Retroactive application of tax loss

As part of the so-called coronavirus package, an amendment to the Income Tax Act came into force, which introduced a complete novelty to Czech tax law: the retroactive application of a tax loss. Until 2020, the tax loss could be deducted from the tax base in the periods that follow. Until 2003, it was possible to deduct a tax loss in seven tax periods immediately following the period for which the tax loss is assessed. Since 2004, this period of claiming losses has been reduced to five tax periods immediately following the period for which the tax loss is assessed. However, the basic principle in applying a tax loss was that in order to be able to use the loss, the tax entity had to make a profit in the following years. If it was unable to generate a profit in the next five tax periods, it lost the possibility of claiming a tax loss.

Thanks to the coronavirus crisis, taxpayers have been given a completely new opportunity to claim a tax loss retroactively. The retroactive application of the loss is not limitless, but is limited by two previous tax periods and, above all, by the amount of the tax loss that can be claimed retroactively, i.e. CZK 30 million. Detailed conditions are described below. However, the recovery of a loss is a very positive change in favour of taxable persons. And not only now, when companies are hit by the economic crisis and may incur losses, but also in "normal" times, when there may be an extraordinary loss in the economy.

As the government of the Czech Republic wanted to provide tax subjects with a quick tool to improve cash flow, the possibility of applying the tax loss retroactively applies from 1 July 2020. This date is important for two reasons.

  1. For the first time, it is possible to claim a loss retroactively for a tax period that ended after the entry into force of the amendment, i.e. after 1 July 2020. Thus, it is possible to deduct in real terms the tax loss incurred, for example, for the financial year August 2019 - July 2020.
  2. Immediately after 1 July 2020, the amendment allowed taxpayers to estimate the expected loss for the first period ending on 1 July 2020, but a maximum of CZK 30 million, and to claim this expected loss for one previous period. This allowed taxpayers to improve their financial situation more quickly without waiting for the tax administrator to assess the loss. This special option is valid only for the first tax period ending on 1 July 2020. In subsequent periods, the retroactive application of the loss will work as standard, as described below.

General conditions for loss recovery:

The basic condition for the possibility of retroactive application of a tax loss is its assessment by the tax administrator. If we consider the standard tax period - a calendar year, then the application of the tax loss for the previous period comes into consideration:

  • only after filing the tax return for the current year;
  • recognition of a tax loss in this return;
  • assessment of the tax loss by the tax administrator.

The retroactive application of the tax loss will be made by filing an additional tax return for the previous tax period. The taxable person must therefore actively recover the loss himself by filling in an additional tax return and submitting it to the tax administrator.

The tax loss can be claimed for a maximum of the two previous tax periods, while the taxpayer can choose whether to claim it for one, the other or both. The actual decision on how to proceed is solely up to the taxpayer and will certainly be decided according to the amount of the tax base reported in these periods and the size of the current tax loss.

A maximum of CZK 30 million in tax losses can be claimed retroactively.

Together with the retroactive application of the tax loss, another important change was adopted, namely the possibility to waive the right to claim a tax loss in the years following the period in which the loss arose. This possibility comes into consideration precisely when the entity uses the retroactive claim of a loss.


Tax loss assessed for 2020     

- CZK -15 million

Tax base for 2019

    CZK 8 million

Tax base for 2018

   CZK 8 million

Additional declaration and retrospective claim for loss for 2019 

  CZK -8 million

Additional declaration and retroactive application of the loss for 2018

  CZK -7 million

In this case, it makes sense for the taxable person to waive his right to claim a tax loss in subsequent years, as he no longer needs this option. However, this step must be carefully considered in light of the resulting circumstances described below.

Why does it make sense to give up the right to deduct a loss in the years to come?

There is one reason and it is extremely important. With the assessment of the loss and the possibility of deduction in the following years, the so-called preclusive period is extended, which is the period during which the tax administrator can check the subject and possibly measure the tax. In fact, this period, which is generally three years, will start to run, both for the period in which the loss arose and for all periods in which the loss can be deducted, with the period for the last year in which the loss can be deducted.

For example, if the loss occurs for the year 2020, it is possible to deduct it for the years 2021 - 2025, and the preclusive period for all these years will start to run from 1 April 2026 (or 1 July 2026 according to the deadline for filing tax returns) and will run until 1 April 2029 (or 1 July 2029). So we see that the tax administrator can start the tax audit for 2020 at the beginning of 2029. And this is very unpleasant due to the considerable time lag. Hence, recovering the loss makes it possible to avoid this problem.

If the tax subject waives the right to deduct the tax loss in subsequent periods, the period for additional assessment of the tax will not be extended.

The waiver of the right to deduct a tax loss in subsequent periods must be made actively, in the form of a notification to the tax administrator, which must be made within the deadline for filing the tax return for which the tax loss is assessed. Submission after the deadline has no effect, so it is not possible to decide subsequently. It is also not possible to withdraw this notification. In fact, the subject decides forever. This is the case even if, for example, he files an additional tax return after some time or if the tax administrator initiates a tax audit and a different amount of loss occurs.