On 25 January, the Coordination Committee of the Chamber of Tax Advisors and the General Financial Directorate (“GFD”) concluded Post 601/30.11.22 concerning the method of assessing the conditions of exemption in the exchange of ownership interests.

Exchange of ownership interests means the acquisition by ownership interests in a business corporation representing a majority of the voting rights (more than 50%) of the acquired corporation, whereby the business corporation will provide to the shareholders of the acquired business corporation an interest in the acquiring business corporation in exchange for the interest in the acquired business corporation, with a possible make-up payment.

Under article 4(1)(s) of the Income Tax Act (hereinafter “the ITA”), income from the transfer of ownership interest in a business corporation for consideration is exempt from tax, if the period between its acquisition and the transfer for consideration exceeds 5 years. At the same time, the period of 5 years between the acquisition and the transfer of ownership interest for consideration is not interrupted in case of their exchange and if the conditions in article 23b of the ITA are met. In the case of securities (other than ordinary certificates), the same conditions apply under article 4(1)(x) of the ITA with a different length of time test, which is only 3 years.

The continuity of the time test for the exchange of ownership interests is applied only if all the conditions in article 23b of the ITA are met. Tax advisors, however, questioned the interpretation that fulfilment of these conditions also means fulfilment of the requirements for tax domicile of the acquiring corporation, the acquired corporation and the partners referred to in article 23b(6), as these conditions relate to the application of article 23b(3) to (5) of the ITA.

The drafters of the paper believed that it is discriminatory that the conditions for tax exemption should be treated differently for partners of the acquired company, who are Czech residents, than for partners, who are tax residents of other EU Member States.

However, the GFD disagreed with the partial conclusion of the tax consultants. In order to maintain (not interrupt) the time test for the exchange of ownership interests, it is necessary that all conditions of article 23b of the ITA are met, including the condition of Czech tax residency.

Author: Vladimír Toráč, Anna Beránková