The benefit which a debtor obtains by gratuitously receiving from another party a loan of money or property will now be exempt from tax. This will remove the current uncertainty over whether the benefit of not paying interest is subject to income tax, gift tax or no tax at all.
However, recipients of gratuitous performance up to approximately CZK 10 million (approximately CZK 155 million for legal entities) will not be pleased by the change. Unfortunately, their tax will go up as the current gift tax rate is lower than the income tax rate. The biggest difference will apply to gratuitous performance up to CZK 1 million where the current tax rate of 7% will increase to 15% for individuals and 19% for legal entities.
Another change, this time in favour of taxpayers, is that all income acquired via inheritance or testament (this should not be confused with income generated by assets acquired by inheritance or testament) will be tax exempt. This rule will apply to individuals and legal entities alike.
Gratuitous acquisitions of property, which are now exempt from gift tax, will be subject to certain adjustments as regards their exemption from income tax. Tax on gifts accepted in connection with employment or business will not change, i.e. they will be taxed as employment- or business-related income. Other gratuitous performance will be taxed by individuals in a partial tax base as miscellaneous income.
The new legislation will preserve the exemptions for gifts to relatives in much the same way as the current gift tax exemptions. Tax exemptions will apply even to occasional gratuitous performance rendered to individuals, unless the value thereof exceeds CZK 15,000 (currently only CZK 3,000).
Performance paid from trusts to beneficiaries will be exempt from income tax under certain conditions, as will gratuitous income paid to or received from a public fund-raising campaign and performance given for humanitarian or charitable purposes.
Another exemption applies to legal entities, namely public-benefit taxpayers, the definition of which is amended for the purposes of the Income Tax Act. The gratuitous income of such taxpayers (not applicable to municipalities and regions) is tax exempt if it is used for the public’s benefit or as a capital contribution for the taxpayer. In addition to entities such as the police, municipalities, government-funded organizations, public-benefit taxpayers include entities whose prevailing business benefits the public in accordance with Section 146 et seq. of the New Civil Code.
Also note that if gratuitous performance is provided to tax non-residents, their income will be subject to tax in the Czech Republic only if the provider is a Czech tax resident.