The Ministry of Finance of the Czech Republic prepared another government measure to mitigate the impacts of the crisis caused by the COVID-19 outbreak. The change concerns Act No. 586/1992 Coll., on Income Taxes, as amended (“Income Taxes Act”), specifically the introduction of the “retrospective utilisation of a tax loss” concept. The new proposal suggests that the possibility to utilise a tax loss as an item deductible from the tax base should be extended in the Income Taxes Act. A tax loss should be utilised not only for the periods immediately following the origination of the tax loss, as it has been until now, but also for the periods preceding the tax loss. The proposal has already passed the external comment procedure, but according to the latest information, it will not be discussed in the state of legislative emergency like other measures to mitigate the impacts of the pandemic; instead, it will undergo a standard legislative process.
It is worth mentioning that counter to previous assumptions, the retrospective utilisation of a tax loss will not be a one-time tool to mitigate the current crisis, but rather a new instrument enshrined in the Income Taxes Act. According to the Ministry of Finance, the possibility to utilise a tax loss retrospectively will serve as an automatic stabiliser embodied in the Income Taxes Act that will be available to taxpayers in case of unexpected economic slumps.
Extension of the period for the utilisation of a tax loss
Up to now, the Income Taxes Act allowed the possibility to utilise a tax loss as a deductible item for five taxation periods immediately following the taxation period for which the tax loss was assessed. The new amendment not only allows to apply a tax loss retrospectively, but also abandons the routine of using taxation periods to define the time period for which this deductible item may be applied. The period for which it will be possible to utilise a tax loss will newly be defined by the beginning of such a period. The period for which a taxpayer may utilise a tax loss has to begin within 2 years (24 months) before the beginning of the period for which the tax loss was assessed, or within 6 years (72 months) after the end of the period. The definition of the period for which it is possible to utilise a tax loss therefore changes substantially. However, if we consider the situation of a regular taxpayer, whose taxation period is a calendar year, then the proposed amendment means that instead of 5 taxation periods, it will now be possible to apply a tax loss for the following 6 taxation periods plus 2 preceding taxation periods, i.e. retrospectively.
According to proposed transitional provisions, the new regime should be applicable to tax losses that originated in a period that ended after 30 June 2020. The existing rules for tax losses and their utilisation will be applicable to tax losses assessed for taxation periods ending before this date. In case of a taxpayer whose taxation period is a calendar year, this means that the new regime will be first applied to the tax loss assessed for 2020, with the possibility to utilise it retrospectively against the tax base for 2018 and 2019.
Procedural aspects of the new tax loss utilisation concept
The retrospective utilisation of a tax loss will be carried out through additional tax returns for the selected preceding periods. By utilisation a tax loss retrospectively, the taxpayers reduce their tax base, and therefore their tax liability as well. If the tax for the preceding period has already been paid, a tax overpayment arises amounting to the difference between the tax paid and the tax liability additionally assessed. To obtain funds, the taxpayer has to apply for overpayment refund, provided that it can be refunded. For the sake of completeness, we would like to state that it is up to the taxpayers whether they want to apply a tax loss retrospectively, even in case of taxpayers who received investment incentives.
It is important to point out how the origination of a tax loss affects the tax assessment period, i.e. the lapse period. The Income Taxes Act defines a special lapse period for loss periods. In case of the period in which the tax loss originated, as well as in case of all taxation periods for which the tax loss may be utilised, the lapse period ends together with the tax assessment period for the last taxation period, for which it was possible to utilise the tax loss. This provision applies and will continue to apply (with a little modification) to the utilisation of tax losses in the immediately following periods. However, at the same time, it will affect the utilisation of a tax loss for the preceding periods, because it will newly be possible to utilise a tax loss for these periods as well. The positive news is that this long lapse period for a retrospective utilisation of a tax loss should be utilised only in case of periods for which the tax loss will actually be retrospectively utilised. In other words, if a tax loss is not utilised retrospectively, then the tax assessment period for these selected preceding periods runs in a standard manner.
Accelerated refund of a refundable overpayment
As mentioned above, the concept of retrospective utilisation of a tax loss itself is not a one-time instrument for crisis mitigation, but a norm that will stay embodied in the Income Taxes Act. However, efforts to mitigate the crisis caused by the COVID-19 pandemic gave rise to a different one-time instrument – the newly proposed special transitional provision which says that the deadline for filing a tax return for a taxation period ending between 30 June 2020 and 29 June 2021 will be 3 months after the end of this period, even in case of taxpayers who have a statutory obligation to submit audited financial statements or whose tax return is filed by a tax advisor or attorney-at-law. Therefore, in general, taxpayers who file a tax return within 6 months after the end of the taxation period. The provision is supposed to serve as a benefit, and therefore if the taxpayers do not file the tax return within 3 months after the end of the taxation period, the standard period remains applicable to them. Therefore, in case of taxpayers whose taxation period is a calendar year, the deadline for filing a tax return for 2020 may be optionally shortened to 1 April 2021, as compared to the usual deadline of 1 July 2021 in the abovementioned cases. The aim of this transitional provision for these specific periods which fall into years hit by the crisis is to speed up the assessment of tax losses, and thereby also the refund of potentially refundable overpayments for the preceding periods.
The proposal to introduce retrospective utilisation of a tax loss is currently being finalised by the Ministry of Finance. We will continue to monitor the situation closely and bring you the latest updates from the legislative process.