Czech Republic: new rules on deductibility of interest expenses
There has been a substantial softening in the rules governing the tax deductibility of interest expenses, including the thin capitalisation rules.
From April 2009, the thin capitalisation rule for related party loans returns the limit on debt/equity ratios to 4:1 (6:1 for banks and insurers). Since 2008, they had been 2:1 and 3:1 respectively.
This change will have a significant effect on tax-efficient structures used in corporate acquisitions and holdings. In particular, it will encourage companies to reduce equity holdings and increase their shareholder’s debt in order to achieve the most tax efficient debt/equity ratio. A good way to do this would be to repay existing equity contributions made outside the registered capital.
Three other rules have been removed, affecting the tax deductibility of interest and other financial costs (eg banking and other fees) incurred in respect of loans:
- the thin capitalisation rule applicable to all loans (both related and non-related-party loans)
- the rule treating financial costs on any subordinated debt (both general and individual subordination) as non-tax deductible
- the rule automatically treating financial costs above a certain level of interest rate as non-tax deductible
There is still no deductibility for financial costs incurred on loans whose interest or other revenue is conditional on profits generated by the debtor.
Loan agreements concluded after 2007 will be governed by new rules for the 2008 tax period onwards.
Loan agreements concluded by the end of 2007 will be governed by new rules for the 2010 tax period onwards and by December 2007 rules for the 2008 and 2009 tax periods (unless their terms as to loan amount or interest rate have been amended since the start of 2008, in which case the new rules will apply to the 2008 and 2009 tax periods too).
Law:
Act no. 586/1992 Coll., as amended, Income Tax Act
Act no. 2/2009 Coll., amendment of the Income Tax Act
Act no. 87/2009, amendment of the VAT Act and other acts (including the Income Tax Act)
