News

Let Us Move on to Realisation

29.05.2012
Company: Amcham

Czech courts are expected to find law, which is absolutely fine. However, these days we have noticed that our judges have been searching for justice and finding it in the darkest corners of our laws. In other words, it seems that any deviation from the provisions of our laws might have surprising results! Is it good or bad news? This is difficult to say.

At the end of April the Supreme Administrative Court issued a decision which looked in detail at the issue of income taxation (taxation of revenues), specifically the income which has been included in accounting although the money has not yet been received. These are so called unrealised FX gains. In such cases a tax payer is simply deemed to have re-evaluated their liabilities in foreign currencies. Everybody would expect that such taxpayers have included these gains in their tax base and paid a relevant tax despite the fact that they did not receive the money and the liabilities still have to be met.

However, in this case the taxpayer decided to defend themselves and contested their own tax return. In the end, the tribunal of the Supreme Administrative court ruled in favour of the tax payer stating that unrealised FX gains should be included in the accounting but cannot be defined as income in accordance with the act on income tax!

The decision (rather extensive and sophisticated) of the Supreme Administrative court raises a number of questions and doubts concerning the relationship between gains reported in accounting and taxable income. Apart from other issues it explains that the “actual changing of currency does not mean that the complainant generated income in the form of savings in the respective taxation period, i.e. reducing the amount of money dedicated to settling the liabilities. From the business as well as a legal perspective there is no need to tax the unrealised FX gains before the money is received as they form only fictitious income. For these reasons unrealised FX gains reflect the situation which has not yet taken place and was modelled for the accounting purposes, i.e. reporting the amount of liabilities in Czech currency. Therefore it is impossible to consider these to be profits or liabilities achieved as of the balance sheet date because the money was not physically transferred within this period which is the only way of achieving profit or loss.”

We, as well as our colleagues, tend not to overestimate this decision. You have surely noticed, just like we have, that such an interpretation could apply while preparing the 2011 tax revenue or the same points could be raised while taxing similar gains. We do recommend you to consider this properly. But what about unrealised FX losses which as a consequence should be regarded as non-deductible!

This decision is radical and therefore questions long-term practises and so it should probably be further confirmed. We do not know the official position of the Ministry of Finance (though it is easy to guess), nevertheless, it is an interesting decision – be it an excess of current legislation or a revolutionary approach.

You might think you are staring into a minefield while contemplating the health care reforms. How do they affect your business, either from the perspective of an employer or an employee? You might be dealing with entirely different issues, e.g. how to secure financing of your project. Or are you planning a merger or a demerger of your company? This issue of our Newsletter, especially the hot topics are covered by our tax specialists, provides you with recommendations and tips which will help you to succeed.


Daniel Kovačovič
RSM TACOMA TAX Consultant
daniel.kovacovic@rsm-tacoma.cz