On December 4, 2024, a request for a preliminary ruling was lodged with the CJEU seeking detailed information on the liability under the Interest and Royalties Directive (IRD) in cases where at the moment of payment procedural obligations to apply exemption has not been fulfilled, although the substantive conditions for exempting payment under the directive were met.
The dispute arose from a late application for a decision confirming the applicability of the IRD exemption. Under Czech domestic law, which implements one of the options available to member states in the IRD, the issuance of this decision for a taxpayer is required for the remitter not to withhold tax.
IRD Directive
The IRD Directive allows for the withholding tax exemption of interest and royalties within the EU under certain conditions, particularly when the beneficial owner of the interest or royalties is a company in another Member State or a permanent establishment situated in another Member State.
IRD directive provides that member state may impose certain limitations in applying the WHT exemption, in particular:
- Article 1(12) of the IRD states that the source state may make it a condition for applying exemption under this directive that it has issued a decision granting the exemption following an attestation certifying the fulfilment of the requirements laid down in the directive.
- Based on Article 1(11) of the IRD the source state may also require that fulfilment of the requirements laid down in the directive be substantiated at the time of payment of the interest or royalties by an attestation. If fulfilment of the requirements has not been attested at the time of payment, the Member State is free to require withholding the tax at source.
In case a tax remitter withholds tax, based on Article 1(15) of IRD, a claim may be made for repayment of that tax. The application for repayment must be submitted within the period laid down which should last for at least two years from the date when the interest or royalties are paid.
Case background
- Under Czech domestic law, for a tax remitter to apply IRD exemption, the taxpayer (either independently or through the remitter) must request a decision of Czech tax authorities. The issuance of this decision is a prerequisite for applying the exemption.
- The request for a preliminary ruling indicates that Slovenia and the Federal Republic of Germany have established similar requirements. Other countries may require an attestation rather than a decision.
- In the underlying case, tax has not been withheld; however, the application for a decision on WHT exemption was filed on June 5, 2019, for the tax periods of 2014-2018, indicating that the request for decision on applicability of exemption was intended to have retroactive effect.
- In course of the case the applicant's position was partially accepted, but only for the two preceding years. This was based on the direct vertical application of the minimum deadline for a tax refund request as outlined in the directive (despite the absence of regulations in domestic law, questionable precision and unconditionality of IRD provisions and the fact that in the case at hand no refund could be due, as tax has never been withheld). This position was a derivative of earlier jurisprudence of the Czech Supreme Administrative Court (SAC). With regard to periods 2014-2016, the applicant's position was rejected due to the lack of a legal basis in either domestic legislation or the directive to issue a decision in regard to periods for which refund could not be claimed under local jurisprudence. Under such an approach it would seem that the tax on these payments should have been withheld in the Czech Republic without the right to exemption at source.
- According to the SAC, being the referring court, issuing a decision in such an instance would essentially be a retroactive ratification of a previous failure to withhold tax.
Request for preliminary ruling
- The Czech SAC raised concerns about whether issuing decision granting an exemption for a period predating the moment when the tax remitter meets the requirements not to withhold the tax (depending on domestic legislation, either when an attestation is gathered or - as under Czech domestic law - when a decision granting an exemption is issued) contradicts the purpose and meaning of the option given to Member States in Article 1(12) of the Directive, which allows the exemption to be dependent on the tax remitter following the respective procedures when intending not to withhold tax.
- Additionally the Czech SAC found it unclear whether obtaining a decision under Article 1(12) of the Directive must be considered a substantive or merely a formal condition for applying an exemption. In other words, the court questioned whether the lack of such a decision precludes the tax remitter from applying the exemption even if, afterward, the tax remitter demonstrates that other substantive conditions under the IRD directive have been met.
- Therefore, the Czech SAC referred for a preliminary ruling, inquiring whether IRD Directive should be interpreted as meaning that it enables the source state to grant, on the basis of a decision pursuant to Article 1(12), a tax exemption in respect of a period that preceded the point when an attestation and required supporting information was provided, or that preceded the point when the decision on applicability of exemption was issued.
- If the Court of Justice answers the first question referred in the affirmative, the Czech SAC asked a second, related question. Its subject is whether it follows from the IRD, directly or indirectly, that there is any deadline for the submission of an application for a decision granting an exemption under Article 1(12) or that there is any time-restriction as to the duration of a period preceding the submission of an application for a decision granting an exemption (the provision of an attestation and supporting information) in respect of which a tax exemption can be granted.
Our comments
The request for a preliminary ruling concerns whether the ability to apply the IRD exemption at source depends on the duly fulfilling all procedural requirements laid down in domestic law implementing the IRD as at the moment of payment. These procedural requirements may include: (1) obtaining attestation that requirements for applying the IRD directive are fulfilled, or (2) as in the case at hand - obtaining a decision from tax authorities on the applicability of the exemption. The aim of the questions is to address the liability of the taxpayer in cases where there is an initial failure to fulfill procedural obligations, but ultimately it can be demonstrated that the substantive IRD exemption conditions were satisfied.
It will be interesting to see how the CJEU resolves this case. On one hand, the wording of the directive suggests that if said procedural obligations are not met at the moment of payment, a tax remitter should withhold the tax and the regulation of any time limit is left entirely to the member states -which is what the SAC seems to be leaning towards. On the other hand, questions may be raised about the proportionality of applying any measures if it ultimately turns out that the exemption was applicable.
Another interesting aspect of the case is that the Czech SAC had historically assumed that Article 1(15) of the IRD may have a direct effect. This is somewhat controversial, considering that it provides a minimal standard of two-year period for the application of a refund rather than establishing it as a strict deadline.
This article has been prepared entirely based on information provided in request for a preliminary ruling in case C-828/24.
[1] - Council Directive 2003/49/EC of 3 June 2003 on a common system of taxation applicable to interest and royalty payments made between associated companies of different Member States
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