Czech Republic: ATAD implementation, deductibility of excess borrowing costs and exit tax

Czech Republic: ATAD implementation

The General Financial Directorate (GFD) issued guidance about issues resulting from the implementation of the EU Anti-Tax Avoidance Directive (ATAD).

1000

Related content

The guidance clarifies certain practical issues associated with the restricted deductibility of excess borrowing costs and the exit tax, among other items.

Limited deductibility of excess borrowing costs

According to the guidance, borrowing costs will only include foreign exchange differences associated with payables arising as a result of selected borrowing costs (i.e., typically foreign exchange differences relating to contractual interest). Foreign exchange differences relating to principal will not be treated as borrowing costs. If interest becomes part of the principal, the related foreign exchange differences will stop being part of the borrowing costs at the moment the interest is included in the principal.

Moreover, the GFD also addressed the treatment of derivatives as borrowing costs and how to proceed when assessing whether capitalised interest represents borrowing costs. Under certain conditions, the amount increased due to the limited deductibility of excess borrowing costs may be deducted from the results of operations for following periods, but this treatment does not pass on a legal successor.

Cross-border asset transfers with no change of ownership

The taxation of cross-border asset transfers without a change of ownership (or an exit tax) targets tax avoidance through transfers of assets to jurisdictions with a lower tax burden. Certain cross-border transfers of assets without a change of ownership will be treated as transfers of such assets by the taxpayers to themselves for consideration that would have been agreed between unrelated parties in normal business relations under the same or similar conditions.

To apply exit tax, it is first necessary to determine whether the assets were transferred with no change of ownership from the Czech Republic to another tax jurisdiction and whether the Czech Republic lost its right to taxation on the subsequent disposals of these assets. According to the GFD, an exit tax applies to all assets of the taxpayer including inventory and assets reported off-balance sheet. In company transformations, it will be crucial to determine whether the transformation involves a change of ownership. When a change of ownership of the assets being transferred is involved, exit tax will not apply. A change of ownership is always involved in transfers of assets by contribution.


KPMG observation

This guidance may have practical implications for a large number of companies, and many taxpayers will be applying the new rules for the first time. Therefore, adequate recordkeeping is critical to prepare correct income tax returns.
 

Read a March 2021 report prepared by the KPMG member firm in the Czech Republic

The KPMG name and logo are trademarks used under license by the independent member firms of the KPMG global organization. KPMG International Limited is a private English company limited by guarantee and does not provide services to clients. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at: + 1 202 533 4366, 1801 K Street NW, Washington, DC 20006.

Connect with us

 

Want to do business with KPMG?

 

loading image Request for proposal