Chamber of deputies passes amendment important in company conversions

At present, transfers of the registered offices of legal entities (including corporations) to and from non-EU countries are governed by a brief regulation in the Civil Code, with the rules stipulated in the Company Conversion Act not applying to these transactions at all. The amendment to the Company Conversion Act provides greater legal certainty and a more comprehensive framework for companies that decide to move their registered office to the Czech Republic from a non-EU country, or the other way around.

A transfer of the registered office is usually accompanied by a change of tax residence, although this may not always be the case. And vice versa, an entity’s tax residence may change even without it relocating its registered office. The legal regulation now passed thus also includes an amendment to the Income Tax Act setting rules for tax residence transfers:

• A taxpayer who has changed their tax residence to abroad shall file a tax return for the period preceding the change of their tax residence. If they continue to have income from sources in the Czech Republic after the transfer of tax residence (e.g., because of the existence of a permanent establishment in the Czech Republic), they shall file their subsequent tax return for the period from the transfer of their tax residence to the end of their taxable period.
• In their tax return, the taxpayer shall claim a half of the depreciation charge for tangible assets for the period up to the transfer of their tax residence abroad. If the assets remain in the Czech Republic even after the change of their tax residence, the taxpayer may claim the second half of the (tax-deductible) depreciation in the tax return for the period from the transfer to the end of the taxable period.
• If, within a tax residence transfer into the Czech Republic, tangible assets are transferred that are depreciated (for tax purposes) abroad, these assets will be depreciated in the same way as a non-monetary contribution from abroad.

The second major change – the introduction of a demerger by separation as a new form of company conversion – allows companies to separate parts of their assets and liabilities and contribute them into newly created or existing entities. Unlike in a spin-off where the members/shareholders of the (demerging) company from whom the assets and liabilities are being transferred become the members/shareholders of the (receiving) company to which the assets and liabilities are transferred, in a separation, the (demerging) company from whom the assets are being separated becomes a member/shareholder of the receiving company. In economic terms, this process can be viewed as a specific type of contribution, whether to one or more newly created companies, or to an existing company or companies (separation with merger).

Unlike for the transfer of the registered office, there is no specific provision regulating corporate income tax issues of demergers by separation. Thus, their tax treatment must be deduced from the current income tax law.

Apart from expanding the possibilities of transferring registered offices and introducing a new form of company conversion, the amendment implements EU directives and introduces changes required by practice. These include the clarification of certain accounting rules, the abolition of the appointment of an expert by the court, and changes to publication obligations, creditor protection rights, and formalities in cross-border conversions.

The act will now be discussed by the senate and if subsequently signed by the president, will enter into force on the thirtieth day after its promulgation in the Collection of Laws.