Tax Treatment of IT Investments and Software

Basic Differences: When Is It an Expense and When Is It a Long-Term Asset?

The correct classification of a purchase in your accounting determines when you can actually deduct the investment from your taxes. From a cash flow perspective, an operating expense is the most favorable option. It reduces your taxable profit immediately in the year of acquisition, thereby saving you money on income tax right away.

Long-term assets work on a completely different principle. You must "capitalize" such an investment in your accounting and reflect its value in tax expenses gradually over several years in the form of depreciation. The state thus does not allow you to reduce your tax base immediately but forces you to spread the tax shield over time.

For IT equipment or a program to become a long-term asset, it must meet two cumulative conditions. The first is a demonstrable useful life exceeding one year. The second condition is the acquisition cost, which must exceed the limit set by law.

This very limit has undergone many historical changes and often differed for tangible and intangible assets. From 2026, however, the system will be definitively unified for all assets at the amount of CZK 100,000. Anything below this threshold is considered a low-value asset and can be booked directly as an expense.

This means that any software, management laptop, or powerful server with a price up to CZK 99,999 can be claimed as a one-off expense. However, if you exceed this threshold by even one koruna, you fall into the mandatory depreciation regime. For more complex IT investments (e.g., a combination of licenses, implementation, and subsequent service), it is advisable to verify the tax implications in advance with our Prague-based tax law team. In such cases, the specialists at ARROWS will help you with legal tax optimization.

The Revolution in Tax Depreciation from 2026 in Detail

The previous system of eight depreciation groups was a nightmare for most entrepreneurs and accountants. Unnecessarily complicated rules often forced companies to divide IT systems into nonsensical parts. The new legislation abolishes these old categories and introduces just three unified depreciation periods.

These new categories are 5 years (60 months), 15 years (180 months), and 30 years (360 months). For technology companies and digitalization, the first group is key. The vast majority of IT hardware, business software, and related technologies fall into the shortest, sixty-month period.

Tax depreciation is now calculated strictly on a monthly basis, not for whole years as it was before. If you buy and connect an expensive server to the company network in April, your tax depreciation starts running from May. This system more fairly and accurately reflects the wear and tear of technology. If you are planning a major IT modernization and want to have contracts and supplier liability set up correctly, a comprehensive review of IT contracts can also be useful.

The popular option of accelerated depreciation is also being definitively abolished. For tax purposes, assets can now only be depreciated on a straight-line basis, meaning the exact same amount each month. However, for older assets that you began depreciating before 2026, the original rules continue to apply until they are disposed of.

It is important to realize that tax depreciation (determined by the state) can and often must differ from accounting depreciation (which the company determines based on actual wear and tear). In practice, the differences between the accounting and tax perspectives often manifest in the setup of internal processes and records, where accounting services can help. The lawyers and tax experts at the ARROWS law firm have extensive experience in harmonizing these two worlds to help you avoid penalties. Contact us at consultation@arws.cz. 

Technical Improvement vs. Repair: The Pitfalls of IT Upgrades

Buying a new computer is straightforward from a tax perspective, but what if you are upgrading an old system? Here we encounter a huge tax problem called technical improvement. If you add new functions to existing software or hardware or significantly increase its performance, it is not a regular expense, but an improvement.

Technical improvements are aggregated for the entire tax period. If the total for a given year exceeds the CZK 100,000 threshold for a specific asset, you must increase its acquisition cost by this amount and continue to depreciate it. If you stay within the limit, you can book the improvement as a one-off expense.

In contrast, regular repairs and maintenance are always an immediate tax expense, regardless of their total cost. A repair is defined as restoring an asset to its previous or operational state. The assessment of when certain expenditures can be claimed as a one-off tax expense can be similarly borderline, which we discuss with examples in the article on unpaid B2B receivables. For example, replacing a burnt-out disk in a server with a new one of the same capacity is a typical repair.

This problem constantly arises in IT practice. For example, tax authorities often classify the transition to a new, substantially improved version of business software as a technical improvement. Meanwhile, regular security patches and routine updates (bug fixes) are recognized as regular maintenance without issue.

