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Czech Republic: Thin cap, CFC rules, exit tax, hybrid mismatch rules enacted

Czech Republic: Thin cap, CFC rules, exit tax

Changes to corporate and individual income tax are reflected in measures that were enacted in the 2019 tax package and generally have an effective date of 1 April 2019.


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Corporate income tax measures

  • There is a general requirement to report payments being made abroad and subject to withholding tax, even if these payments are exempt from tax or not subject to tax because of provisions of an applicable income tax treaty. An exception applies for certain payments not exceeding CZK 100,000 a month.
  • The new law transposes and implements into Czech tax law the EU Anti-Tax Avoidance Directive (ATAD) including:
    • Thin capitalisation and limits on interest deductions—Measures limiting the deductibility of borrowing costs from transactions with related and unrelated parties that exceed a threshold of the greater of: (1) 30% of earnings before interest, tax, depreciation and amortisation (EBITDA), or (2) CZK 80 billion in a tax period. This limit also applies to financial instruments that were subject to contracts entered into before 1 April 2019. The existing rules limiting the deductibility of borrowing costs under the thin capitalisation rules continue to apply for all taxpayers.
    • Controlled foreign corporation (CFC) rules—There are new rules that apply with regard to the taxation of income of a foreign company controlled by the Czech controlling company when: (1) the foreign company does not conduct any substantial economic activity; and (2) its tax liability abroad is less than one half of the tax liability that it would have had if it were taxed under Czech tax laws.
    • Exit taxation—The new law imposes an “exit tax” on the relocation of assets without a change of ownership (e.g., when a Czech tax resident transfers assets to its foreign permanent establishment or when a Czech tax resident changes its tax residence).
    • Equity taxation—There are measures concerning the taxation of profits or the deduction of losses on equity securities as well as measures concerning equity certificates.
    • Hybrid mismatch—The law includes rules that aim to neutralise the effects of hybrid mismatch arrangements such as a “double deduction” when one amount reduces the tax base in more than one jurisdiction, or a “deduction without inclusion” when the tax base is reduced in one jurisdiction without the same amount being included in the tax base in another jurisdiction.

Changes to individual income tax

  • Expense deduction limit increase—For entrepreneurs, the limits of income decisive for claiming expenses as a percentage of income have been increased. The new limits will be effective for the 2019 tax period. 
  • Reporting payments made abroad—There is a new requirement for individuals—as well as legal entities—to report payments made abroad.

Read an April 2019 report prepared by the KPMG member firm in the Czech Republic

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