At the end of the last year, the attention of the expert community was alerted by the judgement of the Municipal Court in Prague, which sided with a taxpayer in a dispute with the tax administration over the run of the tax assessment period. The dispute concerned a situation where the taxpayer had filed additional tax returns for a lower tax loss or claimed a tax loss deduction within the tax assessment period according to the then administrative practice arising from the generally used methodology of the General Financial Directorate (“GFD”). However, after the submission of the additional tax returns, this administrative practice was rejected based on the case law of the Supreme Administrative Court (“SAC”), and the tax administrator therefore discontinued the proceedings on the grounds that the period for determining the tax had expired. The case has now been reviewed by the SAC and the conclusions of the Municipal Court have been upheld.
Facts of the case
In January and March 2020, the taxpayer filed additional corporate income tax returns for the tax years 2008, 2009 and 2010, in which it reported a lower tax loss or claimed a deduction for the 2007 tax loss. In January 2021, the tax administration discontinued the proceedings as the returns were filed after the deadline for tax assessment. In its decision, the tax administrator relied on a new and groundbreaking case-law of the SAC of May 2020, which rejected the tax administration’s practice of chaining losses and concluded that the maximum period for determining tax is ten years even in the case of tax losses. According to the tax administrator, the new case law of the SAC did not allow the tax to be assessed based on additional tax claims.
The taxpayer defended itself against the decision to discontinue the proceedings first before the Appellate Financial Directorate and subsequently by filing an action with the Municipal Court in Prague, where the taxpayer’s intervention was successful. The Appellate Financial Directorate attempted to reverse the dispute by filing a cassation complaint, which was rejected by the SAC.
Protection of legitimate expectations according to the SAC
In this case, the SAC ruled that the tax authorities should have proceeded in accordance with their existing administrative practice in procedures concerning additional tax returns filed prior to the issuance of the new SAC case-law rejecting the so-called loss chaining. In particular, it considered the fact that the GFD’s 2016 methodology raised an expectation in the taxpayer’s mind, which was eligible for protection. That methodology was only overridden in November 2020 following new case-law of the SAC in May 2020, and the taxpayer had filed additional tax returns before then. According to the SAC, there was a basis for the taxpayer’s reasonable reliance on the GFD’s 2016 methodology. When filing the additional tax returns in January and March 2020, the taxpayer followed the GFD’s former methodology, which was unchallenged by case-law at that time. Therefore, the taxpayer could not have known that the administrative practice was contrary to the law and that it would be fundamentally changed to its detriment.
The SAC concluded that the previous administrative practice had raised a legitimate expectation on the part of the taxpayer, even though the administrative practice was unlawful. In view of the facts and the taxpayer’s procedural position, the principle of legitimate expectation thus outweighed the principle of lawfulness in the case under review.
Seminars, webcasts, business breakfasts and other events organized by Deloitte.
