GFD’s Information on ATAD
The General Financial Directorate (GFD) issued its Information on Measures Arising from the Implementation of the Anti-Tax Avoidance Directive (ATAD), clarifying certain practical issues associated with the restricted deductibility of excess borrowing costs, exit tax, controlled foreign company taxation and hybrid mismatches.
Below, we summarise answers to questions relating to two areas of the GFD’s information. The remaining areas will be discussed in the next issue of the Tax and Legal Update.
Limited deductibility of excess borrowing costs
According to the published methodology, borrowing costs shall only include foreign exchange differences associated with payables arising as a result of selected borrowing costs as set out by law, i.e. typically FX differences relating to contractual interest. FX differences relating to principal shall not be treated as borrowing costs. If interest becomes part of the principal, the related FX differences will stop being part of the borrowing costs at the moment the interest is included in the principal.
Moreover, the GFD clarifies what derivatives shall be regarded as borrowing costs, when interest contained in a financial charge on a finance lease has the nature of borrowing cost, or how to proceed when assessing whether capitalised interest represents borrowing costs.
The GFD again draws attention to the fact that, under certain conditions, the amounts by which the result of operations for a given taxable period was increased due to the limited deductibility of excess borrowing costs may be deducted from the results of operations for the following periods, but this option does not pass on a legal successor in case of transformations.
Cross-border asset transfers with no change of ownership
The taxation of cross-border asset transfers without a change of ownership (or an exit tax) targets tax avoidance through transfers of assets to jurisdictions with a lower tax burden. Certain cross-border transfers of assets without a change of ownership shall be treated as transfers of such assets by the taxpayers to themselves for consideration that would have been agreed between unrelated parties in normal business relations under the same or similar conditions.
To apply exit tax, it is first necessary to determine whether the assets were transferred with no change of ownership from the Czech Republic to another tax jurisdiction and whether the Czech Republic lost its right to taxation on the subsequent disposals of these assets.
According to the GFD, exit tax applies to all assets of the taxpayer including, inter alia, inventory and assets reported off-balance sheet.
In company transformations, it will be crucial whether the transformation involves a change of ownership. Where a change of ownership of the assets being transferred is involved, exit tax shall not apply. A change of ownership is always involved in transfers of assets by contribution.
This methodology has significant practical implications for a large number of companies. Moreover, the majority of taxpayers will be applying the new rules for the first time. We therefore recommend paying attention to this matter and conscientiously keep the necessary records to be able to prepare correct income tax returns, as such detailed records need not necessarily be part of standard bookkeeping.