Exemption from withholding tax on interest and royalties may be applied retrospectively

In the case in question, a taxpayer paid licence fees to abroad. On these fees, the applicable withholding tax under the Income Tax Act was withheld and paid in 2011 and 2012. In 2013, the taxpayer applied with the tax authority for the exemption of the licence fee payments from withholding tax, on the grounds of a provision regulating these payments between related parties (the provision is an implementation of the EU directive on the common system of taxation of interest and royalties). In the application, the taxpayer also asked for a retrospective exemption of licence fees, on which the withholding tax had already been paid in 2011 and 2012. The tax administrator only ruled on the tax exemption for 2013; the entitlement for exemption for 2011 and 2012 was denied by the tax administrator arguing that a ruling cannot be issued with retroactive effect. According to the tax administrator, the exemption is conditional upon the issuance of the respective ruling, and as the ruling had not been issued for 2011 and 2012, licence fees paid in those years cannot be exempted from the withholding tax.

This tax administrator’s argument was also accepted and supported by the Appellate Financial Directorate, and by the municipal court of justice. The case thus appeared before the Supreme Administrative Court, which disagreed with the lower-degree rulings and reversed the municipal court’s decision.

According to the SAC, the possibility to exempt licence fees from withholding tax retrospectively is in line with the mentioned directive: under the directive, it is possible to apply tax exemptions retrospectively (i.e. to refund the withholding tax already paid) for up to two years from its payment. According to the SAC, while member states have the option to make the exemption conditional upon issuing a ruling by a tax administrator, such a ruling has only a declaratory nature, confirming that the general conditions for exemption as stipulated by the directive have been met. This means that if these general conditions had also been met in the previous two years, and the taxpayer is able to prove this, then the taxpayer is entitled to the refund of the withholding tax paid on the grounds of an additional exemption, even though they did not have the ruling on the exemption at that time. The same mechanism should apply to the tax exemption of interest.