The Supreme Administrative Court held that an exemption from withholding tax on payments of interest and royalties may be applied retroactively for a period of up to two years.
The taxpayer paid licence fees to entities located abroad. The taxpayer withheld and remitted the applicable withholding tax on these fees in 2011 and 2012. In 2013, the taxpayer filed an application with the tax authority for an exemption from withholding tax on the licence fee payments, based on a provision under the EU directive on the common system of taxation of interest and royalties. In the application, the taxpayer also asked for a retroactive application of the withholding tax exemption for the licence fees paid in 2011 and 2012.
The tax authority granted the tax exemption for 2013, and denied the claim for exemption for 2011 and 2012. The tax authority asserted that the exemption was conditional upon the issuance of an exemption ruling, and giiven that the ruling had not been issued for 2011 and 2012, the licence fees paid in those years were not exempt from withholding tax. This conclusion was affirmed administratively and judicially by a lower court. The taxpayer appealed to the Supreme Administrative Court.
The Supreme Administrative Court disagreed with the lower court and reversed.
According to the high court, under the directive, it is possible to apply tax exemptions retroactively (i.e., to refund the withholding tax already paid) for up to two years. According to the court, while EU Member States can make the exemption conditional upon the issuance of a ruling by a tax authority, such a ruling has only a declaratory nature—that is, confirming that the general conditions for exemption as stipulated by the directive have been met. This means that if these general conditions had also been met for the previous two years, and the taxpayer is able to prove this element, then the taxpayer is entitled to the refund of the withholding tax paid on the grounds of an additional exemption (even when the taxpayer did not then have the ruling on the exemption). The court also found that the same rule would apply to the tax exemption of interest.
Read a March 2018 report prepared by the KPMG member firm in the Czech Republic
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