Extension of periods for which the tax loss can be utilised

The existing Income Taxes Act provided the possibility to utilise tax loss as a deductible item, specifically in five taxation periods immediately following the taxation period for which the tax loss was assessed. The amendment to the Income Taxes Act extends this possibility by two taxation periods immediately preceding the period in which the tax loss was incurred. The possibility to utilise the loss retrospectively is however limited by the amount of CZK 30 million. It means that an incurred tax loss for 2020 can be utilised both in five following taxation periods, i.e. until 2025, and for the two taxation periods that precede, i.e. for 2018 and 2019. Nevertheless, it will be possible to utilise the maximum amount of CZK 30 million for 2018 and 2019, on an aggregate basis for both these periods. It is up to the taxpayer how it will divide the limit between these two periods.

According to proposed transitional provisions, the new treatment should be applicable to tax losses incurred in a period ending on or after 30 June 2020. Tax losses assessed for the periods ended before that date will be subject to existing rules for tax losses and their utilisation.

Form of the tax loss utilisation

The retrospective tax loss utilisation will have the form of an additional tax return for selected preceding periods. By retrospective tax loss utilisation, the taxpayer will decrease its tax base and therefore its tax liability. If tax was already paid for these preceding periods, there will be an overpayment amounting to the difference between the tax paid and the additionally assessed tax liability. To obtain the funds, the taxpayer has to apply for the refund of the overpayment on condition that it can be refunded. For the sake of completeness, please note that the retrospective tax utilisation is up to the taxpayer, even when it is the recipient of investment incentives.

Limitation period

In this context, it is very important to mention the impact of the incurrence of the tax loss on the period for the tax assessment, the limitation period. The limitation period has a special definition in the Income Taxes Act for loss-making periods. For the period in which the tax loss was incurred and for all taxation periods for which this tax loss can be utilised, the limitation period ends at the same time as the period for the tax assessment for the last taxation period for which it was possible to utilise the tax loss for the last time. In utilisation of the tax loss for the two preceding periods, these rules will apply similarly as these two periods are newly the periods for which the tax loss can be utilised as well. However, this long limitation period will apply to the retrospective tax loss utilisation only for those periods when the tax loss is actually retrospectively utilised. In other words, if the tax loss is not retrospectively utilised, the period for tax assessment for these selected preceding periods will be standard.

Waiver of the right to tax loss utilisation

The prior issue is followed by a new possibility of a taxpayer to waive its right to tax loss utilisation. However, the possibility to waive the right applies only to the utilisation of the loss in periods following the incurrence of the loss, with the sole purpose of shortening the above-described limitation period. If the taxpayer waives its right to tax loss utilisation, the tax loss cannot be utilised for the following five years and the special provision on the limitation period does not apply.

An “estimate” of tax loss

In accordance with the explanatory memorandum relating to the amendment to the Income Taxes Act, the concept of the retrospective tax loss utilisation itself is not a one-time anti-crisis tool; it is rather a norm that will become part of the Income Taxes Act in the long-term. However, a special transitional provision that primarily aims to accelerate the obtaining of funds (refundable overpayment) by taxpayers and improve their financial position reflects the efforts to mitigate the crisis caused by the COVID-19 pandemic on a one-off basis. The proposed transitional provision offers a possibility for the taxpayer to determine, or rather estimate, the tax loss that it anticipates to report for the first taxation period ending on or after 30 June 2020, and utilise the estimated tax loss in the additional tax return (or the regular tax return, if it has not been filed yet) for the immediately preceding taxation period as an item deductible from the tax base.

If we consider a taxpayer whose taxation period is set as a calendar year, it can estimate the amount of the tax loss to be reported for the 2020 taxation period after the amendment takes effect already during 2020, and it will able to use the estimated tax loss as a deductible item already in the tax return for 2019 and the tax loss does not have to be actually assessed. At the moment, when the tax return for 2020 is filed and the tax loss is actually determined (assessed), it is necessary to take the actual amount of the tax loss into account. If the actually assessed tax loss is lower than the deductible item used in the estimated amount in the tax return for 2019, then it will be necessary to file an additional tax return and correct the tax calculation for 2019. Such correction will involve an additional payment of tax resulting from the difference between the estimated and the actually assessed tax loss, including the relating default interest. If the actually assessed tax for 2020 exceeds the used deductible item based on the estimate, then there is naturally no need of any adjustment to 2019 and the taxpayer may handle the unutilised tax loss in accordance with the general rules. In conclusion, please note that even this “estimate” of the tax loss is subject to the maximum limit of CZK 30 million.

If you report, or you anticipate to report, a tax loss for the period ending on or after 30 June 2020, consideration should be given to the possibilities of its most effective utilisation.