Amendment of the income tax act

26. January 2019

On 21 December 2018, a draft bill was approved at the Chamber of Deputies, which contains amendments to the Income Tax Act (hereinafter “ITA”), among other things. The deadline for the amendment to be discussed by the Senate is 15 February 2019. The main theme of the amendment of the income tax act is implementation of the ATAD directive, which aims at fighting tax evasions. The amendment was originally supposed to take effect on 1 January 2019, which is already more than unrealistic. The changes are newly planned to take effect later, in most cases from 1 January 2020. This article contains a list of the most interesting changes in the ITA area from this amendment.

Limitation of deductibility of excessive borrowing costs

The ITA already contains a stipulation relating to deductibility of borrowing costs, in article 25 paragraph 1 letter w), where we can find the rules for so-called thin capitalization, and also in article 25 paragraph 1 letter zl) of ITA, where we can find a limitation of interest costs in case interest rules are connected to the debtor's profit, and article 25 paragraph 1 letter zk) of ITA, which contains rules regarding expenses of parent companies relating to stake holding in subsidiary companies. Article 23e will newly be added to the given stipulations, which describes limitation of deductibility of excessive borrowing costs. The given stipulation will apply for the taxable period beginning after the given amendment has taken effect. In case the act comes into force in the year 2019 and your taxable period is the calendar year, then the stipulation will take effect from 1 January 2020.

Taxation in case of relocation of assets without a change of ownership

Another novelty will, no doubt, be the introduction of the fiction of sale to oneself in the case of relocation of assets abroad without a change of ownership. To put it in a very simplified way, it will be necessary to pay tax from the difference between the market price and the acquisition price (or acquisition value). If they are adopted, these rules can be found in article 23g and 38zg of the ITA. The stipulation is planned to be used for the taxable period from 1 January 2020.

Taxation of a controlled foreign company

Some income from controlled foreign companies will newly be subject to the income tax as well. We will be able to find taxation of controlled companies in article 38fa of the ITA, where it will be stated that income from controlled foreign companies and income from handling assets of these companies will be viewed as income realized by the parent company, even in case the foreign company performs no significant economic activity, or in case the corporate income tax in the country of the foreign controlled company (or established permanent premises) is lower than one half of the income tax in the Czech Republic, which would have been assessed for it, were it a tax resident of the Czech Republic. This stipulation will apply for the taxable period beginning after this act has taken effect, i.e. if the taxable period is the calendar year, this stipulation will probably be effective from 1 January 2020.

Hybrid mismatches

After the amendment is approved, we will find a relatively complicated stipulation in article 23h of the ITA under the name Resolution of Effects of Different Legal Qualification. But what are we to imagine under the term hybrid mismatch? The rules of the individual tax systems are applied differently within the European Union. Legal qualification of entities, financial tools or commercial permanent establishments may also vary in the European Union. As a result of these differences, a certain tax advantage may be gained, for example by double lowering of tax base for one expense. In case of the existence of a hybrid mismatch (the situations, when hybrid mismatches occur will be described in the ITA), it will be necessary to lower the tax base at the taxpayer, at whom the tax base is being lowered by this expense. The given rules will apply to affiliated persons defines in article 23h paragraph 5 of ITA, with a limit for assessment of the share in registered capital, voting rights, or profit, which must reach 50% at minimum. In this case, too, application of the stipulation is expected for the taxable period from 1 January 2020.

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