The present dispute before the Supreme Administrative Court (“SAC”) concerned a situation where a taxpayer submitted an application for a decision on exemption in June 2019 for the taxation periods of 2014, 2015, 2016, 2017 and 2018. However, the Financial Administration rejected the application for taxable periods 2014, 2015 and 2016 on the grounds that the two-year time limit had already expired in relation to these periods. The Financial Administration derived this time limit from, among other things, the previous opinion of the SAC, which interpreted Article 1(15) of the Directive to mean that the application for repayment must be submitted within a period of at least two years from the date when the interest or royalties are paid. Both the Financial Administration and the Municipal Court in Prague then concluded that, in the absence of an explicit time limit in Czech law, the Directive has a direct effect and the two-year time limit applies.

The taxable entity filed a cassation appeal with the SAC in which it:

• challenged the application of the direct effect of the Directive, since such an application is to the taxable entity’s detriment;
• argued that the Directive sets a time limit for the repayment of a tax that has already been withheld, not for submitting an application for exemption;
• noted that a claim for tax repayment in line with the Directive is, from the perspective of Czech tax law, a tax return, for which Czech legislation sets a time limit in the Tax Code, namely the statute of limitation (generally three years). For this reason, the direct application of the Directive was not appropriate at all.

In relation to this dispute, it should be noted that the possibility of applying a withholding tax exemption based on a decision on exemption from withholding tax retroactively for taxation periods for which the statute of limitation in line with the Tax Code has not elapsed is now explicitly included in Decree D-59 on the uniform application of certain provisions of the ITA, with the Decree being binding for the Financial Administration. However, Decree D-59 was not in force during the periods in question.

As the matter concerns the interpretation of EU law, the SAC suspended the proceedings in the present case and decided to submit two preliminary questions to the Court of Justice of the EU (“CJCE”):

• May the Directive be interpreted to mean that withholding tax exemption may also apply to a period that preceded the moment of submission of documents that a member state may require for the purposes of issuing a decision on exemption. In other words, whether it is in compliance with the Directive to issue decisions on exemption retrospectively, or only pro-futuro.
• If the answer is affirmative, whether it is possible to infer from the Directive a time limit for applying for withholding tax exemption, or any specification of the period preceding the application for which exemption may be granted.

It is clear from the SAC’s analysis related to the first question that the court has doubts about the retrospective granting of the exemption, stemming from the comparison of different language versions of the Directive and supported by the analysis of local legislations in two other EU member states that have also made the application of the exemption conditional on a decision of the relevant authorities. The legislations of these states (namely Germany and Slovenia) do not include a provision allowing the granting of the exemption for a period preceding the submission of supporting information proving that the conditions for the exemption have been met, with the German legislation even implicitly preventing it.

With respect to the second question, the SAC’s analysis takes issue with the claim that the Directive implies any time limit that would specify either the period when an application for issuing a decision can be made or the period in relation to which the tax exemption may be granted. The SAC is of the opinion that the period of two years set in Article 1(15) of the Directive is only a minimum standard, i.e. a rule addressed to member states implementing the Directive, and as such cannot be interpreted as a specific delimitation of a time limit for submitting the application.

The present case thus contrasts with the current administrative practice of the Financial Administration, which, in line with Decree D-59, habitually issues decisions on exemption from withholding tax retrospectively in relation to taxation periods for which the tax determination period has not yet expired. A negative answer to the first preliminary question would thus constitute a substantial change in established administrative practice to the detriment of taxable entities.

We will keep you updated on this dispute as it develops.