Top-Up Tax – New Tax Obligation for 2024

Companies that are part of international or domestic groups with consolidated income exceeding EUR 750 million have a new tax obligation for 2024 in the form of a top-up tax.

The goal of the tax is to ensure that a minimum effective tax rate of at least 15% on the generated profits is applied in each country where the group is present. This step is part of broader efforts to prevent profit shifting to tax havens and to ensure fair taxation.

Read on to find out who is subject to the top-up tax, what the possible exemptions from this tax are and what conditions you have to meet to be eligible for the exemptions.

You might have already heard of terms such as Pillar 2, GloBE or QDMTT, which are associated with the top-up tax.

Act No. 416/2023 Coll. on top-up taxes for large multinational groups and large domestic groups (hereinafter referred to as “Top-Up Taxes Act”) has introduced two new top-up taxes. Therefore, companies are obligated to calculate and pay the new taxes to the relevant tax office starting with the year 2024.

To whom does the top-up tax apply?

Taxpayers required to pay the new top-up tax are entities that are part of the group with annual consolidated income exceeding EUR 750 million. This threshold must be reached in at least two of the last four reporting periods preceding the first relevant reporting period. We should note that the reporting period constitutes the period for which the ultimate parent entity of the group prepares the consolidated financial statements. The first relevant period for which the taxes will be calculated begins no earlier than 31 December 2023. This means that for most entities, this tax will first be applicable for 2024.

Two top-up taxes apply:

1. Czech top-up tax: This tax is calculated by Czech entities belonging to large groups and is paid in the Czech Republic.
2. Allocated top-up tax: This tax will usually be calculated and paid by the ultimate parent entity of the group. If the country where the ultimate parent entity resides has not implemented the relevant legislation, the obligation passes to another parent entity of the group.

Exceptions – “safe harbour” rules

The Top-Up Taxes Act stipulates a simplified mechanism in the form of “safe harbour” rules. These are exemptions that allow entities from the relevant country to treat the top-up tax as zero tax without the need to carry out detailed complex calculations. Below we list only the exceptions we consider to be the easiest and quickest to identify based on the information from the CbCR report.

1. Small-scale rule: Czech entities do not have to calculate the Czech top-up tax if their aggregate

   

   income does not exceed EUR 10 million and their pre-tax profit or loss is less than EUR 1 million. The income and pre-tax profit or loss are determined based on the CbCR report.

2. Effective tax rate rule: If a simplified calculation of the effective tax rate for all Czech entities shows that the effective tax rate is at least 15%, no further calculations are necessary. The effective tax rate is the ratio of the aggregate of the applicable taxes and pre-tax profit or loss. The pre-tax profit or loss is determined based on the CbCR report, and the applicable taxes are determined from the statements of the individual Czech entities.
3. Standard profit rule: This rule verifies whether Czech entities have sufficient material and personnel capacities corresponding to the profit generated. Even though this rule is more administratively demanding to ascertain than the previous ones, it still presents a simpler option than the comprehensive calculation of the top-up tax.

The exemptions above are by no means the only ones stipulated by the Top-Up Taxes Act. However, they are the most accessible and least complicated to apply. If none of the exemptions can be applied, the effective tax rate and the relevant top-up tax will have to be calculated.

How to calculate the effective tax rate?

Although the calculation of the effective tax rate looks simple at first glance – as a ratio of adjusted tax and qualified profit of all entities of the group in the Czech Republic – in reality, the process is quite complex. This is due to the differences in tax and accounting rules between countries that require the consolidation of calculations at the group level.

The effective rate is determined based on the accounting rules the group uses to prepare the consolidated financial statements, such as IFRS or US GAAP. However, the values have to be further adjusted, which makes the calculation even more complicated.

If the effective rate falls below 15%, the difference will need to be adjusted through the calculation of the Czech top-up tax.

Obligations and Deadlines

Companies that are part of large international or domestic groups are required to:

• File the information return first
• If the effective rate for the relevant country is below 15%, the companies are required to calculate the top-up tax, file a tax return and pay the tax

The deadline for filing the information return for the Czech top-up tax and the tax return for the Czech top-up tax is the same, i.e. ten months (31 October 2025). However, the relevant forms have not yet been issued.

The deadline for filing the information return and tax return for the “global” allocated top-up tax is longer, i.e. 15 months for filing the information return and 22 months for filing the tax return.

Upcoming Amendment to the Top-Up Taxes Act

The Chamber of Deputies is considering an amendment to the Top-Up Taxes Act, which, among other things, should extend the deadlines for filing the information return and tax return for the Czech top-up tax until 2026. Although it is not yet clear when the amendment will be discussed, this change would be quite welcome and give companies more time to prepare.

What to look out for?

It may seem there is still plenty of time to prepare, but the opposite is true. An estimation of the top-up tax will already be required for the 2024 audits. This means that you need to start preparing as soon as possible. The calculation of the tax is not simple and requires cooperation between the Czech entities and the teams that determine the allocated top-up tax at the level of the ultimate parent entity.

How best to proceed?

• First, you need to check whether the group is subject to the top-up tax.
• If so, then you need to check whether the entities in the relevant country meet the conditions for any of the exemptions to the calculation of the top-up tax.
• If no exemption can be applied, it is necessary to start calculating the top-up tax.

If this new obligation applies to you, feel free to contact us. We will be happy to help you deal with this issue.