The state is preparing the possibility of accounting in another currency and a new definition of turnover
In addition to tax changes, the consolidation package will also bring innovations in the area of accounting. They will affect the definition of turnover, accounting in foreign currencies and taxation of unrealised exchange rate differences. Read what the government is planning from 2024.
Changing the definition of turnover
Net turnover was previously calculated as the sum of all revenue accounts (6xx). However, for accounting purposes, net turnover will now include only the proceeds from the sale of goods and services (i.e. accounts 601, 602 and 604). It will no longer include other/extraordinary income or revenue exchange differences.
The change will fundamentally affect the obligation for an entity to have its accounts audited by an auditor. One of the criteria for a mandatory audit is net turnover, which will in many cases decrease significantly under the new regulation.
In the absence of a transitional provision, turnover for 2023 should be calculated according to the current rules.
Bookkeeping in a foreign currency
Until now, all Czech accounting units have had to keep their accounts exclusively in Czech crowns. Now you will also be able to account in another, so-called functional currency - in euros, US dollars or British pounds (only these three will be available).
However, you can only say goodbye to crowns if the new currency is also the currency of the company's primary economic environment (e.g. most of the entity's purchases or sales are in EUR, USD or GBP) - this is the only way to meet the conditions.
The rules for currency switching should look like this:
- If you meet the primary economic environment condition, you can start using the functional currency on the first day of the accounting period - you do not need to report this change anywhere.
- You can only switch to another functional currency or back to koruna if the primary economic environment also changes. A change at a later date solely on the basis of your own decision will not be possible.
- You must therefore assess compliance with the conditions on an ongoing basis after the introduction of the functional currency.
The changeover to a functional currency will also involve a change in the central bank setting the exchange rate (e.g. for sterling, the Bank of England will be relevant, not the CNB).
And what about taxes?
- For the purposes of calculating income tax, the values in the functional currency of the entity will be used. Only when completing the tax return form will it be converted into Czech crowns at the given exchange rate.
- The Value Added Tax Act does not yet provide for a functional currency, so for the purposes of the VAT return or the control report, everything will have to be converted into Czech crowns at the appropriate exchange rate.
Non-taxation of unrealised exchange rate differences
Among the planned innovations, there is also the possibility of not taxing the so-called unrealised exchange rate differences. Although their precise definition is missing in the proposal, the explanatory memorandum deals with the revaluation of receivables and liabilities recorded in foreign currency in the profit and loss accounts.
Until now, these exchange differences have been part of the tax base and could cause significant fluctuations in tax liability. If they were eliminated, the taxpayer could avoid these fluctuations because unrealised exchange differences would only be reflected in profit or loss when realised.
This would be an election, not an obligation. You will only be able to make use of this option upon prior notification to the tax authorities, which must be made no later than the end of the third month following the first day of the tax year (notification by general letter is assumed). Other conditions are that the taxpayer is not subject to insolvency proceedings or that the taxpayer is not in liquidation.
Withdrawal from the scheme will again be either voluntary (however, a relatively long period of two additional tax periods compared to the period of notification of the termination of the scheme must be taken into account here) or linked to directly enumerated legal facts (e.g. in the event of a taxpayer's conversion, the scheme is automatically terminated).
When switching to the regime of non-taxation of unrealised exchange differences, you will need to establish a detailed and accurate record of all movements relating to the receivable or payable in question, as you will need to adjust the tax base for all previously excluded exchange differences on termination of the regime (or on realisation), regardless of whether or not they were realised in the year of the termination. In other words, all past upward and downward movements will be reflected in the tax base in a one-off way at the time of payment of the liability or collection of the receivable.
If the consolidation package is approved, these specific measures can be expected to pass unchanged.
Need help with your accounting?
Accounting and tax legislation changes frequently. Don't be on your own and contact the experts. We keep a close eye on any changes and are here for you, whether you are looking for a bookkeeping partner or a consultation.