The Supreme Administrative Court (“SAC”) has issued a ruling (10 Afs 171/2019-51) dealing with the question of how to tax assigned receivables from contractual sanctions arising in the current period or that arose and were recognised in prior periods.
In the relevant case, a company assigned receivables arising from contractual sanctions for a portion of their nominal value. These receivables were recognised and at the same time they decreased the company’s tax base in prior taxation periods. The company reported a tax loss in its tax return arising from the assignment as a non-tax deductible expense and simultaneously increased its tax base by the actually generated income from the assignment. However, the tax authority disagreed with this approach, stating that the tax base should have been increased by the entire nominal value of the assigned receivables and not just by the income arising from them. The tax authority supported this approach by referencing Section 23 (3) a), item 6 of Act No. 586/1992 Coll., on Income Taxes, (hereinafter the “ITA”), which states that the tax base increase is excluded only if the amount has already been taxed under Section 23 (3) a), item 2 of the ITA, and such a situation can never occur with respect to the assignment of a receivable against payment.
The SAC has confirmed the company’s arguments that ultimately the assignor should additionally tax only the (actual) income from the assignment of a receivable arising from a contractual sanction and the remaining portion of the receivable represents a non-tax expense.
In addition, the SAC confirmed a different approach in the event that contractual sanctions are recognised in the same period as the actual assignment of receivables. In such a case, the wording of Section 23 (3) b), item 1 of the ITA restricts the possibility of decreasing the tax base for receivables from contractual sanctions that ceased to exist during or as of the end of the taxation period, and for the purposes of this provision, assignment means that the receivable has ceased to exist. According to the SAC, the Act indicates a clear legislative intention to restrict the application of this provision in cases where the receivable arose and ceased to exist in the same taxation period, even though it agrees with the company’s opinion that there is no difference between receivables in the two cases. This effectively means that the loss from the assignment of receivables arising from contractual sanctions is taxed twice even though no income has been received.