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Milan Pašek | Petra Vaněčková | August 25, 2023

A major change in accounting and taxation. The Ministry has confirmed the introduction of a functional currency and the taxation of only realised exchange rate differences

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The Ministry of Finance of the Czech Republic has confirmed on its website the conclusions of the meeting of the government coalition on the changes within the consolidation package and has, among other things, published one of the most important changes in the field of accounting in recent times, which is the introduction of the so-called functional currency in accounting from 1 January 2024. In addition to CZK, companies will be able to charge alternatively in EUR, USD and GBP. This option applies to the situation, where a company accounts for most of its transactions in a given foreign currency and thus meets the conditions for using a functional currency. The possibility of using functional currencies other than those mentioned above has not yet been disclosed. The change may have a significant impact on the amount and structure of profit or loss due to the effect of foreign currency conversion.

The amendment will be effective before the completely new Accounting Act is issued, where it was originally proposed. Whether or not this option will be followed by the possibility to pay taxes in foreign currency and how the transitional provisions will be designed will be the subject of further legislative process.

Another significant and surprising change relates to the income tax, specifically the taxation of exchange rate differences. According to the published conclusions, only realised exchange differences, i.e. those arising from payments of payables and receivables in foreign currency, will be taxed. If foreign currency receivables and payables are recorded as of the balance sheet date, the revaluation gives rise to unrealised exchange differences that newly would not enter the tax base. That is, the exchange loss would not be a tax-deductible expense and the exchange gain would not be taxable income. Transitional provisions will also be important here.

Both of these changes would also have an impact on the so-called hedge accounting (about which we informed you here, for example).

Unfortunately, the specific wording of the proposed changes is not available. We will keep you informed about the developments and practical implications for businesses.

Author: Milan Pašek, Petra Vaněčková