Changes to 2019 tax package: corporate income tax
The proposed amendment to the Income Tax Act has passed through external comments and is now available in the government’s public electronic library, with some fundamental changes to its wording compared with the previous version.
The present wording to be discussed by the government no longer contains the abolishment of the ‘super-gross wage’ and the related change in the personal income tax rate. Both the super-gross wage and the flat 15% personal income tax rate are thus likely to remain in place.
The proposed amendment to the Income Tax Act mainly contains provisions implementing the EU Anti-Tax Avoidance Directive (ATAD). The following has been proposed:
- Limiting the deductibility of exceeding borrowing costs in transactions with both related and unrelated parties above the set limit. The limit is the higher of CZK 80 million or 30% of earnings before interest, tax, depreciation and amortisation (EBITDA). Borrowing costs will include, apart from interest on loans, also related FX differences and interest contained in the acquisition cost of assets or finance costs embedded in financial leases. The new rule will apply even to borrowing costs arising from financial instruments entered into before the effective date of the amendment (yet, it shall not apply e.g. to interest contained in the acquisition cost of assets put into use before 17 June 2016). Financial institutions such as banks or insurance companies will be exempt from the new rules. The rules limiting the deductibility of borrowing costs due to thin capitalisation will remain in force for all taxpayers.
- CFC rules, i.e. the taxation of income of controlled foreign companies by their Czech controlling company if the foreign companies are not engaged in any substantial economic activity or if their tax liability abroad is lower than one half of the tax liability that would have been paid by a Czech company on such activity.
- Exit taxation upon the relocation of assets without a change of ownership (e.g., the rule will apply when Czech tax residents transfer assets to their foreign permanent establishments or when Czech companies change their tax domicile). The transfer of the assets will then be taxed in the Czech Republic similarly as if it were a sale of assets.
- Taxation of gains or losses on equity securities voluntarily classified as measured at fair value through equity (IFRS 9), by adjusting the taxpayer’s tax base.
- A new manner of taxation of revenues from equity certificates / instruments measured at fair value, again by adjusting the taxpayer’s tax base.
- Rules neutralising 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.
Most of the above changes are planned to be effective for taxation periods starting on 1 January 2019; exit tax and hybrid mismatch rules are to be effective for taxation periods starting on 1 January 2020. Since the proposed changes follow from the EU Directive that has to be implemented into Czech law by 31 December 2018, we expect that the Chamber of Deputies will make efforts to meet the proposed deadlines.