The subject-matter of the dispute was deduction of cost for the advertisement on Czech Television. The advertisements had been resold by a chain of entities, with the prices for the individual advertisements being multiplied in relation to the prices charged by Czech Television. The Second Chamber of the Supreme Administrative Court referred the case to the Extended Chamber for a ruling on the question whether the finding that the price of the subject-matter of the contract was significantly higher than the normal price, without a satisfactory explanation of the difference, is a sufficient condition for the conclusion that there is a combination of persons for the purpose of reducing the tax base or increasing the tax loss pursuant to Section 23(7)(b)(5) of Act No 586/1992 Coll. on Income Taxes, or whether the tax authorities must prove other facts in the conduct of the taxpayer which indicate that the transaction is unusual. Furthermore, according to the Second Chamber, there was a contradiction in the case-law of the Supreme Administrative Court concerning the relationship required for an adjustment to be issued under the arm’s length provision in Section 23(7)(b)(5) of the Income Tax Act. Decision of the Supreme Administrative Court The Extended Chamber of the Supreme Administrative Court did not agree that there was a contradiction in the case law, and refered the case back to the Second Chamber. Excerpts “The Second Chamber submits that there is a conflict between the VJB PARTNER II judgment and the D.D.D. SERVIS OPAVA I judgment on the question whether the finding of the existence of a significantly increased price of the subject matter of the contract compared to the normal price without a satisfactory explanation of the difference is sufficient to prove a relationship between otherwise related persons under Section 23(7)(b)(5) of the Income Tax Act, or whether other non-standard facts must be proved by the tax administrator. However, the Full Court concludes that, at least for the moment, it is not clear whether this issue is relevant to the assessment of the appeal in the present case, for the reasons set out below.” “[26] It thus follows from the above that the subject matter of the dispute in the present case, which is intertwined with the administrative and judicial proceedings, is in particular the questions whether the administrative authorities have sufficiently justified the conclusion that the complainant was part of otherwise connected persons pursuant to section 23(7)(b)(5) of the Income Tax Act and whether the tax authorities must prove that the complainant knowingly engaged in a contractual relationship intended to reduce the tax base or increase the tax loss.” “[38] There is no inconsistency between the VJB PARTNER II judgment and the D.D.D. SERVIS OPAVA I judgment. The case before the Second Chamber also differs from the case dealt with in the judgment in D.D.D. SERVIS OPAVA I. The subject-matter of the dispute is, first of all, the question of the reviewability of the conclusions of the defendant and, consequently, of the Regional Court as to whether the complainant can be regarded as an otherwise connected person. At the same time, the complainant was, in most of the advertisements under examination, part of a longer chain of entities in which services were resold. However, the First Chamber based its conclusion on the fact that the complainant was not part of a chain. At the same time, the complainant argues that the tax authorities must prove that the chain was established mainly for the purpose of reducing the tax base or increasing the tax loss and that the entity knowingly joined it. However, the referring Chamber did not dispute the premise of the EWE judgment that the subjective aspect is not relevant. The question of price was only expressly raised in the appeal, together with the other objections to the judgment of the Regional Court. [39] The Second Chamber must therefore first consider whether the defendant’s decision and the judgment under appeal are reviewable. If it concludes that it is, it must then consider on what grounds the administrative authorities and the Regional Court regarded the applicant as a person otherwise connected. If that ground is merely the increased cost of the transaction and if it finds a conflict in the preliminary ruling or wishes to depart from it, it may refer the case back to the Grand Chamber for a decision. Alternatively, it may refer the case to the extended Chamber if it concludes that it wishes to depart from the EWE judgment as regards knowledge of the taxpayer’s involvement in a chain of companies and whether the existence of the chain is material. In such a case, it will be for the ECJ to give proper reasons for its different legal opinion. [40] In the absence of jurisdiction, it is not for the extended Chamber to address the question whether, in the absence of a chain of entities, the fact that there has been an increase in price over the normal price is sufficient to conclude that there is a concentration of persons under s 23(7)(b)(5) of the Income Tax Act. [41] Since the Extended Chamber found that it did not have jurisdiction to rule on the matter, it referred the case back to the Second Chamber without considering the merits of the question referred to it.” Click here for English Translation Click here for other translation ...

