Czech Republic: Guidance on taxation of CFCs, hybrid mismatches

Czech Republic: Taxation of CFCs, hybrid mismatches

The General Financial Directorate (GFD) issued guidance concerning the taxation of controlled foreign companies (CFCs) and addressing the consequences of different legal classifications (hybrid mismatches).


Taxation of CFCs

The CFC tax rules have been designed to address situations when subsidiaries or permanent establishments are established in jurisdictions with low or zero taxation. Under these rules, if a relationship satisfies the statutory conditions of a controlled and a controlling company, the controlled company’s activities are considered as being performed in the Czech Republic and therefore taxed in the Czech Republic.

The GFD’s guidance describes in more detail relevant procedures and methodology, and clarifies the calculation of half of the tax amount that would be assessed to the CFC if it were a Czech tax resident. The GFD guidance also clarifies the CFC’s tax period. 

Hybrid mismatches

Hybrid mismatches (resulting from different legal classifications under the income tax law) generally arise when an identical legal fact (especially an entity or a financial instrument) is treated differently in two or more jurisdictions as a result of differences in legal regulations. This treatment may result in a double deduction of expenses or in a deduction of expenses in one jurisdiction without a taxation of relevant income in the other jurisdiction. In such instances, the result of operations of associated companies as defined in the income tax law are to be increased.

The GFD’s guidance:

  • Specifies hybrid mismatches to which the income tax law applies
  • Clarifies the meaning of terms such as “different legal classification of a legal fact” and “expense or another item decreasing the result of operations or the difference between income and expense”
  • Provides typical examples of double deductions or deductions without a corresponding income inclusion or how an imported mismatch arrangement arises (including a specific illustrative example)
  • Confirms that the rules concerning hybrid mismatches do not apply to situations when a Czech tax resident pays out interest abroad and the foreign recipient’s income is exempt from tax, but in both countries, the payment is considered interest (i.e., irrespective of whether the interest expense is tax deductible in one country and whether the interest income is liable to tax in the other)

Read an April 2021 report prepared by the KPMG member firm in the Czech Republic

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