Pillar 2 or Top-Up Tax
An OECD directive implementing rules of Pillar 2 of the BEPS 2.0 initiative (The Directive on Top-Up Taxes for Large Multinational Groups and Large Domestic Groups - 15% minimum taxation level) came into force on 1 January 2024. The Directive’s purpose is to have multinational groups pay a fair portion of tax irrespective of where they operate and cease to move profits to a state where they are not subject to any or only low taxation.
Act No. 416/2023 Coll., on Top-Up Taxes for Large Multinational Groups and Large Domestic Groups, was announced in the Collection of Laws in the Czech Republic on 29 December 2023. This law has been effective since 31 December 2023. The first taxation period, to which this law applies, is the period starting on 1 January 2024 and afterwards. Certain provisions of this law will only come into force on 31 December 2024.
The law defines two new direct taxes in the Czech tax system: an allocated top-up tax and a Czech/domestic top-up tax. The purpose of these newly introduced top-up taxes is to provide for a minimum effective level of taxation of large multinational groups and large domestic groups.
The allocated top-up tax will apply to parent entities of large corporations (with consolidated annual revenues above EUR 750 million in a minimum of two out of four successive previous accounting periods), if their total effective taxation is lower than 15% (the tax burden can be transferred to a member entity under certain conditions).
The law introduced Czech/domestic top-up tax, the purpose of which is to maintain primary right of the Czech Republic to taxation of income generated in sources on the country’s territory. Czech top-up tax makes sure that income from sources in the Czech Republic’s territory is taxed in the country. Taxpayers involve Czech corporations/permanent establishments, which are part of a large multinational or local group. A taxpayer is only obliged to submit a tax return for Czech domestic top-up tax in case that the multinational parent entity is obliged to pay allocated top-up tax for the Czech Republic (which will be, as a result, settled in taxpayers in the Czech Republic by being distributed among local Czech taxpayers from the group).
The Act on Top-Up Taxes also enables application of transitory/permanent exceptions (so-called safe havens) with respect to both the allocated top-up tax and the domestic top-up tax.
The top-up tax’s calculation is based on net profit determined under the IFRS, and/or on other acceptable approved financial reporting frameworks defined by the law (accounting principles generally accepted in an EU member state, in a European Economic Area member state or in significant third countries specified in the law). This net accounting profit is subsequently adjusted by selected items. In case that a Czech taxpayer receives substantial investment incentives or tax deductions (e.g. for research and development), it will not be possible to apply those deductions for the purposes of calculating top-up tax.
The taxation period for both allocated top-up tax and Czech top-up tax is the accounting period, for which the ultimate parent entity prepares consolidated financial statements. If the parent company does not prepare consolidated financial statements, the calendar year shall be the taxation period.
The Specialised Tax Office will be the top-up tax’s administrator.
Czech member entities and branches of large multinational and domestic groups have to get ready, in cooperation with their parent companies, to discharge duties connected with this law.
This article is intended to sum up primary information about top-up tax rather than to provide exhaustive information about any and all associated duties of taxpayers, who will be obliged to file a tax return and meet additional administrative requirements (such as reporting, etc.). If you are affected by the law and the requirements, please feel free to contact us. We will be happy to assist you.
Monika Ruprechtová Michaela Kozminská
ruprechtova@clarksonhyde.cz kozminska@clarksonhyde.cz
