Czech Republic: Deductibility of increased interest; uncollectible debt (Supreme Administrative Court decisions)

The Supreme Administrative Court earlier this year issued two decisions concerning interest income and expense on loans from a corporate income tax perspective.

• In the first decision, the court held (4 Afs 119/2022-47) that interest payments made on loans used to finance the construction of a solar power plant, attributable to a contractual increase in the interest rates on the original loans, were not deductible by the taxpayer because the taxpayer did not prove that they were costs incurred to generate, secure, and maintain taxable income. The taxpayer was required by third-party banks to raise additional equity and claimed that it could only obtain such funds from its original lenders, who demanded an increase in the interest rate on the original loans to extend the additional equity financing. The court found that the taxpayer had a right to the additional equity under a comfort letter provided by the original lenders and thus the increase in the interest rate on the original loans was an unnecessary expense. 
• In the second decision, the court held (2 Afs 79/2023-62) that a taxpayer’s decision to write-off a loan after the loan’s maturity date, and to stop accounting for interest income on the loan, does not alone prove that the loan was uncollectible for tax purposes. 

Read an April 2024 report prepared by the KPMG member firm in the Czech Republic