In recent years, the question of the defensibility of interest costs on so-called "crown bonds" has been repeated very often in case law.
Somewhat in the background, another follow-up issue was discussed. It was basically whether the interest on these bonds had to be paid to the non-accounting lender in order for the expenditure to be tax relevant, or whether it was sufficient to make an accounting adjustment in the relevant accounting period.
Over time, it became clear that the conclusions on this issue were not uniform.
The case law also cites an internal document of the tax administration from 2017 on the issue of assessing the tax deductibility of financial costs from credit financial instruments (which include interest on issued bonds) under Act No. 586/1992 Coll, on Income Taxes, as amended, which states that interest on loans and borrowings will be subject to Section 24(2)(zi) of the Income Tax Act in the taxable year beginning before the end of 2013, according to the legislative abbreviation defined in Section 19(1)(zk) of the Income Tax Act, as amended until the end of 2013, which could also be used for the application of Section 24(2)(zi).
However, since 2014, the provisions of Section 19(1)(zk) include the newly legislated abbreviation "credit financial instrument" (also including bills of exchange and bonds), which is not mentioned in Section 24(2)(zi) of the Income Tax Act. It only refers to interest on loans and interest on credits and therefore, for tax periods starting in 2014, this provision should only apply to interest on loans and credits and not also to interest on bonds or bills of exchange.
It can be summarised that the amendment to Section 19(1)(zk) of the Income Tax Act introduced a new legislative abbreviation "credit financial instrument". This was intended to provide some clarification so that there was no longer any dispute about the use of the legislative abbreviation 'loans and borrowings' previously provided for here.
The First Chamber of the Supreme Administrative Court (SAC) concluded that even before this amendment, the expression "interest on loans" and "interest on credits" contained in Section 24(2)(zi) of the Income Tax Act, effective from 1 January 2005, did not correspond to the legislative abbreviation referred to in Section 19(1)(zk).
The enlarged Senate should make clear on this matter and answer the question: Is interest on bonds classifiable as 'interest on loans' and 'interest on credits' as defined in section 24(2)(zi) of the Income-tax Act as in force for the assessment years 2005 to 2013?
Let's hope that the expanded Senate will bring this issue together by 2013. From 2014 onwards, the issues should hopefully be clear, as I state above. However, everyone reflect on how you have proceeded up to 2013 and whether, especially in the current periods, you are already proceeding correctly.
Author: Jiří Jandečka
Somewhat in the background, another follow-up issue was discussed. It was basically whether the interest on these bonds had to be paid to the non-accounting lender in order for the expenditure to be tax relevant, or whether it was sufficient to make an accounting adjustment in the relevant accounting period.
Over time, it became clear that the conclusions on this issue were not uniform.
The case law also cites an internal document of the tax administration from 2017 on the issue of assessing the tax deductibility of financial costs from credit financial instruments (which include interest on issued bonds) under Act No. 586/1992 Coll, on Income Taxes, as amended, which states that interest on loans and borrowings will be subject to Section 24(2)(zi) of the Income Tax Act in the taxable year beginning before the end of 2013, according to the legislative abbreviation defined in Section 19(1)(zk) of the Income Tax Act, as amended until the end of 2013, which could also be used for the application of Section 24(2)(zi).
However, since 2014, the provisions of Section 19(1)(zk) include the newly legislated abbreviation "credit financial instrument" (also including bills of exchange and bonds), which is not mentioned in Section 24(2)(zi) of the Income Tax Act. It only refers to interest on loans and interest on credits and therefore, for tax periods starting in 2014, this provision should only apply to interest on loans and credits and not also to interest on bonds or bills of exchange.
It can be summarised that the amendment to Section 19(1)(zk) of the Income Tax Act introduced a new legislative abbreviation "credit financial instrument". This was intended to provide some clarification so that there was no longer any dispute about the use of the legislative abbreviation 'loans and borrowings' previously provided for here.
The First Chamber of the Supreme Administrative Court (SAC) concluded that even before this amendment, the expression "interest on loans" and "interest on credits" contained in Section 24(2)(zi) of the Income Tax Act, effective from 1 January 2005, did not correspond to the legislative abbreviation referred to in Section 19(1)(zk).
The enlarged Senate should make clear on this matter and answer the question: Is interest on bonds classifiable as 'interest on loans' and 'interest on credits' as defined in section 24(2)(zi) of the Income-tax Act as in force for the assessment years 2005 to 2013?
Let's hope that the expanded Senate will bring this issue together by 2013. From 2014 onwards, the issues should hopefully be clear, as I state above. However, everyone reflect on how you have proceeded up to 2013 and whether, especially in the current periods, you are already proceeding correctly.
Author: Jiří Jandečka