ATAD: Tax Deductibility of Interest

December 4, 2018

Czech tax expert Petr Karpeles would like to draw your attention to the draft of the Income Tax Act amendment which the Ministry of Finance issued in February 2018. This amendment has not yet been approved. The validity of the amendment is still expected as of 1 January 2019; however, this date is prone to change due to the lengthy ratification process.

EU Anti-Tax Avoidance Directive

The major changes still concern mainly the adoption of several areas from the EU Anti-Tax Avoidance Directive (“ATAD”). The ATAD focuses on new deduction limitation rules for borrowing costs, exit taxation, controlled foreign company rules and hybrid mismatches.

As we informed you at the beginning of the year, it still applies that the Czech ATAD implementation introduces two thresholds for tax deductibility of net borrowing costs:

  • 80,000,000 CZK (approx. EUR 3.1 million), or
  • 30 % of EBITDA (earnings before interest, taxes, depreciation and amortization).

Net borrowing costs (i.e. costs exceeding related revenues) which would exceed the higher of the two thresholds will be considered “exceeding borrowing costs” and will be treated as tax non-deductible.

ATAD: Abuse of Rights

The Czech tax advisor would also like to draw your attention to the impact of the forthcoming implementation of the ATAD to the Tax Code. The amendment should come into effect as of 1 January 2019; however, it has not been yet approved.

One of the fundamental principles of tax administration, the so-called Prohibition of Abuse of Rights, will be expressly incorporated in the Tax Code. According to the explanatory memorandum, this addition should not imply changes as against the interpretation of the abuse of rights under the current legislation.

New Obligation to Register Beneficial Owners

A new register of beneficial owners has been introduced in the Czech Republic. Companies and trustees are newly obliged to register information concerning their beneficial owners.

Any individual with a decisive influence in an entity is considered a beneficial owner for the purposes of this registration. The individual may have either direct or indirect influence through other entities.

This means that, to qualify as a beneficial owner of a company, such a person has to fulfil alone or together with other persons acting in consensus one of the following criteria:

  • hold more than 25 % of the voting rights, or
  • own a share in the registered capital of more than 25 %, or
  • be a beneficiary of at least 25 % of profit distribution.

If no such beneficial owner exists or cannot be determined under the above criteria, a member of the statutory body or a representative of a legal entity acting as such a statutory body is considered the beneficial owner.

The deadline for existing companies is 31 December 2018. Until this date, the registration is also free of court fees.

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