At the ARROWS law firm, we will prepare a detailed analysis for you before any major IT intervention. We will assess whether the planned work falls into the category of repairs or whether it constitutes a technical improvement. This will help you avoid unpleasant additional tax assessments during a potential tax audit.

Software and Its Classification: Purchase vs. In-House Development

With software, it is absolutely crucial to assess its real connection to the hardware. If the program is an integral part of a machine (e.g., a printer's control firmware, a router's operating system), you must not record it separately. It automatically becomes part of the device's acquisition cost and is depreciated along with it.

Stand-alone programs, such as graphic editors, ERP, or CRM systems costing over CZK 100,000, are recorded as separate long-term intangible assets. However, self-employed individuals (OSVČ) have a completely specific status here, as the legal obligation to depreciate software does not apply to them.

Natural persons can claim any software directly as an expense, regardless of its price in the hundreds of thousands or millions. This rule represents a huge tax advantage for self-employed IT specialists and freelancers, which legal entities (s.r.o. or a.s.) unfortunately cannot use.

The development of software by a company's own employees for internal needs causes huge confusion. Its tax acquisition cost must include not only the direct wages of the programmers but also a proportional share of overhead costs, social security contributions, or licenses used. These costs are "capitalized" during the development period.

Deliberately understating these internal costs (for example, by not including overheads) is a frequent reason for additional tax assessments. The experts at ARROWS (consultation@arws.cz) will help you create a secure internal methodology for valuing in-house development so that it is safely defensible before the authorities.

Development of Websites, E-shops, and Mobile Applications

A company website is an absolute necessity today, but its tax assessment depends on its character and functionality. Simple presentation websites (so-called "business cards") that only provide information about services and contacts are usually considered an advertising and promotion expense. They are therefore expensed directly.

However, the situation changes dramatically with robust portals and full-fledged e-shops. If you have a custom-developed e-shop with a database, payment gateways, and user accounts for more than CZK 100,000, you are creating a copyrighted work. You must classify this as a long-term intangible asset and depreciate it.

Mobile applications for iOS or Android developed for customers fall under the same regime. If you have a company application programmed for which you own the source codes and distribution rights, you must carefully track its acquisition cost. If you exceed the hundred-thousand-koruna limit, you will again face monthly depreciation.

Many companies try to avoid depreciation by "renting" a website or e-shop as part of a boxed solution. If you pay a regular monthly fee to an e-commerce platform provider, you do not own any assets but are buying a service. You can therefore comfortably and legitimately book these invoices directly as regular operating expenses.

The distinction between buying the copyrights to an e-shop and simply subscribing to a platform is crucial. Our lawyers will review your contracts with developers before you sign them. We will determine who actually retains the copyrights and, based on that, set up the ideal tax procedure.

Tax Treatment of Cloud Services and Infrastructure

The transition to the cloud has completely changed the perspective on corporate IT budgets. Instead of expensive one-off purchases of physical servers and perpetual licenses, companies today simply rent software and computing power over the internet. From a tax perspective, this shift is a huge simplification.

Renting cloud space on servers such as Amazon (AWS), Microsoft Azure, or Google Cloud is always accounted for as a purchased service. You are not buying any assets, so you book the monthly invoices for these rentals directly as regular operating expenses.

The same rule applies to subscriptions for office suites like Microsoft 365. Although you are using sophisticated software, you do not own a perpetual license for it but only pay for the right to use it. All these subscription fees are therefore an immediate tax expense.

However, you must be cautious with complex cloud migration projects. If you hire an external IT company to spend several months migrating your old systems to a new environment, these high costs can become a technical improvement of your software, and you must depreciate them.

Assessing the costs of cloud migration is a complex tax discipline. The ARROWS law firm will provide you with legal certainty in this matter. We will analyze the invoicing from your IT suppliers and clearly determine what is a regular service and what is subject to mandatory depreciation.

Investments in Artificial Intelligence and Automation

The integration of artificial intelligence and software robots is a trend that authorities are just learning to work with. If you subscribe to extended licenses of AI tools for generating text or graphics for your company, from a tax perspective, this is a standard subscription and therefore a regular service expense.

