Answer ... General and specific tax anti-avoidance rules are set out in the Income Tax Act and enable the Czech tax authorities to deny tax concessions, cost deductions or other benefits to sham, fake or pretend transactions, or in the case of circumvention or abuse of the tax law.
The anti-avoidance rules are both statutory rules and interpretations and applications based on case law.
Answer ... The Tax Procedure Code stipulates the ‘substance over form’ principle of tax procedures, and decisions of the Supreme Administrative Court have established a well-founded general anti-tax avoidance approach that is fairly consistently applied by the courts.
A pending amendment to the Tax Procedure Code will introduce a new, fairly broad general anti-abuse rule that concerns all taxes, not just corporate tax. The amendment stipulates that for the purposes of tax administration, legal deeds and other circumstances whose prevailing purpose is obtaining a tax advantage that defeats the objective and purpose of the applicable tax law shall be ignored.
Answer ... Several specific provisions are in place, such as thin capitalisation rules, the principal purpose test for mergers and other company reorganisations, and limitations on tax losses.
The objective of the thin capitalisation rules set out in the Income Tax Act is to limit interest cost deductions in relation to debt financing provided by a ‘related party’, as defined in the Income Tax Act. They imply that interest and some other financial costs relating to financial instruments granted by related parties are disregarded in calculating the corporate income tax base once qualified debt exceed four times the equity.
The prices of assets, goods and services sold to related parties must be set at arm’s length. The parties to the transaction as well the tax authorities shall make relevant adjustments in calculating the corporate income tax base.
A tax loss may be carried forward for a maximum of five consecutive tax periods. Change of control rules and rules on mergers and demergers imply certain limitations in this regard.
The Income Tax Act currently in force contains no rules concerning controlled foreign companies or anti-hybrid rules. However, these shall be introduced in the act through transposition of the EU Anti-Tax Avoidance Directive, with effect from 2020.
Answer ... The ruling procedures that may be initiated at a taxpayer’s request include:
- assessments of research and development expenditure;
- preferential deductions;
- advance transfer pricing rulings;
- calculation of the tax base of a permanent establishment; and
- assessment of whether some changes to assets represent so-called ‘technical improvements’ which will have an impact on tax depreciation.
Answer ... The tax authorities have incorporated the Organisation for Economic Co-operation and Development (OECD) standards into local guidelines and tax administrative practices, and generally follow the OECD model guidelines quite closely, although in some areas the day-to-day practice may be more lenient. Transfer pricing documentation is not obligatory; however, the taxpayer bears the burden of proof in accordance with the general tax administration rules in any case and proper transfer pricing documentation prepared in line with the OECD guidelines is considered beneficial for the taxpayer.
The most significant transfer pricing cases concern fees for management, technical and manufacturing services. Tax inspections also focus on the assessment and documentation of revenue and cost allocation to permanent establishments.
Answer ... The key statutory limitation period concerns tax assessments, which must occur within three years of the statutory deadline for filing the corporate income tax return. However, the limitation period may be extended for 12 months by law in various circumstances, such as for opening a tax inspection before the tax is statute barred or filing a supplementary corporate income tax return in the last 12 months before the end of the statutory limitation period.
If a corporation carries forward tax losses, the three-year statutory limitation period is extended by up to 10 years. If the corporation receives investment tax incentives, the limitation period is extended up to 13 years.