SAC rules against double taxation upon assignment of contractual sanctions

Regarding the assignment of contractual sanctions, the Supreme Administrative Court (SAC) determined what amounts should increase the tax base. According to the SAC, the tax base shall only be increased by the actual income from the assigned contractual sanctions, not by their full amount. At the same time, any loss on the assignment of the receivables not covered by tax-deductible adjustments is not tax-deductible. The SAC refused an interpretation of the law that would, in effect, lead to double taxation.

In the case in question (10 Afs 171/2019), the court dealt with the issue of what amounts shall increase the tax base upon the assignment of contractual sanctions that were recognised as an income and previously had been reducing (excluded from) the tax base. The SAC did not accept the tax administrator’s approach that the loss upon the assignment of the receivable is not tax-deductible, while, at the same time, the tax base must be increased by the full nominal amount of the contractual sanctions assigned. The SAC unambiguously concluded that this would be contrary to the linguistic and systematic interpretation of the relevant provisions of the law.

At the heart of the dispute was Section 23(3)(a)(6) of the Income Tax Act. The provision states that a creditor who assigns a receivable arising from contractual sanctions the amount of which was an item reducing the economic result (profit or loss), is obliged to increase the economic result by the amount of such a receivable, unless it has already been increased by the same amount under Section 23(3)(a)(2) of the Income Tax Act. The SAC emphasised that the term ‘the same amount’ does not necessarily mean an identical sum. In the court’s opinion, increasing the tax base by the loss on the assignment of the receivables rules out the possibility to also again increase the tax base by the entire amount of the assigned contractual sanctions. The SAC also referred to the amendments to the Income Tax Act and deduced that the aim of the regulation was to prevent a double increase in the tax base upon the assignment of contractual sanctions.

In other words: in the year when a receivable from contractual sanctions is assigned, the tax base shall be increased solely by the total nominal value of the contractual sanctions (leaving aside the loss on assignment concerning the remaining portion of the receivable), and not again be increased by the loss on the assignment. The approach applied by the tax administrators has been also accepted as a conservative option by some members of the professional public. The recent SAC conclusions now offer a chance to modify this approach in the future, and to revise the historical approach to the assignment of contractual sanctions.

Sdílet článek