Unrealised exchange differences

The amendment to the government’s consolidation package also included the long-discussed exclusion of unrealised exchange rate differences.

At present, exchange differences are always reflected in the tax base, even if they relate to tax-exempt income or a tax-ineffective expense. Thus, the new regulation gives the possibility to exclude unrealised exchange rate differences from the tax base and to take them into account for tax purposes only when they are actually realised.

In the following example, a typical example of an unrealised exchange rate difference is a sales invoice for services in the amount of €10,000 issued on 20 December 20xx, but not paid until the following year. Assuming that the accounting entity’s accounting period is a calendar year and that the CNB daily exchange rate on 20.12.20xx (or another rate according to an internal directive) was 24,50 CZK/€ and on 31.12.20xx 24,80 CZK/€, the accounting entity will incur an exchange gain of 3 000 CZK, which will increase its tax base.

 

For example, a foreign exchange loss would arise if the entity had recorded a balance of a €200,000 euro loan at 31 December 20xx that was originally granted at an exchange rate of €23.90. It would then book an exchange loss of €180 000 as at 31.12.20xx, which would reduce the tax base.

As indicated, both example transactions affected the tax base. If they entered the regime of elimination of unrealised exchange differences, they would no longer affect the tax base at 31.12.20xx.

In order to take advantage of this new option, which is likely to come into effect on 1 January 2024, an accounting entity using double-entry bookkeeping will have to notify the tax office within 3 months of the beginning of the period in which it intends to exclude the unrealised exchange differences. Another condition for participation in the scheme is not to be a taxpayer subject to insolvency proceedings or in liquidation.

From the moment of entry into the scheme for the exclusion of unrealised exchange differences, all unrealised exchange differences will have to be excluded in the spirit of this provision, so it will not be possible to determine selectively which receivables and payables are to be covered by the scheme and which are not. This may arise, for example, where an exchange difference is accounted for on a receivable and, at the same time, on the related valuation allowance, which would be taxable under the current arrangements, although the valuation allowance itself is not.

The exclusion regime will also need to be applied to those titles for which tax-effective exchange differences have already been accounted for in the past.

 

Of course, it will also be possible to withdraw from this regime, but this can only be done after 2 periods after the end of the period in which the tax entity notifies the tax administration of the termination of participation in the regime of exclusion of unrealised exchange rate differences. The withdrawal from the scheme will also entail the obligation to retax all unrealised exchange differences that have been excluded from the tax base and for which the tax base has not yet been adjusted.

Although at first glance it may seem that access to the scheme described above will revolutionise accounting or the determination of the tax base, I believe that the use of the scheme will not be very frequent. None of us knows how the exchange rate of the koruna against foreign currencies will develop in the next 9 months after joining the scheme.

If the koruna depreciates at the end of the tax period, those whose foreign currency debts are significant will be at an advantage on the balance sheet, while those who have debts in higher values on the last day of the tax period will lose out.

The sense of entering the regime of elimination of unrealised exchange rate differences will be particularly welcomed by those companies for which the revaluation of receivables and debts at the end of the tax year represents a large administrative burden.

We regularly monitor upcoming and newly adopted legislative innovations for you and are ready to implement them in your business practice. If you have any questions, please do not hesitate to contact our tax advisor Petr Kchimel, who will be happy to consult your case with you.