Czech Republic: No revaluation of advances made in foreign currency toward fixed asset purchases (court decision)

The Supreme Administrative Court held that in considering whether a taxpayer must revalue advances made toward the purchase of fixed assets denominated in a foreign currency, it was not necessary to revalue such foreign currency advances at the end of the accounting period unless there was a reasonable assumption that the assets would not be delivered, and the advance payment would be refunded.

The case identifying information is:  4 Afs 170/2021

Customers typically agree to make advance payments toward the purchase of fixed assets (e.g., a production line) before the delivery of the fixed assets. The advance payment amount, usually stated in the currency the supplier uses for invoicing, is then applied toward the purchase price after the fixed asset is delivered.

This situation was encountered by the tax administrator in the present case. The tax administrator assumed that until the asset was delivered, the advance payment was a regular foreign currency receivable between the customer and the supplier and, consequently, like any other receivables in a foreign currency, was subject to revaluation at the end of the accounting period—and that any gains from this revaluation must be taxed. During the tax inspection, the tax administrator decided that this revaluation treatment applied and assessed additional tax on the unrealized foreign exchange difference.

However, the taxpayer disagreed, and the lower administrative courts agreed with the taxpayer. The tax administrator ultimately appealed to the Supreme Administrative Court. 

The Supreme Administrative Court focused on the purpose of keeping accounting records, which is to provide as true a picture as possible of the accounting entity’s financial performance.

The Supreme Administrative Court also relied on an opinion of the National Accounting Council (I-43), concluding that accounting rules require taxpayers to remeasure receivables only when exchange rate fluctuations affect their future value (i.e., when exchange rate risks arise). Thus, according to the court, when an advance is made in a foreign currency that will be set off against a purchase price if paid in the same currency, no exchange rate risk arises. 

The Supreme Administrative Court, therefore, disagreed with the tax administrator's position—and the expectation that the parties would breach their obligations and that the advance will be refunded, rather than assuming that both the customer and the supplier would want to complete the asset’s sale. As the court noted, if the tax administrator wanted to apply this approach, it would first have to prove that the advance payment was unlikely to be offset (for example, upon withdrawal from the contract).

The Supreme Administrative Court concluded that it was not necessary to revalue advances made in foreign currency for the purchase of fixed assets at the end of the accounting period unless there was a reasonable assumption that the assets would not be delivered and that the advance would be refunded.

Read a March 2022 report prepared by the KPMG member firm in the Czech Republic