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13.2.1. Main Rules

The Czech Republic's thin capitalization rules apply to loans from a related party, and for back-to-back loans from a third party intermediary where a related party provides a loan to the intermediary. In either case, the deductibility of interest payments is limited to a 4:1 debt-to-equity ratio (6:1 for banks and insurance companies).

Effective 1 April 2019, in line with the EU Anti-Tax Avoidance Directive (ATAD), rules for deductibility of excess interest cost have been introduced. These rules are applicable to interest expenses on both related and unrelated party loans that pass all other tax-deductibility conditions.

As per the rules, excess deductible borrowing costs over taxable borrowing income (interest income) will be deductible up to a maximum of:

  • 30% of EBIDTA; or
  • CZK 80 million per year, whichever is higher.

The tax authorities may allow the carry forward of excess borrowing costs exceeding the limits subject to the limitation each year that such costs are not passed on to a legal successor.

Exceptions to the above-mentioned limitation include:

  • Banks, credit unions, investment firms, insurance and re-insurance companies, pension funds and certain others;
  • Taxpayers that are not an associated person in terms of CFC rules, do not have a permanent establishment, or are not obligated to present consolidated financial statements and not in a consolidating entity; and
  • Interest on loans concluded before 17 June 2016.
  • Financial costs on profit-participating loans are never deductible.