30. 11. 2023
Changes in the taxation of exchange rate differences
The government's consolidation package, which is to come into force on 1 January 2024, includes changes to the taxation of exchange rate differences. The current wording treats unrealised exchange rate differences as tax deductible expenses and therefore taxable income. Until now, even according to the tax administrator's interpretation, exchange rate differences have always been included in the tax base, even though they are not tax deductible expenses.
The proposed consolidation package introduces the possibility of entering the so-called exchange rate exclusion regime. This option will be entirely voluntary and the taxpayer will have to opt in to the scheme within 3 months of the start of the tax year. After timely and correct registration in the exchange rate exclusion scheme, it will be possible to exclude unrealised exchange rate differences from the tax base.
As this is a voluntary scheme, it will be possible to opt out either voluntarily or involuntarily. For voluntary withdrawal, an application will again be required. Once the taxpayer has done so, he will cease to be a taxpayer in the exchange difference exclusion scheme on the expiry of the second tax year following the tax year in which the application was made.
To give an example: 'A company decides in 2025 to opt out of the exchange difference exclusion. Its tax year is the calendar year. The company ceases to be a participant in the scheme only from 1 January 2028 (i.e. for the tax year 2028)."
In the case of an involuntary exit from the scheme, this includes situations where the taxpayer enters into liquidation, at the time of a decision on the taxpayer's bankruptcy or the taxpayer is part of a conversion.
However, a number of interpretative uncertainties have arisen in the wake of the draft recovery package which need to be clarified. The Chamber of Tax Advisors has commented on the amendment, pointing out, for example, that:
- there is no precise definition of what is considered to be unrealised exchange differences - it is not clear whether exchange differences that are accounted for on the balance sheet will also be considered,
- there is no information on whether the adjustment will also apply to situations where the taxpayer uses a currency other than CZK as its functional currency,
- under the voluntary exit from the exchange rate exclusion scheme, an unreasonable duration of the scheme is set after the request is sent. The Chamber of Tax Advisers proposes that the scheme should cease to apply by the end of the next tax year in which the application is made. Thus, in the example above, the Company would cease to be a participant in the scheme from 1 January 2027 (i.e. the 2027 tax year).
As the consolidation package is in its third reading at the time of writing, it can be expected that it may not undergo too many changes. However, we will continue to monitor the situation and keep you informed of any new developments.
Please do not hesitate to contact us for any consultations on the consequences of the changes to the consolidation package.
Author: Richard Novotný, Daniel Vladyka
Author: Richard Novotný - Junior Tax Consultant
15. 11. 2023