Proposed changes to the taxation of legal entities from 2019

Regarding corporate income tax, the prepared governmental amendment includes namely the implementation of rules which follow from the EU Anti-tax Avoidance Directive (ATAD).

Reducing the deductibility of excessive borrowing costs

Financial expenses related to received loans, credits, and also leasing and derivatives that exceed possible associated financial revenues will be tax deductible up to the amount of CZK 80 million or up to 30 per cent of the tax revenue before deducting interest, taxation, depreciation and amortisation (EBITDA), if the latter amount is higher.

The borrowing costs will also include exchange rate differences and interest which is a part of the tax value of long-term asset or financial leasing (relevant to assets put in use or allocated for use after 17 June 2016).

Unrecognised borrowing costs should be possible to claim in a future tax period if the amount of deductibility is not exceeded in those periods.

The rule should be applicable to almost all entities with the exception of selected financial institutions and entities outside the group. The limitation of deductibility also applies to financial costs related to a contractual obligation that arose before the amendment takes effect.

The current rule of thin capitalisation that limits the deductibility of the financial costs of financing from related persons stays unchanged.

Taxation of selected income of a foreign controlled company (the CFC rule)

Selected income of a foreign controlled company (e.g. income from licence fees, profit shares, provided financing, sale of business shares) will be part of the tax base of the Czech controlling company that holds directly or indirectly more than 50 per cent of the share of the controlled company or that participates in more than half of its profit or voting rights. A permanent establishment of a Czech company located in a country with which the Czech Republic concluded a double taxation treaty and according to which income is excluded from double taxation using the exemption method will also be considered a controlled company.

The rule will be applied if the foreign company does not carry out substantial business activity and its taxation abroad is lower than half of its potential tax obligation in the Czech Republic.

Potential tax losses of the foreign controlled company will not be deductible from the tax base of the Czech company but can be deductible from taxable future profit of the controlled company for the subsequent three years.

Introducing exit taxation - effective from 2020

The subject matter of taxation should be the transfer of assets owned by a legal entity from the Czech Republic to abroad without change of ownership of the given assets, i.e. the matter in question is a transfer of assets to a permanent establishment located abroad or a transfer of tax residency abroad.

The difference between the market value and the tax value of the given assets will be taxed. The amendment assumes that the tax could be paid in instalments for a period of up to five years.

Solution of hybrid discrepancies - effective from 2020

The provision should prevent situations arising as a result of the various intra-state rules of individual countries (such as the legal classification of entities, financial instruments, definitions of a permanent establishment) where entities within a group can get tax advantages such as double non-taxation of income or double reduction of the tax base using a deduction of the same expenses. The rules should concern hybrid discrepancies within the member states and also towards third countries.

Revocation of low taxation for selected investment funds

The government approved a proposal for the Senate's amendment to the Income Tax Act. According to the amendment, the advantage of reduced taxation using the 5 per cent rate should not be applicable by investment funds that fulfil only the condition that their shares are accepted for trading on the European regulated market. Such funds should be taxed at the same rate as other legal entities, i.e. 19 per cent. The intention is to prevent using the investment funds only for the purpose of tax optimisation of a fund owned by a few owners where the shares are not traded.