1. Rent and new regulations or facts
In view of the fact that the legislative process is ongoing for a proposal of an Act on certain measures to alleviate the impacts of the SARS CoV-2 coronavirus epidemic on commercial space leaseholders, we have prepared for you answers to the most frequently asked questions concerning the applications of this Act in practice.
- I am a tenant of commercial spaces, yet in connection with the current situation there have been no adjustments to lease agreements. I do not provide rent discounts or rent-free. Certain leaseholders are exercising their rights according to the above-mentioned Act and are not going to pay the rent for the months of April through to June in the set terms. How will this affect my tax obligations?
From the perspective of VAT, your situation has not changed; you are still obliged to declare VAT for providing leases. If an obligation arose for you to pay VAT on the basis of accepting rent from a leaseholder, you are, in the event of absence of payments, obliged to declare VAT at the latest by the last day of the pertinent period. Therefore, in the case of monthly invoicing, you have to declare VAT on the last day of the given month at the latest, and on the last day of the given quarter in the event of a quarterly invoicing. If the rent is not paid to you on the basis of a payment or instalment schedule, you are obliged to issue an invoice within 15 days from the day on which the obligation to pay VAT arose and likewise to deliver it to the leaseholder. You are then obliged to declare VAT from rent for the given month or quarterly in the tax return for the month in which the obligation arose for you to declare VAT, i.e. pursuant to the date of the taxable event.
- Do I have to pay VAT if the leaseholder has paid me nothing?
The liberation packages by the Ministry of Finance have not concerned postponement of terms for fulfilling VAT payer tax obligations. Pursuant to the date of the taxable event, the VAT payer likewise also has to cover its tax obligation within the legal deadline for filing the tax return. Therefore, if you do not pay VAT within the legal deadline, you will be in delay with paying, for which the tax administrator can consequently penalize you with default interest.
- Is it possible to postpone VAT payment?
The only possibility to postpone VAT payment is to request a VAT payment deferral from the tax administrator, on which the tax administrator has to rule within 30 days after the request has been filed. Based on our practical experiences until now, we present the following:
I) The tax administrator does not wish to rule on VAT deferral when the exact amount thereof is not yet known. The tax administrator therefore does not wish to permit VAT payment deferral for the accounting period for which a tax return has not yet been filed (tax maturity has not elapsed).
II) Following point I), the tax administrator usually requires that VAT payment deferral only for one accounting period be requested in the context of one request, although the Act does not precisely state this. In the event that the request concerns several accounting periods, the tax administrator requires further requests be filed.
III) In the context of verifying fulfilment of deferral conditions, the tax administrator requires providing of evidence proving that the tax subject would incur serious damages by paying the required taxes. The tax administrator therefore requires documentation in order to compare profits for the given month (quarterly) with the profits for the same period in the previous year as well as a bank account statement from which it will be clear that the final balance will not suffice to cover tax obligations. If financial resources at an amount higher than the tax obligation of the tax subject are found on its bank account, the tax administrator requires an explanation as to why these resources cannot be used to pay the tax, i.e. that the funds are to be used, for instance, to pay employee salaries and other operational expenses.
IV) Although the Minister of Finance has publically declared a pro-client approach on the part of the financial authority, this hospitality cannot be expected from the tax administrator if you are going to request deferral of VAT payment amounting to several million CZK. Although the tax obligation in the given case might not vary from the VAT amount which you usually declare and pay, the tax administrator will, on the basis of internal methodology, require a further guarantee in order to permit tax payment deferral. In the event of higher tax obligation, the tax administrator thus has a tendency to secure the tax obligation at least by way of a collateralization on the tax subject’s immovable property, regardless of the current state of emergency in the Czech Republic.
V) On the basis of point IV), it is therefore pertinent in the request to notify the tax administrator, in advance, to contact the tax subject should it arrive at preliminary conclusion that the tax deferral will have to be secured or collateralized in some manner.
- What if a leaseholder does not pay rent for April to June or at least for one of those months by 31. 12. 2020?
Pursuant to the above-mentioned Act, the landlord then has the right to terminate the lease agreement, whilst the notice period is 5 days. In the event of an bad debt receivable and, eventually, VAT claim on such receivable, it will be required that the receivable is the subject of completed or ongoing enforcement or insolvency proceedings. Based on a specific situation, we are prepared to provide you with more detailed information.
- How are we to proceed from the perspective of income tax if the leaseholders owe rent even on 31. 12. 2020? That is, they do not pay their receivables even at the end of the protected deadline fixed by the Act?
