As we have already covered in our earlier article, in June 2018 the country’s government adopted the Czech tax package 2019. The changes went through the standard legislative process and were finally signed by the President and published in the Collection of Laws end of March 2019. Most amendments of the Czech tax package 2019 came into effect on 1 April 2019, however, there are some significant exceptions.
The Czech tax package 2019 brought significant changes also to the Czech VAT Act and to the Tax Code, but in our present article we only highlight some of the main changes to the Income Tax Act. About other amendments you can either read our earlier summary or the updated, latest newsletter of WTS Alfery, the exclusive representative of WTS Global for the Czech Republic.
In particular, the Czech tax package 2019 shall implement EU Directive 2016/1165 (ATAD) laying down the following five rules against tax avoidance practices:
Limitation on the deductibility of excessive borrowing costs
Borrowing costs exceeding the associated income of a tax period shall be tax deductible only up to CZK 80 million (roughly EUR 3 million) or up to an amount corresponding to 30% of earnings before interest, taxes, depreciation and amortization (EBITDA), whichever is the greater. Borrowing costs exceeding the above thresholds shall be considered tax non-deductible; however, they may be deducted in the following years.
Unlike thin capitalisation rules, the new rules will also cover loans from unrelated parties. Moreover, the definition of borrowing costs shall be much broader than under the thin capitalisation rules. For example, capitalized interest or exchange differences related to funding shall also be subject to these rules. The thin capitalisation rules shall continue to apply, which means that ATAD introduces yet another rule applying to borrowing costs.
Exit tax in the Czech tax package 2019
With effect from 2020, transfers of assets without changing ownership shall be subject to tax as if they were sales of assets. This applies, for example, to situations in which a Czech company transfers its assets to its permanent establishment abroad or changes its tax residency.
The difference between the market value and the tax value of assets shall serve as the corporate tax base. In certain cases, payments of this tax may be split into several instalments over the following five years.
CFC rules in the Czech tax package 2019
Starting from this year, a Czech company is obliged to include the revenues of a foreign company in its tax base if the foreign company is considered to be a controlled entity.
A controlled entity shall mean an entity in the capital of which a Czech company has – whether directly or indirectly – a holding exceeding 50% where, at the same time, the foreign entity does not carry out any significant economic activity, its tax liability abroad being less than half the tax liability this company would have had were it taxed under Czech tax law.
A Czech parent company will be allowed to set off any tax the controlled subsidiary has paid on its income abroad against the parent company’s own tax liability.