The new coronavirus pandemic is currently perhaps the most used phrase. In this respect, the economic crisis and its associated effects are stepping on its heels, especially in relation to redundancies and rising unemployment.
On the other hand, this pandemic also shows the good in us and triggers waves of mutual help. One form of such help is hire-out of employees by those companies that do not currently have work to do to those companies that suffer from a shortage of employees, for example due to childcare leaves or due to increase in production in specific sectors.
Hire-out of employees represents help not only for employers on both sides, but also for employees who will maintain their employment. It is especially for this reason that the Chamber of Commerce also calls for hire-out of employees as a part of the nationwide initiation Save a Job!
Temporary assignment of an employee is regulated by the Labour Code. It is a situation where the so-called legal employer, i.e. the employer with whom the employee has concluded an employment contract, lends its employees to the so-called economic employer, whereas the employee must agree to such step. The work is then assigned to the employee and its performance is controlled by the economic employer, but the wage or salary or travel expenses are paid by the legal employer. However, the essential condition is that no remuneration may be paid for a temporary assignment, only a reimbursement of employee’s costs incurred.
This is what distinguishes a temporary assignment of an employee from agency employment, where the agency charges a profit margin. Therefore, it is not necessary to have a permit from the Ministry of Labour and Social Affairs for the temporary assignment.
As can be seen from the above, the assignment of employee requires conclusion of two agreements:
In this respect, there is a question how to solve the whole situation from a tax perspective. An attempt to solve this was brought by the Coordinating Committee of the Chamber of Tax Advisors and the General Financial Directorate already in the year of the introduction of this institute into the Labour Code.
A summary of these negotiations can be found below.
Personal income tax
The employee's remuneration for work during temporary assignment is standardly subject to the personal income tax as well as to the health insurance and social security. In case of temporary assignment within the Czech Republic, the legal employer remains a payer of income tax on employment in the Czech Republic.
Travel and other compensations under the Labour Code are not subject to tax, regardless of whether they are paid by legal or economic employer. Of course, double travel expenses cannot be paid for the same days.
Corporate income tax
In principle, two types of costs are incurred by the economic employer when the employee is hired-out:
Should the general conditions for the tax deductibility of costs be met, i.e. the costs are incurred to achieve, secure, and maintain taxable income, these costs are tax-deductible cost on the side of the economic employer.
Furthermore, it is necessary to mention that in case where the legal and economic employer are related persons according, the reimbursement of costs without margin and in the full scope is considered as the usual market price.
Value added tax
Recently, the area of VAT has raised the most questions.
In 2012, the Coordination Committee agreed that the reimbursement of costs for temporarily assigned employees is not a consideration for the taxable supply, as it was confirmed that the reimbursed costs are an expression of the value of the work provided by the employee to the economic employer and thus, income from labour law relationship, and therefore, are not considered economic activity in accordance with the VAT Act. This resulted in opinion that the reimbursement of costs induced by the assignment of the employee is not subject to VAT.
On the other hand, mid-March 2020, the EU Court of Justice has decided that that the assignment of employees for work against the reimbursement of costs is indeed subject to VAT.
Therefore, the question is how to behave in this situation so that the legal and economic employer avoids the potential risk of additional VAT assessment. Given that VAT is a harmonized tax at EU level, it is advisable to consider cases of temporary assignment of employees in the light of the above decision and correctly apply the conclusions in question. Generally, the temporary assignment of employees shall no longer be considered as a transaction not subject to the VAT, regardless of the calculation of the amount invoiced between the employers.