 Coll., on top-up taxes for large multinational groups and large domestic groups, for inter-ministerial consultation. The draft responds in particular to new OECD Administrative Guidance, especially the January 2026 guidance referred to as the “Side-by-Side Package”, as well as to practical comments from the professional community on the procedural provisions of the Act.

The amendment introduces extensive changes to the Safe Harbour rules, adjustments in the area of deferred taxes and several significant procedural changes. At the same time, its aim is to maintain the compliance of the Czech legislation with the OECD Implementation Framework and to protect the qualified status of the Czech domestic top-up tax.

1. New permanent Safe Harbours

The most significant change is the extension of the list of Safe Harbours under Section 92 of the Act. The proposal introduces:

• a permanent Safe Harbour for an equivalent global taxation regime (“Side-by-Side Safe Harbour”),
• a permanent Safe Harbour for the domestic taxation regime of the ultimate parent entity (“UPE Safe Harbour”),
• a Safe Harbour for qualified tax incentives based on economic substance,
• a permanent Safe Harbour based on a simplified calculation of the effective tax rate.

The first of these regimes represents the Czech implementation of the so-called Side-by-Side Safe Harbour. If the ultimate parent entity is located in a country with a Qualified Equivalent Global Tax Regime (“Qualified SbS Regime”), the group’s jurisdictional top-up tax will be considered zero for the purposes of the Income Inclusion Rule, i.e. IIR, and the Undertaxed Profits Rule, i.e. UTPR.

What does a qualified equivalent global taxation regime mean? The jurisdiction has a system of taxation of domestic and foreign income (including a CFC regime; “Controlled Foreign Company regime”) that the OECD considers functionally comparable to the GloBE rules and leading to similar outcomes. Therefore, tax calculated and paid under such a regime is also respected by other jurisdictions, and neither the IIR nor the UTPR rule applies to the jurisdiction.

The application of the rule will be conditional on the qualification of the relevant regime at OECD level. According to the explanatory memorandum, the United States of America was the only qualified jurisdiction at the time the draft was prepared. However, the rule does not affect qualified domestic top-up taxes, which will continue to apply.

Example of Side-by-Side Safe Harbour
 

For example, if a US multinational group owns a subsidiary in the Cayman Islands whose profits are subject to zero taxation, this low level of taxation could normally lead to the application of the IIR or UTPR rules. However, where the Side-by-Side Safe Harbour is used, it is assumed that the US tax system, including the rules for taxing foreign income, provides a comparable level of taxation, and therefore neither the IIR nor the UTPR rules apply.

The Safe Harbour for the domestic taxation regime of the ultimate parent entity, referred to as the “UPE Safe Harbour”, applies for the purposes of the UTPR rule. The difference compared with the “Side-by-Side Safe Harbour” is that the jurisdiction of the ultimate parent entity has a sufficiently robust system for taxing domestic income, which the OECD considers comparable to the objectives of GloBE. The jurisdiction sufficiently taxes its domestic profits, and other states therefore will not apply the UTPR rule to low-taxed profits located in that jurisdiction.

Example of UPE Safe Harbour

Let us imagine that:

• the UPE is located in State X,
• State X has not implemented the standard IIR under Pillar Two,
• State X has, however, introduced its own robust system for taxing domestic profits,
• the OECD recognises State X as a jurisdiction with a Qualified UPE Regime.

The group also has companies in the Czech Republic, Germany and Poland.

Without the UPE Safe Harbour, other states would have to take into account any insufficient taxation at the UPE level in State X when applying the UTPR.

With the UPE Safe Harbour, the OECD says:

We consider taxation at the UPE level in State X to be sufficient, and therefore we will not challenge it for UTPR purposes.

Summary of both Safe Harbours: While the Side-by-Side Safe Harbour represents recognition of the entire taxation system of the UPE jurisdiction as an equivalent alternative to the IIR and UTPR rules, the UPE Safe Harbour is limited to recognising sufficient taxation at the level of the ultimate parent entity for UTPR purposes.

Both of these Safe Harbours will be available for reporting periods beginning on or after 1 January 2026.

 

Tax incentives based on economic substance

The new Safe Harbour for qualifying tax incentives is intended to limit the negative impact of selected incentives on the calculation of the effective tax rate. It is intended to apply to generally available tax benefits whose amount is directly proportional to the costs or expenses incurred or to the physical volume of production in a given country.

The current Pillar Two rules may result in the use of certain tax incentives reducing the effective tax rate and increasing the risk of a top-up tax. The new Safe Harbour therefore provides more favourable treatment for selected incentives based on genuine economic substance, in particular employment, investment or production activity.

If the conditions are met, the jurisdictional amount of adjusted covered taxes will be increased by the value of qualifying incentives, up to a specified limit. The basic limit corresponds to 5.5% of eligible payroll costs, or 5.5% of accounting depreciation and impairment of eligible tangible assets, if this amount is higher. Alternatively, subject to the relevant conditions, a limit of 1% of the carrying amount of eligible tangible assets may be applied.

A typical example may be a tax incentive for research and development, the amount of which is derived from eligible costs actually incurred for research activities carried out in a given jurisdiction.

Another example may be an investment incentive granted to a manufacturing company, the amount of which depends on the volume of eligible labour costs or on the value of tangible fixed assets used in production in a given country.

