Information on ATAD – continued
In the March issue of our Tax and Legal Update, we commented on the General Financial Directorate’s Information on Measures Arising from the Implementation of the Anti-Tax Avoidance Directive (ATAD). This time we summarise information on the remaining areas, such as the taxation of controlled foreign companies (CFC rules) and addressing the consequences of different legal classifications (hybrid mismatches).
Taxation of controlled foreign companies (CFC rules)
Tax obligations are sometimes avoided by the establishment of subsidiaries or permanent establishments in jurisdictions with low or zero taxation. The rules for the taxation of controlled foreign companies (CFC rules) have been designed to tackle this type of business structuring. If a relationship meets the statutory conditions of a controlled and a controlling company, the controlled company’s activities are considered as being performed in the CR and therefore taxed in our territory.
The GFD’s information, inter alia, describes in more detail relevant procedures and methodology, and clarifies the calculation of half of the tax amount that would be assessed to the controlled foreign company if it were a Czech tax resident. The GFD also clarifies the controlled foreign company’s taxable period.
Addressing the consequences of different legal classifications (hybrid mismatches)
Hybrid mismatches, or addressing the consequences of different legal classifications pursuant to the Income Tax Act, are generally situations when an identical legal fact (especially an entity or a financial instrument) is treated differently in two or more jurisdictions as a result of differences in legal regulations, which may result in a double deduction of expenses or in a deduction of expenses in one jurisdiction without a taxation of relevant income in the other jurisdiction. In such cases, the result of operations of associated companies as defined in the Income Tax Act shall be increased.
The GFD’s information specifies hybrid mismatches to which the Income Tax Act applies, and clarifies the meaning of terms such as ‘different legal classification of a legal fact’ and ‘expense or another item decreasing the result of operations or the difference between income and expense’. The methodology also provides typical examples of double deductions or deductions without a corresponding inclusion or how an imported mismatch arrangement arises (including a specific illustrative example). The GFD also confirms that the rules against hybrid mismatches shall not apply to situations where a Czech tax resident pays out interest abroad and the foreign recipient’s income is exempt from tax, but in both states the payment is considered interest (i.e. irrespective of whether the interest expense is tax deductible in one state and whether the interest income is liable to tax in the other state).