SAC: Application for exemption from income tax on royalties is not time-limited

The dispute concerned a company that, in June 2019, applied for a decision granting exemption for the taxable periods from 2014 to 2018. The tax administrator granted the exemption only for 2017 and 2018, while rejecting the application for the preceding periods by reference to the SAC case law standing at that time (3 Afs 250/2016), according to which the application had to be filed within two years of the conditions for the tax exemption being met.

The municipal court reached the same conclusion. It held that, since the Czech Income Tax Act does not regulate any time limit for filing the application, the direct effect of Council Directive 2003/49/EC on a common system of taxation applicable to interest and royalty payments made between associated companies of different member states applies. In the existing case law, the directive had been interpreted as allowing a two-year time limit.

The case reached the SAC, which referred two questions to the CJEU for a preliminary ruling. The court answered them as follows (judgment in case C-828/24):

1. It confirmed that the exemption may also be granted retroactively, i.e. for periods preceding the submission of the certificate and other supporting information, as well as for periods before the decision itself was issued.
    
2. The directive does not set any deadline for submitting the certificate and supporting information, nor does it in any way limit the period for which the exemption may be granted retroactively.
    

On the basis of the CJEU judgment, the SAC confirmed that the conclusions of its previous case law had been superseded. Filing an application for a decision is therefore no longer subject to any time limit, whether it concerns royalties or interest on debt financial instruments.

The court ruling concerns exclusively the time limit for filing an application for a decision granting the tax exemption. The time limit for filing an application for a refund of tax already withheld is not affected and remains two years.

The context of the judgment suggests that the company had not been withholding the tax in the taxable periods concerned, and that the tax administrator should have recognised retroactively that the conditions for the exemption had been met for all the years covered by the company’s application. Conversely, if the company had withheld the tax, it would again have been entitled to the exemption for all years. The difference would be that the tax administrator would have had to refund the withheld tax only for the year in which the company applied for the refund and for the two preceding periods.