On 1st January 2016, new legislation concerning deposit insurance came into force. Among other changes, it has introduced the exclusion of deposits of some territorial self-governing units and deposits of the state from deposit insurance. These rules come from a European directive that is also binding for the Czech Republic. This directive determines that deposit insurance does not apply to any public authorities, yet allows Member States to enable deposit insurance for local authorities whose tax revenues are not higher than EUR 500,000.
The Czech Republic has decided to take advantage of this possibility to insure the deposits of small municipalities, and therefore the new legislation determines the conditions under which such municipalities can have their deposits insured.
However, it is important to emphasise that since 1st January 2016 the deposits of small municipalities are not insured automatically as they were before. A municipality now has to apply to maintain the insurance of its deposits and demonstrate its fulfilment of the legal conditions. An application must be submitted to the bank, cooperative credit union or building society (“financial institution”) where the municipality has its account, respectively its deposits that should be insured.
Conditions and procedure for small municipalities to obtain deposit insurance:
- By law, deposit insurance is only available for a municipality whose tax revenues according to the Act on Budget Allocation of Taxes are at most EUR 500,000. (For example: at an exchange rate of CZK 25/EUR the limit amount is CZK 12.5 million).
- Obtaining insurance is an administrative procedure, during which the municipality must cooperate with the financial institution where it has its account or uses a financial product to which deposit insurance could apply. The financial institution must issue to the municipality a certificate of deposit insurance. The deposits of the municipality can only be insured if the financial institution issues such a certificate.
In practice this means that:
- a) If a municipality wants to have insured deposits in a financial institution in which it already has saved funds, it must apply for a certificate of insurance from that financial institution. (If the municipality has deposits in several institutions, it must obtain confirmation from them all!) Deposits are only insured after the issuance of the certificate (or in a given year, see below). Without this confirmation the deposited funds are not subject to deposit insurance.
- b) If a municipality is considering a new relationship with a financial institution from which it does not have confirmation of deposit insurance, and the municipality wants its deposits with that financial institution to be insured from the beginning, it must obtain a certificate of insurance before it entrusts its funds to the financial institution. However, it is possible for a municipality to demonstrate its tax revenues at a later date, while the deposits will be insured only after receipt of confirmation of insurance pursuant to letter a).
If a municipality has an account with a branch of a foreign bank operating in the Czech Republic, we recommend that it seeks information directly at such branch about the conditions of deposit insurance for the municipalities, as some countries have not taken advantage of the exceptions permitting deposit insurance for small municipalities.
Tax revenue for the purpose of deposit insurance for municipalities – definitions and the record date
The first step on the road to deposit insurance for municipalities is to clarify, what is meant by tax revenues of a municipality. In this respect, the new legislation refers to Act No 243/2000 Coll., on the Budget Allocation of Taxes, as amended, while this Act provides a list of tax revenues of municipalities in Section 4. The Ministry of Finance then in connection with the application of the new legislation stated that these are tax revenues reported in statement FIN2-12M compiled according to Decree No 5/2014 Coll. To clarify – these are the following 7 (of 82) items broken down according to the budgetary composition under Annex B of Decree No 323/2002 Coll., on Budget Structure.
- 1111 Tax on the income of natural persons from employment and functional benefits
- 1112 Tax on the income of natural persons from self-employment
- 1113 Tax on the income of natural persons from capital gains
- 1121 Tax on the income of legal entities
- 1122 Tax on the income of legal entities for municipalities
- 1211 Value Added Tax
- 1511 Real Estate Tax
The second step is to determine the year for which the applicable tax revenues will be calculated, as it is not excluded that in one year the municipality meets the condition of tax revenues (not exceeding EUR 500,000), but not in another year. Deposit insurance can be obtained only in years for which in their previous record year the condition of maximum tax revenues was met.
This previous record year is, according to the law, the year that precedes by two years the year in which the municipality wants to have its deposits insured. The explanatory report then provides clarification in the form of an example - if the municipality is interested in insuring deposits in 2015, it must demonstrate its tax revenues for 2013. For deposit insurance in 2020 it is therefore necessary to demonstrate tax revenues for 2018.
As the limit of EUR 500,000 must be converted into the equivalent in Czech crowns, the law determines that this must be done using the exchange rate announced by the Czech National Bank for the last day of the calendar year to which the tax revenues relate.
The applicable exchange rate for the conversion in 2020 is thus the CZK / EUR rate announced by the CNB for 31. 12. 2018. Data on exchange rates announced by the CNB can be obtained on the website www.cnb.cz and the mentioned rate as at 31. 12. 2018 was CZK 25.725/EUR. Conversion of the upper limit of EUR 500,000 using this rate shows that the upper limit of the tax revenues for a municipality in 2018 for entitlement to deposit insurance in 2020 amounts to CZK 12,862,500.
Proof of tax revenues to a financial institution – method
If the condition of maximum tax revenues is met, the next step to obtain deposit insurance for the deposits of municipalities is to demonstrate this fact to the financial institution. The specific method for such demonstration is not determined. It is therefore up to the municipality itself to choose the procedure, and up to the bank the municipality contacts as to whether it considers the procedure used by the municipality to be satisfactory.
If a municipality meets the above conditions for the insurance of its deposits and asks for a certificate of confirmation of deposit insurance, the bank, if the legal requirements are met, is obliged to issue one. In this confirmation the bank is legally obliged to indicate the period for which the certificate applies.
The law obliges the bank to issue a certificate without undue delay. This means that the entity in question must act immediately after having been called to do so, and that its actions should be subject to no delay. It is generally considered that an act performed without undue delay should be performed within in a matter of days, however a longer duration (several weeks) is possible when something prevents the entity from issuing confirmation earlier. There is however always a need to assess immediacy in relation to each specific case.
If a municipality asks a bank to issue confirmation in a year in which its deposits should be insured, the deposits are insured from the date on which the confirmation was issued by the bank.
If a municipality asks before the start of a year in which its deposits should be insured, and the bank confirmation is issued before the start of the year, the deposits of the municipality are insured from the first day of the year for which the confirmation was issued.
Based on the confirmation from the bank, the deposits of the municipality are always insured only until the end of the calendar year. If the municipality wishes to continue the insurance of its deposits in the following year, it should demonstrate to the bank in a timely manner its compliance with the legal requirements and request a new confirmation from the bank for the next calendar year.
The Ministry of Finance has issued two reports on this issue:
You can find the texts of the legislation on the page Legislation.