Application of exchange rates in the light of a judgment of the Supreme Administrative Court
There are many investment opportunities at present, which are open not only for a selected group of persons, but basically for everyone already, in the world of new investment applications that enable purchase and sale of securities without fees, transactions based on so-called “fractional shares”, investments in commodities and many others. All of these services are provided mainly at the US and the European Mercantile Exchange, so all transactions are in foreign currencies and the question of their conversion to Czech currency for tax purposes needs to be resolved.
- Act no. 563/1991 Coll., on accounting (hereinafter the “AA”)
- Act no. 586/1992 Coll. on the income tax act (hereinafter the “ITA”)
Use of exchange rates in conversion to Czech currency
Taxpayers are obliged to convert all foreign currency income when compiling tax return into Czech korunas and to state these converted sums in the tax declaration. Significant areas for foreign currency conversion include for example purchase and sale of securities, income from bonds held until maturity, dividends from foreign companies and other financial instruments. In case operations occur in the course of several taxable periods, it is also necessary to handle the question as to what rate is to be used for the individual operations.
According to article 38 paragraph 1 of ITA, for tax purposes it is necessary to use the foreign currency market rate announced by the Czech National Bank. If the taxpayer does not keep accounts, a unified rate announced by a guideline of the General Financial Directorate is used. In practice, this rate is applied to transactions, which took place in foreign currencies within the given taxable period. The stipulation does not handle the situations, when purchase and sale take place in different taxable periods.
Two approaches to foreign currency conversion emerged in the past. The first approach consisted in using a unified rate for the given year, for all operations relating to income. If, for example, a security was bought in the year “x-1” and then sold in year “x”, the exchange rate of year “x” was used for the acquisition price as well as for the selling price. The second approach consisted in foreign currency conversion according to the rate at the time, when the operation took place, and thus, in case a security was bought in the year “x-1” and sold in year “x”, the exchange rate from the year “x-1” was used for the acquisition price and the rate announced for the year “x” for the selling price.
Case Law – Supreme Administrative Court – unifying opinion
At the end of the year 2019, a judgment of the SAC was issued in the matter of using a unified exchange rate in case of sale of securities acquired in the previous taxable period. According to the SAC, in this situation, the version of the act under article 10 paragraph 5 of the ITA is fundamental here: “For income, the expense is the price, for which the taxpayer provable acquired the object”, based on which one should proceed further during conversion to Czech currency. Further support in the act is in article 24 paragraph 6 of the AA, where conversion to Czech currency is “as of the moment of valuation”, which further derives from article 24 paragraph 2 letter a) of the AA “as of the moment of the accounting case”.
Based on the above-mentioned argumentation, the SACS decided that the conversion rate depends on the period, in which a security was acquired, for determining the acquisition price, and for sale, the exchange rate for the period, in which sale took place, will be used. Similar logic should also be used for transaction expenses, which usually relate to purchase and sale of securities and are tax-eligible costs. According to the case law, the second approach has been confirmed.