Comparing the effect of the application of thin capitalization rules on the tax burden of taxpayers in the Czech Republic with respect to detailed definition of joint persons

Abstract

Thin capitalization rules were introduced in the Czech law on income tax in 1993. During the time of their existence in the law, they however passed through numerous changes, which resulted in a non-uniform exercise of the rules and caused legislative chaos. Due to these reasons, lawmakers subjected them to an essential transformation in 2009 in effort to adjust a stricter regime for the application of thin capitalization rules and to enact their uniform assertion in all credit and loan contracts including annexes regardless of closing date from the beginning of taxing period 2010. In this connexion, a uniform definition was stipulated of joint persons concerned by the rules, which may in some cases adversely affect the assessment base of the taxpayer. The paper investigates the effect of a uniform application of thin capitalization rules including the definition of joint persons in the corporate assessment base in the tax period of 2010 and compares on the basis of comparative analysis whether the original application of rules prior to the tax period of 2010 was more favourable for taxpayers from the taxation point of view or not. The comparison is carried out on model examples on which we veri­fied which procedure is optimal for taxpayers from the taxation point of view. With respect to our findings, the paper also contains a proposal for amendment in the income tax law so that the appli­cation of thin capitalization rules in force since the tax period of 2010 does not impose excessive tax burden on taxpayers.

Keywords

• thin capitalization rules
• tax burden
• credit
• loan
• financial expenses
• joint persons