The current legislation, which has undergone several different versions over the years, provides that in principle all exchange rate differences, whether realised or not (unless complex hedging documentation is maintained), enter the taxpayer's tax base.
The unrealised ones arise due to the accounting entity's obligation to revalue outstanding liabilities/receivables and other foreign currency items at the date the financial statements were prepared into Czech currency. Where the exchange rate at the time of such revaluation is different from the exchange rate at the previous valuation point, an unrealised exchange gain or loss arises and is accounted for by the entity. This is a representation of the current value of foreign currency items for the purpose of ensuring a true and fair view in the accounts, but there is no impact in terms of actual cash flows. The current legislative wording may be disadvantageous for the taxpayer because of the taxation of only notional gains or, conversely, the creation of tax losses that may be forfeited. A specific option to address this potential negative impact is the use of hedge accounting. In this case, there is only balance sheet accounting for these items, with the resultant accounting only taking place when the related hedged item is accounted for. Hedge accounting is appropriate only in some cases and it is up to the entity to decide whether to use it.
The draft amendment to the Income Tax Act within the framework of the 2024 consolidation package, which was approved by the Senate, introduces the possibility for taxpayers to exclude the above-mentioned unrealised exchange rate differences from the tax base in the taxable year of their occurrence. On the contrary, they would be taken into account in the tax base only at the time of their actual realisation, i.e. in the case of receivables or debts at the time of their repayment or write-off.
An entity keeping double-entry accounts may use the above option if it applies for the special scheme for eliminating exchange rate differences within the specified time limit. However, it must not be a debtor in insolvency proceedings or in liquidation. The deadline for notifying entry into this scheme is set at three months from the first day of the tax year.
In the case of entry into the unrealised exchange differences exclusion regime, it will be necessary to apply this system to all unrealised exchange differences. It will not be possible to selectively choose only certain types of unrealised exchange differences.
The use of this scheme may be terminated both based on the entity's decision and for legislative reasons. A legislative reason may be, for example:
- entering into liquidation;
- the effectiveness of the decision on the taxpayer's bankruptcy;
- dissolution of the taxpayer without liquidation, e.g. on the basis of a merger/division;
- situations where an income tax return is filed under Section 38ma(1)(a), (b) and (d) to (f) of the Income Tax Act.
In the event of withdrawal from the scheme, it is necessary to adjust the tax base at the end of the relevant tax period for unrealised exchange rate differences that were excluded in previous periods and have not yet been taken into account retrospectively, regardless of whether they have already been realised or not.
If leaving the scheme voluntarily, the taxpayer must resubmit an application to leave the scheme and cease to apply the related procedures at the end of the second tax year following the tax year in which the notice to leave the scheme is given.
The actual benefit of using this scheme is difficult to estimate, because no one can predict the exchange rate developments that will affect the real impact. Therefore, the impact of the exclusion of unrealised exchange rate differences can both reduce and increase the tax base. Taxpayers will be able to play this tax roulette from next year.