The common system of taxation applicable to interest and royalty payments made between associated companies of different Member States has been introduced by the European Union by way of Council Directive 2003/49/EC (Directive). The Czech Republic implemented this system into its national tax legislation by way of the provision under Section 38 (nb) of Act 586/1992 Coll., on Income Taxes (ITA).The subject of the assessed case was a negative ruling passed by the Tax Administrator in terms of acknowledging the tax exemption of income from interest on a debt financial instrument for 2011 and 2012 based on an application filed by the taxable entity in July 2013. According to the Tax Authority, and as later confirmed by the Appellate Financial Directorate, the application for tax exemption could not be approved due to the fact that it was filed too late. In terms of the late filing, the authorities stated that a critical precondition to utilise a tax exemption is to obtain a resolution of a constitutive nature. In other words, this means that tax exemptions may be utilised no sooner than after the issuance of the relevant tax exemption resolution, ie not backwards.

In its appeal, the taxable entity principally referred to the Directive as such, which stipulates that if the taxable entity’s company withholds tax at source in a case in which tax exemption should be used, an entitlement arises for the taxable entity to seek the refund of the tax withheld in this way, within a period of at least two years from the date on which the interest and royalty payments were made (if the tax exemption preconditions have been de facto met). Given that in the Czech Republic, tax exemptions depend on the issuance of a resolution under Section 38 (nb) of the ITA, the two-year period for refunding withheld taxes may be connected with the point at which the application for tax exemption was filed.

The SAC upheld this opinion of the taxable entity and stated that the importance of decisions on tax exemption lies in the authoritative confirmation of matters based on which the entitlement to tax exemption originates and the fulfilment of which is required in order to achieve the exemption of interest from withholding tax.