The Act does not bring any exceptions or changes to standard tax obligations. Therefore, you have accounted receivables from rent into the revenues which are taxable revenues for 2020. It is not possible to account for tax bad debt provision unless the leaseholder has entered into insolvency proceedings. The formation of tax bad debt provision depends on the expiry of at least 12 or 18 months from the maturity of the receivables, which will not yet have been fulfilled by 31. 12. 2020.
- In order for us to accommodate our leaseholders, we have reduced their rent by half for the period of March to June. How will this appear in our accounting and taxes?
In case you and the leaseholders agree on the reduction of rent, because the leaseholder cannot use the leased premises, this agreement results in decrease of accounting revenues. You therefore issue an invoice for halved rent or issue credit notes if the rent has already been invoiced or partially paid in advance, as the case may be. You will have generally lower revenues in accounting, lower taxable revenues for income tax purposes and a lower tax base for VAT purposes.
- We invoice our leaseholders in euros, for we are also currently paying a foreign currency loan in euros. What influence will devaluation of the Czech crown have on our accounting and tax?
In recent days the Czech crown has weakened considerably – from EUR 1 = CZK 25.41 on 2nd January 2020 to EUR 1 = CZK 26.99 as at 15th April 2020. It can be expected that this devaluation and the currency exchange difference stemming therefrom will have a large impact on the accounting and tax of many clients.
In your case of a foreign currency loan it applies that unless the crown has strengthened by the end of the year, you can expect marked foreign currency exchange losses on the balance sheet date as at 31. 12. 2020, which will reduce the accounting profit and the income tax base.
On the other hand, euro receivables will then bring a higher payment in Czech crowns and therefore foreign currency exchange profits. If the crown has not strengthened by the end of the year and these receivables have remained unpaid, you then charge foreign currency exchange profits on these receivables, which will increase the accounting profit and the legal entity income tax base.
In these matters it is appropriate newly to consider implementation of hedge accounting for 2020 in order to limit the fluctuations. We will be pleased to discuss this with you in detail.
2. Changes in company financial plans
- How is the financial plan to be adjusted with respect to the current uncertainty of further developments?
More than ever it is important to have available a financial overview which can simply and continuously be updated which, prior to the current crisis, was not necessary given the stability and good predictability. The management needs a financial plan to run the firm, banks also require it and it has to be up to date. Implementing an update of the financial plan in a situation where it is in many sectors uncertain how matters will stand tomorrow is by no means easy.
In numerous parameters it is unclear what value will be correct and it is probable that it will soon change in any event. The financial plan should cover i) flexibility, i.e. the possibility simply to adjust the overview with an adjustment of the input parameter or parameters and ii) dynamic, i.e. the possibility to see the future in several probable variants / scenarios. Besides this, it is useful if the financial plan contains a summary of the key performance indicators, so-called KPIs, and enables implementation of sensitive analysis of the change of these parameters.
- How is one to prepare for the possibility of exercising the right to state compensation of damages?
Pursuant to the Crisis Act, the state is obliged to compensate for damages incurred by natural persons and legal entities as a direct result of crisis measures. The precise interpretation of the pertinent provisions of the Crisis Act will most certainly be the subject of further professional discussion, and will probably be ultimately settled by the courts.
Damage could be in the form of so-called real damages (food supplies in restaurants were spoiled as a direct result of crisis measures) or loss of profit (a hotel makes no profit as it cannot accommodate guests as a direct result of crisis measures). Both forms of damages have to be proved.
Besides the above-mentioned obligations to prove the damage, it will also be necessary to provide evidence that the subject fulfilled the preventative obligations, i.e. that it attempted to avoid the damages or to minimalize them. From an entrepreneurial consideration this refers to whether I could, for instance, have conducted business “online”, for this type of entrepreneurial activity is not affected by crisis measures, through to the extent to which I actively participated in exceptional programs which the state has arranged or is arranging for affected businesses.
Because the burden of proof will be on the subject requesting compensation, all generally termed negative events have to be carefully documented and archived. Thus, various forms of written material such as letters, emails, expressions, requests, minutes from meetings, internal regulations / directives, registers, agreements, invoices, photographs and other forms will be at issue. In the next step it will be unavoidable to have an expert appraisal processed which will prove the amount of damage incurred and which will serve as documentation of proof thereof for state administration bodies or the court.
We are prepared to offer you our services in this area.