Taxation by the removal the property between the permanent establishment and the founder (Exit Taxation)
In the last newsletter, we drew attention to the proposal of the amendment of the income tax law. This amendment not only touches on the tax deductibility of tax-efficient borrowing costs, but also changes the way of taxation of the permanent establishments in an important way.
The sense of the proposed amendment is the taxation of the registration reassignment of any property and transferring the business activities between the permanent establishment and its founder from the Czech Republic into foreign countries. There will be no change of ownership and even no physical motion in the case of intangible assets. The new institute of taxation is called Exit Taxation because it will touch on the transfer of property and activities leading to the cessation of a permanent establishment.
Transferring property to another tax jurisdiction will be viewed as selling to itself. The selling price will be determined as it would be negotiated between the connected persons in common business relationships, so it means on the level of the market price. It will be possible to reduce the price by remaining tax value of the removed property.
It is important to realise that the floating capital will be taxed. The floating capital are the stocks of material. The registration of the transfer of a property abroad will be the moment when the removal of a property should be taxed.
A similar approach will be applied in the case of property transferred into the Czech Republic. The amortisations into the amount of the fictive selling price, the permanent establishment could apply as a taxable expense, under the condition that the permanent establishment registers and will be used for obtaining income in the Czech Republic.
The new legal adjustment should become effective from the 1st of January 2020 at the latest. It brings new obligations to the foreign founders of the permanent establishments in the area of tax evidence as well as in the area of transfer pricing. We recommend to prove the inventory of the registration of the property located in the Czech Republic on time and consider processing the transfer pricing documentation.
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