Czech Republic: As of 2015, Interest-free loans will have an income tax impact on the level of the borrower (irrespective of whether a private individual or a legal entity)
As of 2015, new rules apply to the taxation of interest-free loans („zápůjčka“, in Czech, according to the terminology of the new Civil Code which differentiates between „loans for consumption“ and „loans for use“). While the topic is still highly controversial, the following is an attempt to outline in broad strokes the currently prevailing interpretation of the new rules.
In the case of natural persons (private individuals), the monetary advantage derived from interest-free loans (i.e., the hypothetical interest) is exempt from income tax e.g. if the income originates „within one’s family“ or from someone with whom the taxpayer has lived in a shared household for at least one year before he or she obtained the interest-free loan. The monetary advantage is also tax-exempt if the total advantage from one and the same taxpayer does not exceed CZK 100,000 in a given assessment period. „Advantage“ here is the hypothetical interest, which corresponds to the customary interest that would normally be charged e.g. by a bank at the borrower’s place of residence for a bank credit. If the above-mentioned threshold for tax exemption of the advantage (of the hypothetical interest) is exceeded, then the entire monetary advantage is considered taxable income.
For legal entities, income in the form of a monetary advantage (hypothetical interest) is tax-exempt as long as the advantage from one and the same person does not exceed CZK 100,000. This limit is calculated based on the tax assessment period / the period for which a tax return is filed. If the exemption threshold is crossed, then the entire value of the monetary advantage is subject to tax.
Aside from the above-mentioned tax exemption, legal entities may make use of a reduction of their assessment base pursuant to Sec. 23 (3) (b) item (8) of the Income Tax Act, provided that the interest-free loan is being used to generate, secure, and maintain taxable income which is not tax-exempt. A real-life example would be a company which takes out an interest-free loan to purchase machinery with which it produces its products. Such an interest-free loan would have zero consequences for the company’s tax base (in that the company would on the one hand have to increase its tax base, but this would be perfectly counter-balanced by the corresponding reduction, see above).
The biggest headache associated with the practical application of the new law will presumably be caused by the need to determine, at the end of the year, what interest rate would have been „customary“ for the given loan, and whether the loan is subject to tax or not. Also, the taxpayer may have to prove that the loan was used to generate, secure and maintain taxable income.
Source: Income Tax Act (Act No. 586/1992 Coll.)