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.

 Click here if you want to read the full article about further changes of the Czech tax package 2019 on the homepage of WTS Alfery, the exclusive representative for the Czech Republic of WTS Global.

A Final version of the Czech tax package 2019 approved bejegyzés először WTS Klient Hungary | tax | accounting | payroll | advisory | HR services | digital solutions | state aid-én jelent meg.

NAV, ÁFA (VAT), EKAER: the Hungarian hits

Nowadays, reading and understanding a letter written by a tax adviser can be a challenge in itself, considering the special terminology and the rapidly changing environment of international taxation. Clients also expect us to provide brief, concise and comprehensible articles. This is not helped by EU and OECD tax bodies, since incredible amounts of material have been prepared during the past 3-4 years to prevent tax fraud and aggressive tax planning, and of course, new terminology means new abbreviations.

We can happily add Hungarian specialities to this. Investors coming to Hungary are not familiar with many Hungarian abbreviations, but as they quickly learn about Hungarian tax regulations they know that if they hear 27%, that is surely the world record holder of value added tax in Hungary, the VAT rate. They also know that if they receive a letter from the NAV (National Tax and Customs Administration) it rarely means good news. Those who know the abbreviation EKAER (Electronic Public Road Trade Control System) understand that tax administration in Hungary is not negligible by any means (and although there is a common interest to fight against the black economy, unfortunately the extra administration involved definitely increases costs).

BEPS, ATAD, AEOI and other newcomers from abroad

Having learned the most common Hungarian abbreviations, let’s take a look at the terminology created by the EU and OECD to please taxpayers. There is no need for further explanation in the case of BEPS (base erosion and profit shifting), we already know this includes actions related to direct taxes and against tax evasion. The European equivalent of the Action Plan is ATAD I and ATAD II (the anti-tax avoidance directives). We have already written about MLIs (multilateral instrument). This instrument provides a practical and effective “facelift” solution for bilateral agreements reached between countries.

We already know the legal framework of the fight against tax evasion, but what is even more important is how tax authorities will be able to collect information about transactions in which more than one country is involved. We should never think that the NAV will not gather information about incomes arriving from abroad. There are a number of tools facilitating the automatic exchange of information on bank accounts. AEOI (automatic exchange of information) and CRS (common reporting standards) supplemented by FATCA (foreign account tax compliance) regulations of the United States of America provide enough munition for tax inspectors. It is perfectly conceivable that we might receive a reminder letter from the Hungarian tax authority about declaring the income sitting on our foreign bank account.

DAC: abbreviated directives

EU Member States also exchange information about transactions previously made bulletproof by conditional agreements. This is all the result of Directive DAC3, and supplemented by CbCR (country by country reporting), which is based on the BEPS Action Plan and Directive DAC4, as well as the obligation to provide information about beneficial owners as stated in Directive DAC5, we can happily say that the lives of taxpayers will be an open book in the case of companies as well now.

Based on our short and hopefully light summary, in keeping with the summer season, we can now translate the title: The BEPS Action Plan supplemented and supported by EU regulations against tax evasion spell good news for the Hungarian tax authority too. The question is how much fun taxpayers will have due to the increasing administrative burden, and whether they will be able to follow the turbulent changes in legislation?

A BEPS = ATAD + NAV – LOL? letters against tax fraud bejegyzés először WTS Klient Hungary | tax | accounting | payroll | advisory | HR services | digital solutions | state aid-én jelent meg.