The regime will be available for periods beginning on or after 1 January 2026.

 

Simplified calculation of the effective tax rate

The amendment also introduces a permanent Safe Harbour based on a simplified calculation of the effective tax rate. If the simplified effective tax rate reaches at least the minimum rate of 15%, or if the tested subgroup reports a simplified loss, the jurisdictional top-up tax will be considered zero.

The starting point is to be data from the group’s consolidated financial statements. However, the proposal provides for a number of specific adjustments, for example for excluded equity gains, capital gains and losses, deferred taxes, goodwill, permanent establishments, transparent entities and transfer pricing adjustments. It is therefore not a simple accounting calculation of the effective tax rate, but a separate simplified regime with its own rules.

Currently, the simplified calculation of the effective tax rate can only be used under the transitional CbCR Safe Harbour, which is a time-limited regime based on data from a Qualified Country-by-Country Report (CbCR) and qualified financial statements.

2. Extension of the transitional CbCR Safe Harbour

The introduction of the permanent regime is followed by the extension of the transitional CbCR Safe Harbour by one year. The proposal allows it to be used for reporting periods beginning no later than 31 December 2027 and ending no later than 30 June 2029 (currently 31 December 2026 and 30 June 2028 apply).

Currently, the transitional CbCR Safe Harbour is a time-limited regime intended to allow groups, during the first years of Pillar Two implementation, to reduce the administrative burden associated with full calculations under the GloBE rules. If the specified conditions are met, a group may use data from CbCR reporting and avoid detailed GloBE calculations for the relevant jurisdiction. The proposed amendment therefore extends the possibility of using this simplified regime for additional reporting periods before it is fully replaced by the new permanent Safe Harbours.

For periods beginning in 2026 and 2027, the applicable rate for the simplified effective tax rate test is to be 17% (currently, a rate of 16% applies for periods beginning in 2026).

3. Changes in the area of deferred taxes

In the area of deferred taxes, the amendment primarily clarifies and administratively simplifies the existing rules.

The new Section 62a regulates the method for monitoring deferred tax liabilities, which is currently not explicitly addressed in the Act. These may be monitored individually, by a separate general ledger account or by an acceptable grouping of accounts.

Special restrictions are intended to apply in particular to goodwill, intangible assets and receivables or liabilities involving related parties. It is precisely these items that the OECD has long considered to involve a higher risk of tax planning.

The proposal also introduces the possibility of making a medium-term election not to allocate cross-border deferred tax expenses or income. In addition, it clarifies the rules for hybrid and reverse hybrid entities, the allocation of covered taxes and the relationship between carrying amounts and values required under the OECD rules.

4. Simplification of the notification obligation

A significant procedural change concerns the notification that the obligation to file the information return on behalf of a Czech taxpayer will be fulfilled by another constituent entity of the group. Under the current rules, the notification must be filed annually, even if the reported information has not changed, and separately for the Czech and allocated top-up tax.

According to the Regulatory Impact Assessment (RIA; “Regulatory Impact Assessment”), the preferred solution is a combination of a one-off notification followed by notification only of subsequent changes and the introduction of a standardised form. The amendment therefore provides that the notification will not have to be repeated if it has already been filed for the previous period and the information has not changed. At the same time, the notification will become a formalised filing. A related amendment to Decree No. 68/2026 Coll. is intended to set out the content requirements for electronic forms.

5. New deadline for tax returns

The current deadline for filing a tax return is 22 months from the end of the tax period. According to the RIA, this deadline is too long because it creates an unjustified delay between the deadline for the information return and the tax return. It is therefore proposed that the tax return be filed within three months after the deadline for the information return.

For a standard period, this will generally mean 18 months from the end of the period, and for the initial period 21 months. However, for tax periods beginning before the amendment enters into force, the existing 22-month deadline will continue to apply.

6. Transfer of tax liability

The new Section 137a deals with the dissolution of a taxpayer without a legal successor and the insolvency of a taxpayer. In these situations, the tax liability is to be transferred primarily to the ownership constituent entity with the highest direct ownership interest, or to another constituent entity of the same group designated by the tax administrator.

The aim is to prevent a situation in which a future top-up tax cannot be collected because its amount is still unknown at the time of dissolution or commencement of insolvency proceedings. In this context, the RIA also points to a possible threat to the qualified status of the Czech top-up tax and to the risk of subsequent taxation or multiple reporting abroad. The new rule is to apply only to periods beginning on or after the effective date of the amendment.

7. Conclusion

The proposed amendment significantly expands the possibilities for using Safe Harbours and at the same time adjusts the practical aspects of the administration of top-up taxes. For the groups concerned, the key changes will include the new Side-by-Side and UPE Safe Harbours, the tax incentive regime, the permanent simplified ETR test, the extension of the CbCR Safe Harbour and changes to procedural deadlines.

The RIA report expects an increase in legal certainty and, in some areas, a reduction in the administrative burden. At the same time, the submission report anticipates a reduction in the collection of allocated top-up tax in the order of tens of millions of Czech crowns. No new state budget expenditure is expected. In general, the proposal is intended to enter into force on the day following its publication, while the temporal application of individual changes will depend on specific and transitional provisions.