The recent adjustments introduced by the consolidation package affect a broad spectrum of entities, including corporations. This article provides a concise overview of the key changes.
Treatment of Unrealized Foreign Exchange Differences
Under the previous regulations valid until the end of 2023, all exchange rate variations were included in the tax base, encompassing both realized and unrealized foreign exchange differences. In scenarios involving exchange rate losses, these were considered tax-deductible expenses, whereas exchange rate profits were always deemed taxable income. The enactment of the consolidation package, however, ushers in a novel approach to the treatment of unrealized foreign exchange differences, allowing businesses to omit these from their taxable income.
Unrealized foreign exchange differences emerge from the need to re-evaluate foreign currency assets and liabilities at the time of the balance sheet. This re-evaluation process generates exchange rate differences. Businesses now have the option to adopt a policy that allows them to exclude unrealized foreign exchange differences from their taxable income.
The core principle behind excluding these unrealized foreign exchange differences is that they are only recognized as a tax expense or taxable income when they become realized. However, opting into this policy requires adherence to specific guidelines, such as notifying the tax authority of the decision within three months from the start of the fiscal year.
Adoption of Functional Currency
Traditionally, the law mandated that financial records be maintained in Czech currency, with parallel accounting in a foreign currency if utilized. Now, entities have the option to conduct accounting in a so-called functional currency, such as euros or dollars.
The functional currency is defined as the primary currency of the environment in which the entity primarily operates. Despite the allowance for accounting in a functional currency, entities must still report in Czech crowns for tax purposes, including value-added tax calculations.
Amendments to Extraordinary Depreciation Rules
Significant modifications have also been made in the realm of extraordinary depreciation. The new regulations permit the application of extraordinary depreciation exclusively for emission-free vehicles acquired between January 1, 2024, and December 31, 2028. Entities aiming to leverage this benefit must satisfy certain legal criteria.
The entity must be the initial owner of the depreciating asset, which should be depreciated continuously to 100% of the purchase price within 24 months. Depreciation is applied uniformly up to 60% of the purchase price in the first year, and evenly up to 40% in the subsequent year.
Notably, the application of extraordinary depreciation must be continuous and precisely calculated by the month. Additionally, depreciation must commence in the month following the fulfillment of depreciation criteria, with amounts rounded to the nearest crown.
