Impacts of the amendment to the Income Tax Act
In connection with the implementation of the EU Anti-Tax Avoidance Directive (ATAD), the Czech Income Tax Act will introduce several changes that will have an impact on tax planning and investment structuring:
The essence of the provision will be the obligation to tax the taxpayer’s profits if the property is transferred abroad without change of ownership in the country from which it was transferred. This is a legal fiction when the transfer of the property in question is considered as the sale itself and at the usual price. The residual cost of the asset will be used as a tax expense for fictitious income.
In practice, these are cases of transfer of property between the taxpayer’s country of tax residence and its permanent establishment situated in another country, between two permanent establishments of one taxpayer in different countries, or in the event of a change in tax residence, unless income from the sale is subsequently taxed in the Czech Republic or an exclusion method was used in the contract.
If you are planning to move assets such as licences, securities and other investments, software, customer lists, machines or cars, especially to Germany, the Netherlands, Great Britain, Italy and other countries, it is advisable to make this move in time or to structure it correctly so that the related profits are taxed only upon its real and not its fictitious sale.
The CFC rule will apply to cases where Czech income tax payers have subsidiaries abroad (direct or indirect share of the registered capital is more than 50%, or has at least 50% of the share of the profit) or a permanent establishment in a country where the exemption method is applied, if:
- the foreign entity does not carry out any substantial economic activity;
- the foreign entity is located in a country with a low level of taxation – real tax (not tax rate) is 50% lower than in the Czech Republic.
The Czech controlling company will also include in its tax base a proportion of the selected revenues realised by its foreign subsidiary or permanent establishment, with the possibility of offsetting the tax paid abroad.
These provisions may impact subsidiaries that only receive passive income (such as dividends, interest, royalties) and have their headquarters in, for example, Bulgaria, Ireland, Liechtenstein, Hungary, Cyprus, Malta or other countries. If you are using a similar structure, it is advisable to recheck it.
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