Changes to tax loss carry-back

The chamber of deputies has passed an anti-crisis tax package that, among other things, introduces the option to carry back tax losses. The originally proposed concept has been further extended: for instance, it should be possible to claim a 2020 loss (as estimated by the taxpayer) already in the 2019 tax return.

The government has proposed extending the option to deduct tax losses from the tax base also retrospectively, for two years (‘tax loss carry-back’). Unlike in the previous wording, the bill now assumes that the existing manner of counting taxable periods will be applied, meaning that tax losses may be utilised in two preceding periods, while the possibility to deduct the tax loss in five future taxable periods shall remain. Shorter taxable periods are not to be included in the calculation, while it will still be possible to utilise tax losses in such periods.

Under the bill’s transitional provisions, taxpayers may deduct an estimated tax loss, solely in the period immediately preceding the taxable period for which the loss may be first carried back. This means that taxpayers with a calendar-year taxable period may deduct the expected loss for 2020 in their tax return or additional tax return for 2019. Once the tax loss is actually determined, i.e. upon filing the tax return for 2020, the standard procedure under the amended act shall be followed, i.e. the tax base for two preceding taxable periods may be reduced by the tax loss actually assessed. Deducting the tax loss before it has been assessed is therefore a one-off instrument, targeting the current coronavirus crisis.

Using this option also involves a certain risk: if the taxpayer overestimates the tax loss, they would have to file an additional tax return, settle the tax underpayment and pay related default interest under the Tax Procedure Code. If they underestimate the loss, they could still file an additional tax return and claim the difference, as they would end up with a tax overpayment.

Taxpayers should therefore carefully consider whether to deduct a tax loss before its assessment, and in what amount. Should the tax loss be overestimated, sanctions in the form of default interest may not be inconsiderable. Nevertheless, it will still be possible to apply for a waiver of such default interest following the common procedure regulated by the Tax Procedure Code.

Another change from the originally proposed wording limits the amount that may be carried back to CZK 30 million; the same limit shall also apply to the first taxable period in which an estimated tax loss may be utilised. Tax losses carried forward, on the other hand, remain unlimited.

Waiver of the right to claim loss

The bill also introduces the possibility to waive the loss carry-forward. The waiver has to be made within the deadline for filing the tax return for the period in which the tax loss has been assessed. The waiver applies to all subsequent periods in which the loss may be deducted, and covers the whole amount of the tax loss; this means that it is not possible to waive just a portion of a tax loss, and taxpayers will also lose the possibility to deduct any additionally assessed loss in the event of a tax inspection. The waiver does not affect the right to carry back tax losses.

The purpose of the waiver is to limit the deadline for assessing tax: since the tax loss can no longer be deducted from the tax base, the deadline for assessing tax for the period when the tax loss was assessed or for subsequent periods shall not be extended.

Refund of overpayment

The new wording of the proposed amendment no longer includes the special transitional provision that allowed taxpayers with a deadline for filing the tax return of six months after the end of the taxable period to reduce the deadline to three months, giving them faster access to refundable overpayments for the previous period. The transitional period was intended to only apply to taxable periods ended from 30 June 2020 to 29 June 2021.

This means that taxpayers subject to a statutory audit or filing their tax return through an authorised tax advisor will only be entitled to a refund of their overpayments after the expiry of six months from the end of the period in which the tax loss was assessed, as is the standard procedure.

Legislative process and effective date

While the original wording of the bill proposed the effective date as the first day of the month following the promulgation, under the current wording the amendment shall enter into effect on the day following its promulgation. The bill is now to be debated in the senate.

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