However, the situation becomes more complicated if you have developers custom-train your own closed language model on your company data. Such a tailor-made AI system, to which you have exclusive rights, represents a highly valuable long-term intangible asset.

If the development costs of your own AI solution exceed the CZK 100,000 threshold and you will use the model for more than a year, it falls into the category of intangible assets. You must therefore classify it for use and begin to depreciate it on a straight-line basis over a five-year, i.e., sixty-month, horizon.

The introduction of robotic process automation is assessed similarly. If you have a software robot programmed to automatically transcribe invoices into your accounting system, you are acquiring software. If the cost of programming it exceeds the hundred-thousand-koruna limit, you will face tax depreciation.

At the ARROWS law firm (consultation@arws.cz), we can handle the copyrights to the generated code, set up license conditions, and ensure that you depreciate your huge investments in artificial intelligence flawlessly and legally.

Cybersecurity: Costs of Data Protection

With the approaching NIS2 directive, companies are rapidly increasing their cybersecurity budgets. Here, too, you must differentiate carefully. If you hire ethical hackers for penetration testing of your infrastructure, you are purchasing a service. You can therefore immediately claim the security audit as a tax expense.

The same applies to regular security training for employees against phishing and social engineering. These expenses are clearly operational. But what if, based on an audit, you purchase sophisticated hardware firewalls for your server rooms that cost a quarter of a million korunas?

In that case, you are buying a long-term tangible asset. A firewall costing over CZK 100,000 with a lifespan exceeding one year will have to be depreciated over five years. You will thus spread it out for tax purposes into 60 uniform monthly depreciation charges, which will gradually reduce your tax base.

Furthermore, the installation of complex security software may constitute a technical improvement of your original system. Especially if you deeply integrate the new security module into your existing enterprise ERP. Scrutinize any intervention that changes the original nature of the program.

The lawyers at ARROWS will be happy to help you. Our team includes experts not only in tax but also in technology law and cybersecurity. We will align your investments with NIS2 compliance and at the same time set up your accounting so that you claim security expenses in accordance with the tax code.

International License Purchases and the Risk of Withholding Tax

When a Czech company buys software from foreign suppliers (typically from the United States or Ireland), it enters the dangerous territory of international taxation. Payments for software licenses can very often be subject to so-called withholding tax on income collected at the source.

If you pay for a license to an American company, the Czech state may require you to deduct a certain amount (e.g., 15%) from this payment and remit it to the Czech tax office. You would then send only the remaining amount to the foreign company. If you fail to do this, the tax office will assess the tax directly to you.

Fortunately, the Czech Republic has double taxation treaties with many countries. These treaties can reduce or even completely eliminate withholding tax on software licenses. However, the application of these treaties is not automatic and requires compliance with strict administrative steps.

You must have a tax residency certificate from your supplier and flawlessly interpret the relevant international treaty. A distinction is also made between buying standard boxed software (where withholding tax is usually not paid) and the right to modify and distribute the software (where there is a risk of massive withholding).

The international taxation experts at the ARROWS law firm will guide you through this complex process. We will ensure that you do not pay taxes for your suppliers out of ignorance. We will issue a legal opinion for you that will defend your procedure before Czech tax auditors.

Subsidies for Digitalization and Their Impact on Depreciation

Many companies today use generous European subsidies, grant programs like OP TAK, or funds from the National Recovery Plan to purchase IT equipment. However, the joy of receiving millions is often followed by a rude awakening when you discover the impact the subsidy has on your tax depreciation.

Tax laws are clear. If you acquire a long-term asset partly or wholly from a subsidy, you must reduce the acquisition cost for tax depreciation by the amount of this subsidy. The state will not allow you to depreciate the portion of the money you received for free under the grant program from your taxes.

If you buy a server center for one million korunas and a subsidy covers half a million, only the value of CZK 500,000 enters into tax depreciation. You then spread this reduced amount over 60 monthly depreciation charges. Incorrectly claiming the full amount for depreciation is one of the most common subsidy-related offenses.

