We would like to familiarise you with an interesting judgment issued by the Czech Supreme Administrative Court (hereinafter the “SAC”) on 25 February 2020, file number 10 Afs 171/2019-51, in which it dealt with an interpretation of the stipulation of article 23 paragraph 3 letter a) point 6. and its relation to the stipulation of article 23 paragraph 3 letter a) point 2. of act no. 586/1992 Coll., on income taxes (hereinafter the “ITA”), i.e. by what sum is it necessary to raise the tax base on case of assignment of receivables arising from contractual sanctions (i.e. especially contractual fines and late payment interests), which were entered in the revenues of the company and by which the tax base was lowered in previous taxable periods at the same time.

It its judgment, the SAC confirmed the reasoning of the company that in the year of assignment of the receivable, the assignor should only additionally tax real income from assignment of the receivable, not the entire nominal value of the assigned receivable. In the year of assignment, the assignor will thus only pay income tax from the assignment of contractual sanctions. This procedure should prevent double taxation of the same assigned receivable from contractual sanctions.

For greater clarity let us state a simplified example. In the taxable period of 2019, a company included a contractual fine of 300 in its revenues; and this company lowered its tax base for the year 2019 by this sum, in compliance with article 23 paragraph 3 letter b) point 1 of the ITA. In the year 2020, the company assigned this receivable arising from a contractual fine to a third party against remuneration reaching 100. The loss from assignment captured in the accounting of the company in the taxable period of 2020 reaching 200 is not tax-eligible cost. In compliance with the conclusions of the above-mentioned judgment of the SAC, though, the company will increase its profit/loss in the taxable period of 2020, in the sense of the stipulation of article 23 paragraph 3 letter a) point 6 of the ITA, by the sum paid for assignment of the contractual fine, i.e. 100. In both taxable periods, the company will thus only tax the sum paid for assignment of the receivable, i.e. 100.     

In case you are dealing with assignment of contractual sanctions or have dealt with it in the past, we recommend a revision of determination of the tax base in the year, in which the claim was assigned, to you and we will be happy to assist you with the revision.