The Supreme Administrative Court has closed a closely watched dispute concerning the possibility of retroactively granting an exemption for royalties from withholding tax. In its current decision, the court confirmed that the two-year deadline does not apply to the submission of an application for a decision on granting an exemption under Section 38nb of the ITA. We have summarized the most important information about the whole dispute for you in this article.
In our earlier article, we reported on the preliminary questions that the Supreme Administrative Court (“SAC”) asked the Court of Justice of the EU (“CJEU”) regarding the retroactive granting of an exemption for royalties from withholding tax. Subsequently, we also provided a summary of the CJEU’s judgment in Case C-828/24, Erdrich Umformtechnik GmbH, which confirmed that Directive 2003/49/EC does not preclude the retroactive granting of the exemption. The SAC has now decided on the case again and has closed the dispute in the Czech context.
The core of the dispute was the question of whether an exemption from withholding tax on royalties can be granted in the Czech Republic even for periods preceding the submission of the application and the issuance of the decision under Section 38nb of the ITA. In June 2019, the German company submitted an application for an exemption for the tax periods from 2014 to 2018, but the tax administrator rejected the application in relation to the years 2014 to 2016 on the grounds that the two-year period within which it was possible to apply for the exemption had already expired. This deadline was inferred from Article 1 (15) of Directive 2003/49/EC, which concerns the refund of tax already withheld.
The SAC has now held in decision 2 Afs 140/2022-94 that the two-year period referred to in Article 1 (15) of the Directive does not apply to an application for a decision on the granting of an exemption under Section 38nb of the ITA. At the same time, it concluded that the Czech legislation does not provide for any other special deadline for the submission of such an application. By reaching this conclusion, the SAC also departed from its previous case law, which had applied the two-year deadline to applications under Section 38nb of the ITA. At the same time, however, the two-year time limit for applying for a refund of tax already withheld remains unaffected, as it applies under a different procedural regime.
The SAC confirmed that the decision under Section 38nb of the ITA is declaratory in nature, i.e. the tax administrator only confirms that the conditions for exemption have been met. For that reason, the time limit for tax assessment under Section 148 of the Tax Code cannot be applied to this procedure, nor can Section 38nb(3) and (5) of the ITA be interpreted as imposing a time limit on the application or on the retroactive effect of the exemption.
The SAC’s judgment thus confirms that neither the EU nor the national legislation sets a specific time limit for filing an application for a decision on granting an exemption under Section 38nb of the ITA. Therefore, applications for retroactive granting of the exemption cannot be rejected as late-filed solely by reference to the inferred two-year period, but must be assessed according to whether the conditions for exemption have been met in the relevant periods and whether tax rights are no longer precluded.
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