You must also carefully monitor the moment you are certain you will actually receive the subsidy. Only at that moment is the subsidy booked against the asset. If the subsidy is granted in subsequent years, it requires a complex accounting adjustment and recalculation of already claimed tax depreciation.

For subsidy consulting and subsequent compliance checks, you can confidently turn to ARROWS. We will ensure that you do not violate the subsidy conditions and that you correctly reflect the received European funds in your tax return without the threat of future penalties.

Disposal of IT Assets: Sale, Liquidation, and Destruction

The life cycle of IT hardware is the shortest of all asset types. Computers and servers often become morally and technologically obsolete long before their mandatory five-year tax depreciation period expires. If you decide to sell, decommission, or liquidate obsolete technology, it has its tax consequences.

When you sell a server that is not yet fully depreciated, you can claim its so-called tax residual value (the amount you have not yet managed to depreciate) as a one-off tax expense. This expense is deductible without limitation and is compared with the income you receive from the sale of the hardware.

But what if you simply throw a broken laptop or old servers into e-waste? The physical liquidation of an asset also allows you to claim the residual value as an expense. However, you must have a verifiable protocol of ecological disposal. If the asset just "disappears," the tax office will not recognize the residual value.

Similar rules apply to software for which you purchased a license but stopped using it after two years. The residual value of a decommissioned intangible asset can be expensed in the year you can prove that you have definitively stopped using the license and have removed the asset from your accounting records.

At the ARROWS law firm (consultation@arws.cz), we will teach you how to correctly create liquidation protocols and how to proceed when selling IT equipment to employees. This minimizes the risk of the tax office questioning the costs of disposing of undepreciated assets.

Common Mistakes in IT Purchasing and How to Avoid Them

A typical mistake is ignoring the actual status of a completed project. A company has long been actively using the software, the testing phase has ended, but the accountant still records it on the account for unfinished assets under acquisition. The goal is usually to postpone depreciation to later, more profitable years.

The tax office will detect such a deliberate delay. Auditors insist that depreciation must begin at the moment the asset was objectively capable of serving its purpose. Your tax shield for past years will be forfeited, and you will also be hit with a penalty for the accounting error.

Another common trick is to deliberately split one large investment below the hundred-thousand-koruna limit into many smaller invoices. A company acquires a complex information system for 250,000, but has it invoiced as five independent invoices for 50,000 korunas and books it as an expense.

If it is a single functionally integrated unit from the same supplier, the tax office will easily uncover this disguised investment. The transaction will be reclassified as the purchase of an asset over the hundred-thousand-koruna limit. This is immediately followed by an additional tax assessment, a huge penalty, and, if malicious intent is proven, even criminal prosecution for tax evasion.

With the experts from the ARROWS law firm (consultation@arws.cz), you can easily eliminate these unnecessary rookie mistakes. Before every major IT investment, we will analyze the contracts and invoicing model with you in detail. We will ensure that a potential audit from the tax office does not catch you off guard and that you can sleep soundly.

Final Summary

Digitalization presents a huge financial and accounting challenge for every dynamic company. The correct distinction between a one-off operating expense and a long-term asset is absolutely key to optimizing cash flow. This is especially true with the arrival of revolutionary tax changes from 2026, which unify the limit at CZK 100,000 and introduce precise monthly depreciation without unnecessary exceptions.

Deliberately splitting IT purchases into small invoices, incorrectly valuing in-house software development, or naively confusing cloud services with intangible assets unnecessarily attracts the attention of the authorities. These rookie mistakes and attempts at amateur tax optimization unfortunately most often end in high penalties, hefty additional tax assessments, and unnecessary investigations of statutory bodies.

If you are planning to purchase a robust information system, a massive hardware renewal, or extensive integration of artificial intelligence, involve us right from the start. The lawyers and tax experts at the ARROWS law firm (consultation@arws.cz) will set up your processes so that you can claim your IT investments in a tax-efficient, one-hundred-percent secure manner, and in strict compliance with legislation.