On 27 March 2019, the Czech Republic released the Law of 12 March 2019, which includes the introduction of measures to comply with the EU Anti-Tax Avoidance Directive (ATAD). The law usually enters into force on 1 April 2019. However, the taxation rules do not apply to the transfer of assets without change of ownership in the tax periods started before 1 January 2020 and the hybrid mismatch provisions will not apply for tax periods beginning before 1 January 2020.

Restriction on interest deduction

According to law, the deduction of excess borrowing cost is limited to 30% of EBITDA or CZK 80 million, whichever is higher. Loans concluded before 17 June 2016 would be grandfathered.  Exceeding the borrowing costs that exceed the limits may be carried forward indefinitely each year with the same limit, but may not be passed to a legal successor. The law does not repeal the existing thin capitalization rules (4:1 debt-equity ratio, 6:1 for banks and insurance companies).

Exit taxation rules

The law includes rules on exit taxation, where the transfer of assets should be taxed without a change of ownership. This rule applies when Czech companies transfer assets to their foreign permanent establishments or vice versa or Czech companies change their tax residence. The transfer of assets is then taxed in the Czech Republic in a manner similar to the sale of assets. This means that the tax base is the difference between the market value of the assets and their tax base. In some cases, the tax can be spread over the next five years.

Hybrid Mismatch Rules

Hybrid mismatch rules are introduced in line with ATAD for hybrid mismatch transactions between connected persons that involve double deduction outcomes or deduction without inclusion outcomes. Under this, the hybrid mismatch will be addressed by either form of a ‘double deduction’, when one amount (for instance a deductible expense) reduces the tax base in more than one jurisdiction, or the form of a ‘deduction without inclusion’ of the related income in the tax base, when the tax base is reduced in one jurisdiction without the same amount (income) being included in the tax base in another jurisdiction.