In the Czech Republic, the tax base for corporate income tax is determined from accounting profit adjusted for non-taxable revenues and non-deductible expenses. 'Accounting profit' is defined by the Accounting Act and the Decree on Accounting Principles. On January 1 2002 the act was amended and a new decree released.

The new decree requires a revaluation of assets and liabilities denominated in foreign currency at year-end according to the respective foreign exchange rate at the balance sheet date, in such a way that both exchange rate gains and losses will directly impact on accounting profit and hence the tax base.

As the value of the Czech koruna has fluctuated significantly in recent years this seemingly small change is likely to have a major effect on the corporate income tax payable for 2002 by many companies. Among others, it will affect foreign capitalized companies which were financed through loans denominated in foreign currency some years ago.

Some experts are of the opinion that such changes conflict with the spirit of the Accounting Act, which emphasizes principles of prudence. Some even deem it unconstitutional effectively to increase taxes through the implementation of a new decree which is not a law and does not require parliamentary approval. Although various tax advisers and chambers of commerce have attempted to address these issues in the past few months, it will be difficult to revise the rules in the near future because of economic pressures caused by the country's disastrous floods in August of this year.

For further information on this topic please contact Albrecht Hobe at Vorlickova & Partners by telephone (+420 2 33 111 100) or by fax (+420 2 33 111 133) or by email ([email protected]).