Uplatneni zapoctu dane ze zahranicniho prijmu osvobozeneho v CR

Crediting of tax on foreign income exempt in the Czech Republic

The Supreme Administrative Court has recently considered the question of the eligibility of a credit for tax paid abroad on income that is exempt from tax in the Czech Republic (3 Afs 303/2021 - 48). In the present case, the taxpayer (the complainant) paid withholding tax on interest and dividend income earned in Canada. He subsequently claimed a credit of the tax paid on that income in his corporate income tax return, while the dividend income was exempt from income tax in the Czech Republic.

The complainant took the view that the wording of the Income Taxes Act implied that the credit was to be made at the level of the individual states of income source from the total income earned in the respective state. At the same time, in his opinion, the Act does not explicitly state that exempt income and the related tax paid cannot be taken into account for the purposes of set-off if the foreign income as a whole has been at least partially taxed in the source state and in the Czech Republic.

On the other hand, the Appellate Tax Directorate, in the position of the defendant, argued that it was not decisive whether the complainant received also other income from Canada together with the dividend income which was not exempt from tax in the Czech Republic (interest income). In the defendant's view, the foreign income must be included in the Czech tax base (it must - in the words of the law - 'participate' in it) so that the tax credit can be applied. However, according to the defendant, this situation did not arise because the dividend income did not enter the complainant's tax base because of its exemption. Thus, the income under consideration was not subject to double taxation but was taxed only once, in Canada.

The Supreme Administrative Court dismissed the appeal and upheld the defendant's conclusions that there was no double taxation in the present situation. It added that a credit of tax payable abroad is a special 'benefit' for the taxpayer, which can be invoked only in accordance with the express provisions of the relevant treaty and Czech law. In the present case, however, the relevant income is exempt from tax and does not enter into the tax base. Therefore, the taxpayer could not offset the tax paid on the dividend income earned in Canada.

In conclusion, we would like to stress that the above brief commentary cannot replace a detailed tax assessment of a particular tax situation.

If you have any questions, please contact the authors of this article or the EY tax team you regularly work with.

Authors:

Ladislava Zamazalová

Karolína Mikešová