Be careful when attempting to optimise your tax. The tax administrator will make some considerations, but not many.

 

Act no. 80/2019 Coll. has added a seemingly banal paragraph to the Czech Tax Code which states that “any actions or other facts which are decisive for the administration of tax and whose primary objective involves the acquisition of tax advantages at odds with the sense and purpose of the tax regulation will not be taken into consideration during the tax administration.”

In practice, this means that, if the tax administrator adjudges that you have undertaken a certain action (for example, the conclusion of a contract of donation for real estate) predominantly for the purpose of reducing your tax obligation (or to meet the conditions for the application of a tax discount), it will not take this legal act into consideration with reference to the cited provision. Such an approach on the part of the tax administrator will then lead to an additional tax assessment and sanctions.

The supplemented provisions of the Tax Code do not constitute anything essentially new in Czech law, because they are based on a general principle, according to which the abuse of a right cannot be considered to mean the exercising of said right. Czech and European judicature is constantly involved with this principle. However, when applying this rule in tax matters, the courts always judged whether tax payers had appropriately used the provisions of the law or any loopholes in it for the purpose of paying lower taxes or whether they had directly created artificial transactions for the purpose of acquiring a tax advantage.

As has been expressly stated, for example, in the decision of the European Court of Justice in case C-103/09: “An entity which is obliged to pay tax cannot be faulted for choosing financial leasing which provides it with an advantage involving, as is clear from the submitted decision, the distribution of the payment of its tax debt instead of a purchase which would not provide it with any such advantage, provided the VAT on this financial leasing has been paid correctly and in full.”

Or in case C-117/16: “if an entity which is required to pay tax has to decide between two actions, it is not obliged to choose the action which is associated with the payment of a higher amount of tax, but on the contrary is entitled to choose to structure its activities in such a way so as to limit its tax debt.”

To date, the judicature has used the so-called dual-component abuse test when evaluating the aforementioned question, according to which the result of the performance in question must involve the acquisition of a tax advantage and the objective circumstances must clearly show that the main purpose of the performance in question was the acquisition of a tax advantage.

The enacted text is somewhat laconic from this point of view and it may therefore tempt the tax administrator to use the institute in inappropriate cases. Even the European Court of Justice has inferred, for example: “irrespective of a purely fabricated operation devoid of any economic substance – the fact that a citizen of the Union, a natural person or a legal entity, intended to use the advantageous taxation valid in a member state other than the state of said entity’s residence or registered office does not in and of itself strip said entity of the option of invoking the provisions of the Treaty”.

Therefore, in order to prevent any unpleasant additional tax assessments and sanctions in your case, it is necessary for your transactions to have an indisputable economic sense and purpose and for all the accompanying written documents to support this. This is not an overly taxing task during simple transactions, but there are many cases where it would be advisable (and often necessary) to consult an expert.