Lze při aplikaci nízké kapitalizace využít nezdanění souvisejících příjmů?

Is it possible to use the non-taxation of the related income when applying thin capitalisation?

In cases where companies have non-tax deductible interest expenses and at the same time they receive interest income, we quite often encounter discussions in practice regarding the use of Section 23(4)(e) of the Income Taxes Act (ITA). This allows for non-taxation of interest income up to the amount of "directly related" non-deductible expenses.

A recent decision of the Supreme Administrative Court (10 Afs 221/2022) deals with this issue.

What was the issue in simple terms?

• The company issued CZK 70m worth of so called crown bonds with an interest rate of 8% p.a., which were subscribed by its shareholder.
• The shareholder subsequently assigned interest-free loans in the same amount to the company, which he himself granted to related foreign borrowers.
• The claim against the shareholder on the subscribed bonds and the obligation to pay for the claims assigned were set off.
• The company additionally agreed with the foreign debtors to an interest rate of 8% per annum.
• The interest expense did not meet the thin capitalisation test and was therefore not tax deductible.
• The company argued that the interest income was directly related to non-deductible interest expense and was therefore non-taxable under section 23(4)(e) of the ITA.
• The tax administrator rejected this approach, which was subsequently confirmed by the Regional Court and the Supreme Administrative Court.
• Although it can be argued that the bonds issued in the case at hand were in fact used to finance foreign loans, the courts considered this link (i.e. through set-off of mutual claims) insufficient.
• The taxpayer's position was also weakened by the fact that the interest on the foreign borrowings was agreed only after a certain time lag.

What can be learned from this? The application of Section 23(4)(e) of the ITA should always be carefully considered, properly implemented and appropriate documentation prepared in a timely manner - we will be happy to assist you with this.

If you have any questions, please contact the author of this article or the EY team you are working with.

Author:

David Kužela