Companies complain about the volume of regulations that make their work more difficult. It is not only the number of them that bothers them, but mainly the hastiness, unpredictability and lack of time to comply with them.
As recently as last year, companies perceived regulation as the 14th global risk to business, but today they rank it right up there. According to companies, incoming legislative rules are often unnecessarily complex, it is not clear how companies should apply them and what their impact will actually be in practice. While the process of adopting laws is often prolonged and delayed, companies do not have enough time to get acquainted with the final version. According to BDO's Global Risk Landscape survey, these are also the reasons why five times more companies perceive regulations as the highest risk to business compared to last year.
Specifically in the Czech Republic, one of the reasons for the negative view of companies on the incoming regulations is the peculiar domestic approach to the adoption of EU legislation. The problem is that European regulations are often applied to our law with significant changes, which are more complicated and in most cases even more burdensome for companies. An example is the law on equalisation taxes, which concerns the taxation of large multinational and large national groups, which will affect several thousand companies in this country.
Moreover, European directives are often implemented in the Czech Republic just before the deadline by which we undertook to adopt them, or even after it. The business sector is then given minimal time to comply with the new requirements. All this is happening despite the fact that it has been clear for years that regulation would come, just not in what form and with what modifications.
Stability is key for companies, which the Czech Republic lacks
Excessive changes are not only a problem for the companies themselves, but also discourage investors. The unstable situation in the Czech Republic can also be illustrated by national legislation, for example on the issue of taxes, as last year was another turbulent year for tax laws in the Czech Republic. As my colleague Igor Pantůček recently reminded us, there were, for example, four amendments to the Income Tax Act during the year, and even the VAT Act was updated five times. Such a frequency of amendments makes it significantly more difficult for entrepreneurs and companies to do business and also significantly reduces the attractiveness of the Czech Republic for investors and their investments.
Anyone who expects that tax norms could be stabilised is mistaken. An example is the forthcoming extensive amendment to the "new" VAT Act, which is expected to come into force on 1 January 2025.
Some laws are in force for a year or two, then they are adjusted again
Another complex adjustment that was quite confusing for companies was the government's consolidation package. This included, for example, a change regarding the payment of employee benefits, but it was so opaque that it required the subsequent preparation of methodological information from the General Financial Directorate, which was thirty-one pages long. A further modification of benefits is currently being negotiated, as the adopted modification does not meet the needs of employers and employees.
The consolidation package, by the way, also introduced a financial ceiling on the purchase of a personal company car, so that a maximum of CZK 2 million can be counted as a tax deductible expense. However, it is being considered that this may change. After three years, this measure may be abolished and from 2027 it could again be possible to claim full tax deductions for "luxury" vehicles. So much for consistency.
Impact of the accounting change
Other legislation is also coming down on companies; for example, the new Accounting Act will be of crucial importance. Businesses have been waiting for this for 34 years, as it is to replace the existing old law from 1991. Unfortunately, the Ministry of Finance published the long-awaited proposal at the beginning of the year in such a state that the Legislative Council of the Government has recommended suspending the legislative process until the accompanying law is submitted together with the necessary decrees. While it was foreseen to take effect from the beginning of 2025, it is already clear that the adoption will be even longer and we will not have a law until 2026 at the earliest.
The big sticking point will be the accompanying tax law. The proposal on the table is very incomprehensible and introduces concepts that are not necessary. Another problem is that it enters quite fundamentally into the business of individuals who do not charge. It even proposes a significant restriction on the exemption of personal income for property that is sometimes rented out.
Entrepreneurs need to have their hands free
ESG, particularly reporting and emissions reduction, and the long-gestating new law on cybersecurity, which will determine how companies will have to protect themselves in the digital environment, will also have a major impact on companies. At least some of these are expected to have an even greater impact on businesses than the much-discussed GDPR has had in the past. With all that is in store for businesses, expect them to take an even more critical view of the coming regulations.
The Confederation of Industry and Transport is aware of this and is actively commenting on the proposed laws and recommending certain changes. The Chamber of Commerce is currently preparing its own proposal for an anti-bureaucratic package, which should free the hands of entrepreneurs.
