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).
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.
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
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