Czech Republic vs DFH Haus CZ s.r.o., November 2022, Supreme Administrative Court, Case No 4 Afs 287/2020-54

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In 2013, DFH Haus CZ s.r.o. filed amended tax returns for 2006, 2010, and 2011, following the German tax authority’s adjustment of its transfer prices in 2006, in order to claim the resulting tax loss for 2006 and apply it against its tax liability in the Czech Republic for 2010 and 2011.

The tax authorities disallowed the amendments.

A complaint filed by DFH with the district court was dismissed and an appeal was then filed with the Supreme Administrative Court.

Judgement of the Court

The Court rejected DFH’s arguments that the tax loss must be allowed under the Czech-German income tax treaty. DFH could not reduce its tax liabilities in the Czech Republic in 2010 and 2011 with the 2006 tax loss resulting from the German transfer pricing adjustment.

The Court noted that the usual purpose of double taxation treaties is to regulate the place where income is taxed, but the actual rules for taxation or the deduction of expenses remain reserved to national law. In this case, the Double Taxation Convention could not be applied because there was no international aspect of taxation and the deduction of tax losses was a matter for national legislation.

“[38] In the present case, the complainant first invoked a motion for protection against the tax authority’s failure to act in relation to the activation of conciliation proceedings on 28 October 2019 in respect of the resolution of the case by way of an agreement under Article 25 of the Double Taxation Treaty. The Appellate Financial Directorate postponed this complaint on the grounds that the alleged inaction of the tax administrator (the Tax Office for the Pilsen Region) had been eliminated, as the tax administrator had submitted the case to the defendant 2) for resolution of the case by agreement under the said treaty. Subsequently, on 15 December 2019, the complainant submitted a request for removal of the inaction pursuant to Article 38 of the Tax Code, to which defendant 2 responded on 28 January 2020 by stating that it did not find the request for resolution of the case by agreement under the Arbitration Convention justified, since the tax administrator had issued additional payment assessments for the years 2005 and 2006, thereby accepting the adjustments made by the German tax administration and thus eliminating double taxation. The defendant also stated in its reply that the activation of the double taxation convention was not an option even for the tax years 2010 and 2011, since there would have been taxation in breach of that convention. On 7 February 2020, defendant 1 responded to this complaint by stating that it did not consider it justified, since the conciliation procedure under Article 25 of the Double Taxation Treaty and the measures under Section 39q(a) and (b) of the Income Tax Act did not constitute tax administration procedures and therefore could not be invoked as a defence against inaction; at the same time, defendant 1 also referred in this reply to the opinion of defendant 2.)

[39] It is clear that defendant 2), which potentially had the competence to conduct conciliation proceedings under Article 25 of the Double Taxation Treaty (in conjunction with Article 9 thereof), acted in accordance with the above-quoted conclusions expressed in judgment No 5 Afs 468/2019-65 and informed the complainant of the reasons why conciliation proceedings could not be initiated. The reasons for its action (failure to adopt a measure pursuant to Section 39q of the Income Tax Act) were also communicated to the complainant by defendant 1). Those reasons were subsequently reviewed by the Municipal Court in the judgment under appeal in that it considered the possibility of submitting the matter to conciliation under the double taxation treaty or of adopting a measure under section 39q of the Income Tax Act. In so doing, it concluded that the issue raised by the applicant, for which it seeks an order requiring the defendant to adopt the measures repeatedly referred to, is not resolved by a double taxation treaty but is purely domestic in nature. For that reason, he did not consider that there was any merit in either the requirement to submit the matter by way of an agreement under a double taxation treaty or in the requirement to take measures in relation to a foreign country by defendant 1) under the Income Tax Act.

“[41] The appeal is not well-founded for the reasons set out above and the Supreme Administrative Court therefore dismissed it pursuant to the second sentence of Article 110(1) of the Code of Civil Procedure.”

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