For example, while the ESG just mentioned aims at environmental sustainability, governments should also ensure that business itself is sustainable - that it has a future. So far, they are rather tying it down.
jiri.nekovar@bdo.cz
As recently as last year, companies perceived regulation as the 14th global risk to business, but today they rank it right up there. According to companies, incoming legislative rules are often unnecessarily complex, it is not clear how companies should apply them and what their impact will actually be in practice. While the process of adopting laws is often prolonged and delayed, companies do not have enough time to get acquainted with the final version. According to BDO's Global Risk Landscape survey, these are also the reasons why five times more companies perceive regulations as the highest risk to business compared to last year.
Specifically in the Czech Republic, one of the reasons for the negative view of companies on the incoming regulations is the peculiar domestic approach to the adoption of EU legislation. The problem is that European regulations are often applied to our law with significant changes, which are more complicated and in most cases even more burdensome for companies. An example is the law on equalisation taxes, which concerns the taxation of large multinational and large national groups, which will affect several thousand companies in this country.
Moreover, European directives are often implemented in the Czech Republic just before the deadline by which we undertook to adopt them, or even after it. The business sector is then given minimal time to comply with the new requirements. All this is happening despite the fact that it has been clear for years that regulation would come, just not in what form and with what modifications.
Stability is key for companies, which the Czech Republic lacks
Excessive changes are not only a problem for the companies themselves, but also discourage investors. The unstable situation in the Czech Republic can also be illustrated by national legislation, for example on the issue of taxes, as last year was another turbulent year for tax laws in the Czech Republic. As my colleague Igor Pantůček recently reminded us, there were, for example, four amendments to the Income Tax Act during the year, and even the VAT Act was updated five times. Such a frequency of amendments makes it significantly more difficult for entrepreneurs and companies to do business and also significantly reduces the attractiveness of the Czech Republic for investors and their investments.
Anyone who expects that tax norms could be stabilised is mistaken. An example is the forthcoming extensive amendment to the "new" VAT Act, which is expected to come into force on 1 January 2025.
Some laws are in force for a year or two, then they are adjusted again
Another complex adjustment that was quite confusing for companies was the government's consolidation package. This included, for example, a change regarding the payment of employee benefits, but it was so opaque that it required the subsequent preparation of methodological information from the General Financial Directorate, which was thirty-one pages long. A further modification of benefits is currently being negotiated, as the adopted modification does not meet the needs of employers and employees.
The consolidation package, by the way, also introduced a financial ceiling on the purchase of a personal company car, so that a maximum of CZK 2 million can be counted as a tax deductible expense. However, it is being considered that this may change. After three years, this measure may be abolished and from 2027 it could again be possible to claim full tax deductions for "luxury" vehicles. So much for consistency.
Impact of the accounting change
Other legislation is also coming down on companies; for example, the new Accounting Act will be of crucial importance. Businesses have been waiting for this for 34 years, as it is to replace the existing old law from 1991. Unfortunately, the Ministry of Finance published the long-awaited proposal at the beginning of the year in such a state that the Legislative Council of the Government has recommended suspending the legislative process until the accompanying law is submitted together with the necessary decrees. While it was foreseen to take effect from the beginning of 2025, it is already clear that the adoption will be even longer and we will not have a law until 2026 at the earliest.
The big sticking point will be the accompanying tax law. The proposal on the table is very incomprehensible and introduces concepts that are not necessary. Another problem is that it enters quite fundamentally into the business of individuals who do not charge. It even proposes a significant restriction on the exemption of personal income for property that is sometimes rented out.
Entrepreneurs need to have their hands free
ESG, particularly reporting and emissions reduction, and the long-gestating new law on cybersecurity, which will determine how companies will have to protect themselves in the digital environment, will also have a major impact on companies. At least some of these are expected to have an even greater impact on businesses than the much-discussed GDPR has had in the past. With all that is in store for businesses, expect them to take an even more critical view of the coming regulations.
The Confederation of Industry and Transport is aware of this and is actively commenting on the proposed laws and recommending certain changes. The Chamber of Commerce is currently preparing its own proposal for an anti-bureaucratic package, which should free the hands of entrepreneurs.
For example, while the ESG just mentioned aims at environmental sustainability, governments should also ensure that business itself is sustainable - that it has a future. So far, they are rather tying it down.
jiri.nekovar@bdo.cz