Additional claim of higher tax relief for investment incentives is possible

Taxpayers who were promised an investment incentive can claim tax relief in their tax return, which might, in some cases, reach up to 100% of their tax liability. However, what should be done when a company finds out that the tax amount was supposed to be higher and files an additional tax return? Is it possible to apply a higher tax relief to cover the higher tax?

The Regional Court in Prague assessed such a situation in its recent ruling issued on 29 April 2022, Ref. No. 51 Af 62/2020, specifically for an investment incentive to increase production capacity. For investment incentives to increase production capacity, the tax relief is determined by the difference between the current tax amount (S1) and the average for the previous three taxable periods (S2). The main issue was the interpretation of the provisions of the Income Tax Act stipulating that the amount of S1 does not increase for the calculation of the relief if a higher tax liability is assessed additionally.

The calculation of the income tax starts from the economic result, which is further adjusted, for example, for non-tax-deductible expenses or non-taxable income, taking into account, for instance, gifts and donations made, tax-deductible losses carried forward or deductions for research and development support. The income tax rate is applied to the tax base adjusted in this way, and the tax is calculated. However, it can be further lowered by tax credits – for corporations, this mainly includes the credit for employees with disabilities and the credit arising from investment incentives – and also by, for example, the credit for tax paid abroad. Only then do we get the final tax.

The Financial Administration’s interpretation was that credit, once claimed, cannot be increased additionally because the prohibition on increasing S1 cannot be applied to the final amount of tax liability, as it is not the basis for calculating S1. In the additional assessment proceedings, the tax base is newly determined, which, after adjustments, is the basis for the calculation of S1. Therefore, if the tax base is subsequently increased, the tax relief originally claimed does not change, and the entity should pay the difference in tax.

Conversely, the court was in favour of the taxpayer and concluded that in the context of the limiting condition for calculating tax relief, additionally assessed tax liability is to be understood as the final tax amount. Therefore, if a tax base is increased in the additional tax return with applying a higher tax relief against this increased tax and without increasing the final tax, the condition for subsequently determining a higher tax liability is not met, and the relief can be claimed. According to the court, the additionally assessed tax liability is only the final tax that has been assessed with final effect. An additional tax return can therefore be used to increase the claimed tax relief arising from investment incentives, provided that the final tax amount does not change.

It should be noted that the Financial Administration filed an appeal in cassation against this ruling. The matter of claiming higher tax relief additionally will soon be assessed by the Supreme Administrative Court.

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