The Investment Incentives Act has recently been amended. The purpose of this Act is to support technological investments in the Czech Republic. Investments in the construction and expansion of technology centers, strategic service centers and manufacturing companies are supported. Technological centers are entities with a focus on applied research, development and innovation of technically or otherwise advanced products, technologies and production processes, including the creation and innovation of their software. Strategic Service Centers are software creation centers focused on creating new or upgrading existing software, data centers focusing on data storage, sorting and management, as well as repair centers focused on repairing high-tech equipment. Last but not least, Shared Service Centers are also supported with a focus on taking over the management, operation and administration of internal activities from the controlling or controlled entity or from contractors for whom these activities are not the subject of business.
Newly, the parameters of support – especially its amount – will be set by a government regulation and will no longer be included directly in the law. The government will thus be able to respond flexibly to changes in the market. The currently valid government regulation lays down qualification conditions. These conditions vary for small, medium and large businesses.
For example, in technology centers, a minimum investment of CZK 10 million is required from large enterprises, with at least 50% of the funds being invested in new machines and at least 20 new jobs created. For small and medium-sized enterprises (SMEs), the qualification requirements are halved.
For strategic service centers, large enterprises are required to create a minimum number of new jobs, 20 for SW development centers, 20 for data centers, 50 for hi-tech repair centers, and 70 for repair centers. For SMEs, the qualification requirements are again only half.
In the manufacturing industry, only large companies that invest at least CZK 100 million will invest on incentives, with at least 50% investing in new machines. SMEs have half the qualification requirements. Interestingly, these qualification limits are halved for all beneficiaries, irrespective of size, when investing in affected regions or favored industrial zones. The affected regions and industrial zones are delimited by a separate map.
In addition to minimum investments, the government regulation now requires compliance with the condition of higher added value in developed regions. This condition has a number of parameters.
First of all, it must be ensured that min. 80% of employees will have up to 7 resp. 12 months after publication at least the average wage. The average wage announced by the Czech Statistical Office in the region where the investment is made is taken into account. This condition applies to large enterprises and SMEs.
- At the same time, an undertaking requesting an investment incentive in the manufacturing industry should demonstrate that it has concluded a cooperation agreement with at least one research organization that is on the research organization list, that it has cooperated with that organization in the field of research and development the years of submission of the investment incentive plan have spent at least 1% of the estimated value of the total eligible costs specified in the investment incentive plan. At the same time, the enterprise should respect the share of employees with university education at the place of the investment project at least 10%, or
- company should prove that it employs and will employ min. 2% of R&D collaborators or
- prove that acquired machinery which is or will be used predominantly in (R&D), which was purchased at market price, was not produced more than 2 years before commencement of its acquisition, was not subject to accounting depreciation before its acquisition, was not put into use before 2 years prior to the submission of the investment incentive intent and was not included in the eligible costs of the investment action, at least 10% of the estimated value of the total eligible costs specified in the investment incentive intent.
However, the above-mentioned 3 conditions are not entirely clear in terms of coherence in the Regulation and therefore we present their present interpretation according to Czechinvest.
The maximum amount of the investment incentive is given by the regional state aid map, which defines its maximum size for a large enterprise at 25%, for a medium-sized enterprise 35% and for a small enterprise 45% of the eligible expenditure. Eligible expenditure is either realized investments or wage funds spent within a properly submitted and detailed project description in the application. Wage funds cannot be claimed as eligible expenditure within the manufacturing industry.
The investment incentive itself is not a subsidy, but a tax credit. The investment is expected to generate significant future income for the applicant and thus an increased future tax liability. This means that the applicant has to generate sufficient profit, which is subject to income tax, after the implementation of the project. If the applicant does not make sufficient profit, the tax credit is not attractive to him as he will not apply any discount (incentive). In the next 10 years following the submission of the investment incentive, the beneficiary may reduce its tax liability up to the amount of the investment incentive granted, which is still limited by the regional map and the actual amount of eligible costs incurred.
Income tax cannot be reduced to zero by the beneficiary through an incentive, but it fixes the existing tax liability which it has to pay throughout the investment incentive. The incentive applies to the increased tax liability that results from increased profits after the investment is made. Once the incentive is exhausted, the company will start paying the proper income tax. Investment incentives can be repeatedly requested.
Special conditions apply to large investments referred to as strategic investment action. Here, in addition to the tax credit, it is possible to obtain direct financial support – a subsidy of up to 20% resp. 10% of eligible costs. Direct financial support can reach up to an absolute amount of CZK 1.5 billion.
The issue of state aid and, in particular, investment incentives is linked to tax legislation and requires a careful, well thought-out set of steps. It is advisable to cooperate with experienced grant and tax advisors for the application and administration of the investment incentive project.