Constitutional Court deals with exchange rates upon acquisition of securities

The Constitutional Court (CC) dealt with a taxpayer’s complaint regarding the conversion (to Czech currency) of the acquisition cost of securities whose sale took place in a different taxable period than the acquisition. The CC confirmed the correctness of the interpretation methods applied by the Supreme Administrative Court (SAC).

The crucial issue was whether a purchase of securities in a foreign currency in a previous taxable period shall be converted to Czech crowns using the fixed exchange rate announced by the General Financial Directorate (GFD) for the year in which securities are being sold, or for the year in which they were acquired.

In decision No. 2 Afs. 4/2019 -38, the SAC agreed with the approach applied by the tax administrator. The SAC stated that while the Income Tax Act gives taxpayers who do not keep accounting books the option to choose from two alternative conversion rates (a fixed exchange rate announced by the GFD for the taxable period and a foreign exchange market rate applied pursuant to the Accounting Act), it does not allow them to choose the manner of determining the point in time of the valuation of expenses (cost) or income (proceeds). To convert the expense or income to Czech currency, it is always necessary to apply the exchange rate valid for the period in which the accounting transaction took place: i.e., for expenses, the exchange rate valid for the period when the purchase took place, and for income, the exchange rate valid for the year in which the sale took place.

The taxpayer (complainant) did not accept the SAC’s opinion and filed a constitutional complaint in the matter, demanding the application of the in dubio pro libertate principle, meaning that where there are several possible interpretations of a public law rule, it is necessary to choose the one that does not infringe on an individual’s basic rights or freedoms, or does so only as little as possible.

The CC held (IV. ÚS 563/20) that in the case in question there was no room for applying the mentioned principle, as the situation did not involve several comparably conclusive interpretation alternatives. In the CC’s opinion, the administrative courts clearly explained the legal regulation in the proceedings, giving the CC no reason to interfere with their interpretation of a sub-constitutional law. At the same time, the CC noted that it was impossible to make a general decision whether it would be more advantageous for the taxpayer (in the meaning of lower tax liability) to apply the annual rate announced for the precedent or the subsequent taxable period. The advantageousness or disadvantageousness depends on the actual values of the exchange rates in the given years; therefore it is impossible to determine which of the interpretations would be the one less infringing on an individual’s basic rights. The CC thus dismissed the complaint.

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