Natural disasters

Tax aspects of donations and natural disasters

Authors: Barbora Halousková, Andrea Kleinová
Natural disasters
Following the sad events of recent weeks, when natural disasters in South Moravia and the Ústí nad Labem Region caused unprecedented consequences and damages, we would like to summarize some tax aspects of donations and other forms of help associated with such situations. These rules and impacts are addressed primarily by those who have decided to help. However, even entities affected by the situation, both corporate and individual, need to address how to deal with the costs of a natural disaster, also from the tax point of view.

Firstly, let's define the natural disaster itself according to the Income Tax Act (hereinafter "ITA"):

"For the purposes of this Act, natural disasters include fire and explosion, lightning, storms with wind speeds above 75 km/h, floods, inundations, hail, landslides and rockfalls, unless they have occurred in connection with industrial or construction operations, landslides or avalanches and earthquakes reaching at least the 4th degree of the international scale indicating the macroseismic effects of earthquakes. The amount of the damage has to be documented by the opinion of the insurance company, even if the taxpayer is not insured, or by the court expert´s opinion."

From the point of view of taxes, it is then necessary to approach each and every case individually and take into account different levels. On one hand, we can look at the tax implications in question according to the flow of money (incomes and expenses), and on the other hand according to the type of entity of the beneficiary (individuals and corporations/legal entities).

Incomes, resp. revenues

Exemption from personal income tax is defined in various provisions of the ITA and includes, for example, received compensation for property or non-property damage, benefits from property insurance, contributions from public budgets, benefits provided in connection with voluntary service, subsidies from selected public budgets, gratuitous incomes for humanitarian or charitable purposes or from a public collection, etc. However, as we wrote above, different types of income can have very different tax implications, so it is usually necessary to analyse from whom the income in question comes and what is its legal status.

In case of corporate income, the rule is that donations are subject to income tax and thus, taxed; however, there are exceptions as well, such as exemption of gratuitous income, which includes, inter alia, incomes flowing into the public collection, for humanitarian or charitable purposes and incomes received from a public collection.

With the above in mind, we would also like to draw your attention to the fact that costs (expenses) that have been incurred in connection with tax-exempt income have to be excluded from the tax base.

Expenses, resp. costs

We would like to start by mentioning that tax-deductible expenses include not only the damages caused by natural disasters in their narrow definition but also expenses incurred in the framework of assistance provided in the form of non-monetary supplies in connection with the elimination of natural disasters, which include, for example, provision of machinery, equipment, means of transport, food, etc. with confirmation, e.g. from crisis management bodies.

However, another situation is aid in the form of a donation.

From the donor's point of view, in the case of donations, this is generally a tax non-deductible expense, both on the side of legal entities as well as individuals.

However, the ITA also knows legal institutes whose goal is to motivate to solidarity and philanthropy. The donation can thus reduce the income tax base. In order to claim such a tax advantage, the value of the gratuitous supply (i.e. the donation itself, which can be in monetary or non-monetary form) has to be at least CZK 2,000 in the case of corporate entities and at least CZK 1,000 in the case of personal entities. In general, donations of up to 10% of the tax base can be deducted. For the tax period that has ended, resp. ends in the period from 1 March 2020 to 28 February 2022, donations of up to 30% of the tax base can even be deducted. We have already informed about the increase of this limit in our article from February 2021.

It is also important to take into account the character and nature of the recipient of the donation. In order for the donor to be able to provide a donation that will be deductible from the tax base, they have to provide such a donation for purposes defined by law. In case of corporate entities, these include donations for humanitarian and charitable purposes, which is certainly fulfilled in the case of donations to eliminate the consequences of a natural disaster of this magnitude. Conversely, donations to individuals are, in terms of deductibility, limited to providers of health services, operators of schools and school facilities, animal protection facilities and financing of such facilities, as well as medical devices for disabled persons or minors who are dependent on the care of another person. It is therefore necessary - unfortunately - to emphasize here that donations to individuals as assistance in the event of natural disasters do not enjoy such a tax advantage and cannot, therefore, be deducted from the tax base as items reducing the tax base.

In any case, do not forget that for tax favourable application of a donation, proof of its actual provision is required. This can be done, for example, by a donation agreement, or by confirmation of the recipient declaring the amount and purpose of such donation.

If you are interested in further details regarding this issue, do not hesitate to contact us. At the same time, we thank all those who participated and are participating in helping others.

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Andrea Kleinov√°
Andrea Kleinová
Certified Tax Advisor