The Supreme Administrative Court has changed its previous approach to the time limit for filing an application for recognition of an exemption from income tax on royalty payments. Under its new conclusion, no time limit applies to the filing of such an application. In doing so, the Supreme Administrative Court responded to the judgment of the Court of Justice of the European Union in Case C-828/24.

The tax authority’s original approach

The case concerned a company that, in June 2019, applied for recognition of an exemption from withholding tax on royalty payments for the tax periods from 2014 to 2018. The tax authority granted the application only in respect of 2017 and 2018. It refused to recognise the exemption for the earlier periods because, under the Supreme Administrative Court’s case law applicable at the time, the application had to be filed no later than two years after the conditions for the exemption had been met.

This conclusion was subsequently upheld by the Municipal Court. Since the Czech Income Taxes Act does not expressly provide for any such time limit, both the tax authority and the courts based their position on an interpretation of Council Directive 2003/49/EC. Until then, the Directive had been interpreted as permitting a two-year time restriction.

The exemption may also be granted retroactively

The Supreme Administrative Court referred preliminary questions concerning the interpretation of the Directive to the Court of Justice of the European Union. The CJEU confirmed that a tax exemption may also be granted for periods preceding the submission of the relevant certificate and other supporting information. Likewise, the exemption may be recognised for periods preceding the issuance of the tax authority’s decision itself.

According to the CJEU, the Directive does not establish any time limit for submitting the required documentation. Nor does it restrict the number of previous periods for which the exemption may be granted retroactively.

The Supreme Administrative Court’s previous case law has been superseded

Based on the CJEU’s interpretation, the Supreme Administrative Court concluded that its previous case law could no longer stand. An application for a decision recognising a tax exemption is therefore not subject to a two-year or any other time limit. This conclusion does not apply solely to royalty payments. It also applies to interest on debt financing instruments, provided that the statutory conditions for the exemption are met.

The time limit for refunding withheld tax still applies

The decision concerns only applications for a decision recognising a tax exemption. It does not change the rules governing the refund of tax that has already been withheld and paid by the payer.

An application for a refund of withholding tax must still be filed within the two-year time limit. The exemption may therefore be confirmed retroactively for older periods, but the tax authority will refund the tax actually withheld only for periods in respect of which the refund deadline has not yet expired.

Practical implications of the decision

The new interpretation may be particularly significant for companies that met the conditions for an exemption in respect of royalty payments or interest in previous years but have not yet applied for the relevant decision.

Are you dealing with the retroactive exemption of royalty payments or interest, or considering whether tax already withheld may be refunded? Contact the PKF APOGEO tax team. We will help you assess whether the statutory conditions have been met and verify the applicable time limits.

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Authors: Michal Šimíček – Tax Consultant; Daniel Vladyka – Tax Manager