Exit tax – new criterion for cross-border restructuring
Effective from the taxable period started 1 January 2020, an amendment to the Income Tax Act introduced a tax on the relocation of assets without a change of ownership, i.e. exit tax. What cross-border transactions are subject to the exit taxation?
Council Directive (EU) 2016/1164, laying down rules against tax avoidance practices that directly affect the functioning of the internal market, imposed the obligation on member states to implement in their national legislations certain rules aiming to prevent the tax base erosion within the internal market and shifting of profits outside the member states in which profits have been generated. One of the measures aiming to do so is the exit tax. Consequently, a new provision regulating the taxation upon the relocation of assets without a change of ownership was added to the Income Tax Act in the form of Section 23(g).
This provision aims to prevent tax avoidance through the transfer of assets from the Czech Republic to states with a lower tax burden. The amendment specifies transactions that will be subject to exit tax as transactions in which assets are relocated from the Czech Republic abroad without a change of ownership whereby the Czech Republic loses the right to tax the proceeds from the future sale of these assets. This means that, for income tax purposes, such transactions shall be deemed to be a transfer for consideration of assets to oneself at a price that would have been agreed between independent parties within regular business relationships under the same or similar conditions.
The transactions include transfers of assets from headquarters in the CR to a permanent establishment abroad, or transfers of tax residence to a foreign country. An explanatory report to this amendment clarifies that company transformations or contributions of assets into corporations involving a change of ownership should not be subject to exit tax.
According to the explanatory report, property and assets subject to the regime defined in Section 23(g) shall be any resources a business uses for its activity; consequently, relocations of any assets, both non-current and current, shall be subject to this tax.
The practical application of Section 23(g) causes much uncertainty. It is therefore strongly advisable to perform a thorough analysis of the relevant tax aspects when planning cross-border restructuring or other transactions.