Under Czech tax law, a tax loss (daňová ztráta) is a legitimate instrument for optimizing tax liabilities. A proper understanding of how the mechanisms of its creation and application work allows businesses to offset financial losses from prior or future periods.
In this article, we will examine in detail:
- What the fundamental difference is between an accounting loss and a tax loss;
- The specifics and limitations of utilizing losses for sole traders (OSVČ) and companies (s.r.o., a.s.);
- Lawful compensation mechanisms: carry-forward of losses to future periods and recovery of taxes already paid from prior periods (carry-back);
- Hidden risks: how a tax loss extends audit limitation periods (preclusive periods) and how these risks may be lawfully managed through a waiver of the right to use a loss.
The Concept of a Tax Loss
According to the Czech Income Taxes Act (Zákon o daních z příjmů č. 586/1992 Sb., hereinafter — ZDP), a tax loss (daňová ztráta) arises where tax-recognizable expenses (daňově uznatelné výdaje/náklady) exceed taxable income (zdanitelné příjmy). This rule is established in § 34 ZDP.
It is necessary to strictly distinguish between a tax loss (daňová ztráta) and an accounting loss (účetní ztráta). An accounting loss reflects the actual financial result (výsledek hospodaření) of a sole trader or enterprise. The tax base (základ daně), however, pursuant to § 23 ZDP, is formed by calculation: the accounting result is adjusted for income not subject to taxation and for expenses not recognized as tax deductible by law (for example, entertainment expenses — náklady na reprezentaci).
Thus, the existence of an accounting loss does not guarantee the existence of a tax loss, and vice versa.
Tax Losses of Individuals (OSVČ)
For sole traders (OSVČ), a tax loss is recorded separately by income category. According to the law, a tax loss may be generated exclusively in two categories of income: income from independent business activity (§ 7 ZDP) and rental income (§ 9 ZDP).
For all other categories of personal income, the creation of a tax loss is not permitted (documented expenses may reduce the tax base only to zero). Such income categories that cannot generate a loss include:
- Income from dependent activity (employment, salary) — § 6 ZDP;
- Income from capital (interest, dividends) — § 8 ZDP;
- Other income (occasional earnings, sale of property) — § 10 ZDP.
Moreover, there is a strict limitation on offsetting: a loss lawfully arising from business (§ 7) or rental (§ 9) cannot offset income from dependent activity governed by § 6 ZDP (příjmy ze závislé činnosti).
At the same time, the law allows cross-offsetting within the permitted categories. For example, a rental loss (§ 9) may reduce a tax base generated by profit from business activity (§ 7) or, for example, income from sale of property (§ 10 ZDP).
Tax Losses of Legal Entities (s.r.o., a.s.)
Legal entities form a single tax base based on their accounting result. However, for companies there are significant specifics in applying accumulated losses, particularly where there is a change in ownership structure or business transformations (for example, mergers).
Pursuant to § 38na ZDP, a company’s right to utilize prior tax losses may be cancelled in the event of a “substantial change” (podstatná změna) in persons directly or indirectly participating in the company’s capital or control. In practice, such change is generally understood as a change of more than 25% of share capital or voting rights. This provision was introduced specifically to combat fictitious acquisitions of “loss-making companies” solely for tax optimization of a new profitable business.
Nevertheless, this limitation has lawful ways of being overcome:
- Continuity test (80% revenue condition). A company automatically retains the right to utilize an old loss if it can document to the tax authority that at least 80% of its income in the period when the loss is claimed was generated by the same activity within which that loss originally arose.
- Binding tax ruling (Závazné posouzení). If the company understands it will not meet the 80% condition (for example, a new owner has partially or fully repurposed the business), the law leaves one further possibility. The company may file an official application with the Financial Administration requesting a binding ruling. If it can prove to the tax authorities that the ownership change and business changes were driven by objective economic reasons (business recovery, genuine investment), rather than a simple aim of tax avoidance, the authority may exceptionally permit the use of old losses.
Mechanisms for Applying a Tax Loss
Czech legislation provides two directions for utilization of a tax loss (uplatnění daňové ztráty):
- Carry-forward. Taxpayers may reduce their tax base by the amount of a recorded loss during the following 5 tax periods (zdaňovací období).
- Carry-back / zpětné uplatnění. A loss may be applied retrospectively to 2 preceding tax periods. This mechanism requires filing an amended tax return (dodatečné daňové přiznání), based on which the Financial Administration returns tax previously paid. The maximum limit for retrospective use is capped at CZK 30,000,000.
Effect of a Tax Loss on Tax Audit Limitation Periods
A key risk when declaring a tax loss is the automatic extension of the preclusive period (lhůta pro stanovení daně) — the period during which the tax authority (finanční úřad) has the right to initiate an audit.
The standard period for tax assessment is 3 years. However, where a loss exists, this period increases.
Because a loss may be utilized over the following 5 years, the limitation period for reviewing the year in which the loss arose expires simultaneously with the limitation period for the final year of its possible use.
As a result, the standard 3-year period transforms into an 8-year period (3 years + 5 years of carry-forward), which requires long-term and careful retention of all primary documentation.
Waiver of the Right to Use a Loss as a Risk Management Tool
If the amount of the loss is insignificant and the risk of prolonged tax review is considered high, a taxpayer may use a preventive instrument — an official waiver of the right to apply the tax loss in future periods (vzdání se práva na uplatnění daňové ztráty do budoucna).
This is done by filing a corresponding notification. Timing is critically important: the waiver must be declared no later than the filing deadline for the tax return for the year in which the loss arose; the deadline depends on the form in which the tax return is filed.
This waiver is irrevocable. By using this mechanism, the taxpayer loses the right to use the loss over the next 5 years, but in return blocks the extension of the preclusive period (lhůta pro stanovení daně), preserving the standard 3-year period for tax audits.
Key Points (Summary)
To summarize, let us highlight the main rules governing tax losses in the Czech Republic:
- A tax loss is not an accounting negative result. It is a calculated base formed strictly under the rules of the Income Taxes Act (ZDP) and may differ significantly from the company’s actual financial result.
- Strict framework for individuals (OSVČ). A loss may arise exclusively from income from business activity (§ 7) and rental (§ 9). Offsetting these losses against taxes paid on salary income is strictly prohibited.
- Unified base and restrictions for companies (s.r.o., a.s.). Unlike individuals, companies form a single tax base (and a single loss) from all income and expenses. However, if more than 25% of owners change, the company risks losing the right to utilize losses accumulated before that transaction. To preserve them, it may need to pass the “80% revenue test” or obtain official approval from the Financial Administration.
- Two compensation routes. A loss may be carried 5 years forward or 2 years back (up to 30 million CZK), allowing flexible management of tax burden and working capital.
- The price of a loss is longer audit exposure. Declaring a loss automatically increases the audit limitation period from 3 to 8 years. In cases of insignificant losses, it may be more prudent to formally waive the right to use them in order to minimize risks.
If you have questions about applying a tax loss (daňová ztráta), carry-forward and carry-back rules, tax risks, or the correct treatment of losses for OSVČ or companies, you can contact DoMyTax for a professional tax consultation.
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