ATAD issues in corporate income tax returns
When compiling a tax return for 2020, you must remember four new provisions that were implemented into the Czech tax legislation already in 2019 at the initiative of the Organisation for Economic Cooperation and Development. Aimed at preventing the erosion of the tax base and the transfer of profits, the provisions were created in accordance with the EU Council Directive (ATAD) and set rules for:
- limitation of the eligibility of excessive borrowing costs;
- taxation on the transfer of property without change of ownership;
- taxation of a controlled foreign company;
- addressing the consequences of different legal qualifications.
In line with the implementation of the ATAD Directive, new lines 63 and 163 have been added to the model of the tax return for 2020. What's the difference? Under the conditions stipulated by law, the economic result can be reduced by these amounts in the following periods.
Frequent ambiguities in the interpretation of the new provisions have led the Directorate-General for Finance to issue information on their application. Some of the Directorate-General for Finance's replies concern situations that may have realistically occurred in 2020. And it is these situations that we would like to draw your attention to.
The reduction of excessive borrowing costs will apply to large investment groups for which the set cost limits of CZK 80,000,000 (or 30% EDITDA) may have been exceeded. You may recall that when quantifying excessive borrowing costs, the total amount should also include exchange rate losses related to contractual interest, as well as interest applied in 2020 in the context of tax depreciation of tangible assets as a tax-effective cost, provided that, in accordance with accounting regulations, they became part of the valuation of assets put into use after 17 June 2016.
Taxation of transfers of assets without change of ownership applies to foreign permanent establishments established by Czech tax residents, permanent establishments of tax non-residents located in the Czech Republic, and situations where the tax residency was transferred from the Czech Republic abroad in 2020. The provision applies to events that occurred from 1 January 2020, while inventories and low-value tangible assets are also regarded as assets. Therefore, if in 2020, in connection with the cross-border transfer of assets, a permanent establishment or its founder registered the transferred assets in another item of the accounting of assets, we remind you to regard such a situation as if the transfer of assets took place at market value. Then it is necessary to examine whether the Czech Republic loses the right to tax income from the subsequent transfer for a consideration. If so, the result of the transaction must be recorded on a separate line of the tax return. We recommend having functional and risk analyses prepared for these situations, which are a necessary part of the transfer pricing documentation.
Taxation of controlled foreign companies applies to companies that have established a subsidiary or a permanent establishment in a jurisdiction with a tax liability half as much as would be imposed in the Czech Republic. Please note that the income of the controlled company is deemed to be the income of the controlling company. The expenses of the controlled company must be assessed in accordance with Czech law for the purposes of determining the tax base.
The application of the new provisions may not always be completely clear when drawing up the tax return. We will therefore continue to inform you in more detail about further developments in this area.