At issue was VAT and tax deduction for costs of media and advertising space that EVEREST allegedly purchased from Koukni and Concept s.r.o. and Concept s.r.o.. A tax assessment was issued to EVEREST based on (1) failure to prove the receipt of the supply of “media and advertising space” to the declared extent and (2) denial of the claimed right to deduct VAT as the tax administrator found that EVEREST knew or should have known that it had engaged in VAT fraud by participating in those arrangements. An appeal was filed by EVEREST claiming that various legal formalities had not been observed by the tax authorities i.e. the tax administrator was not competent to issue the decision at all, the decision suffers from defects which render it manifestly internally inconsistent or legally or factually unworkable; the decision is issued on the basis of another void decision issued by the tax administrator; EVEREST was not a related party in relation to Koukni and Concept for the purpose of creating illegal tax optimisation. Decision of the Regional Court The Court decided in favor of the tax authorities and dismissed the appeal of EVEREST. Excerpts (in English) “The applicant alleges each of those grounds. However, in neither case did the Court find that her plea of nullity was well-founded.” “The case-law of the Court of Justice of the EU has repeatedly dealt with VAT fraud. It shows that a situation where a taxable person claims a deduction fraudulently (or abusively) is an exception to the principle that, if the substantive and formal conditions for entitlement to a deduction are met, the taxable person is entitled to the deduction (see, for example, Case C-371/08, CJEU v. Czech Republic [2006] ECR I-1753, paragraph 1). Judgments of the Court of Justice of 21.6.2012, Mahagében and Dávid, Joined Cases C 80/11 and C 142/11, paragraph 41, or of 28.7.2016, Giuseppe Astone, C 332/15, paragraph 50). However, the mere existence of fraudulent conduct is not sufficient to deny a deduction. The right to a deduction is not affected if one of the preceding or subsequent supplies in the chain of supplies was affected by tax fraud, unless the taxable person knew or could have known this (see, for example, judgment of the Court of Justice of 6 July 2006, Axel Kittel and Recolta, Joined Cases C 439/04 and C 440/04, paragraphs 45 and 49). It is therefore necessary to examine the existence of tax evasion and, if it is established, it must be shown that the taxable person knew or should have known of the evasion in order to be denied the right to deduct the tax.” “Also irrelevant is the applicant’s contention that it did not benefit from the disputed transactions but, on the contrary, profited from them. As the Court has already explained above, the right to deduct may be denied not only in a situation where the taxable person himself has committed the evasion, but also where the taxable person knew or ought to have known that he was engaged in a transaction which is part of a VAT evasion by acquiring goods or services and, by his participation in the chain, made such transactions possible, even though he himself did not directly benefit from them. In other words, a taxable person who knew or ought to have known that his purchase was part of a VAT fraudulent transaction must be regarded as participating in that tax fraud, irrespective of whether he benefits from the subsequent sale of goods or use of services in the context of the taxable transactions which he has carried out at the exit (see, for example, the VAT Code of Conduct, the VAT Code of Conduct and the VAT Code of Conduct, the VAT Code of Conduct and the VAT Code of Conduct, the VAT Code of Conduct and the VAT Code of Conduct). Bonik, cited above, paragraph 39; Kittel and Recolta, cited above, paragraph 56; and Mahagében and Dávid, cited above, paragraph 46). Nor can the expert opinion of Prof. Ing. Hótová, which concerned only the fictitious transactions between the applicant and Ebko. Its conclusions are therefore not transferable to the transactions now under examination. Indeed, in its reply, the applicant admitted that it partly agreed with the defendant as regards the applicability of that expert opinion in that it concerned fictitious transactions, but nevertheless stressed that it did not know and could not have known of the dishonest conduct of its business partners (see paragraph 60 above). The question of the applicant’s knowledge of its involvement in the fraud has already been dealt with in detail by the Court above.” Click here for English Translation Click here for other translation ...

LAKUM KTL, a. s. had deducted from its taxable income costs for the purchase of advertising and promotional services from PRESSTEX MEDIA and PAMBROKE Media. Following an audit, the tax authorities concluded that LAKUM had entered into a legal relationship with PRESSTEX and PAMBROKE for the purpose of reducing the tax base. The tax authorities established reference prices on the basis that LAKUM could have entered into the contract for advertising and promotional services directly with the club concerned and, from the price range thus established, determined the arm’s length price for the services and increased the tax base accordingly. Decision of the Regional Court The Regional Court ruled in favour of the tax authorities on the pricing issue. Excerpts “37. The applicant first argued that the conditions for the application of the first sentence of Article 23(7) of the Income Tax Act were not met. According to that provision, if the prices agreed between related parties differ from the prices which would have been agreed between unrelated parties in normal commercial relations under the same or similar conditions, and if that difference is not satisfactorily substantiated, the taxpayer’s tax base is adjusted by the difference found. The concept of connected persons is defined in paragraph (b)(5) of the same provision as meaning that, for the purposes of this Act, connected persons are otherwise connected persons who have formed a legal relationship principally for the purpose of reducing the tax base or reducing a tax loss. 38. The applicant argued that a finding that the price obtained differs from the normal price is not sufficient to conclude that there are connected persons, otherwise the question of otherwise connected persons would be superfluous. At the same time, the applicant’s knowledge of that unreasonable increase must be established. He also argued that there was no profit on the part of the applicant, since he had actually spent the sums on advertising and the savings in the form of a reduced tax base were much smaller in relation to the costs incurred. 39. The Regional Court did not find any merit in this objection in its previous judgment. It has reached the same conclusion now. It did not consider it necessary to await the decision of the Extended Chamber in Case No 2 Afs 132/2020-56 of 22 December 2021 on the question whether ‘the finding of a significantly increased price of the subject-matter of the contract compared to the normal price without a satisfactory explanation of the difference is a sufficient condition for concluding that there is a combination of persons for the purpose of reducing the tax base or increasing the tax loss, or whether other facts in the conduct of the taxpayer indicating the unusual nature of the commercial transaction must be proved by the administration’. The reason for this is that the tax authorities based their conclusion that the parties were connected not only on the finding of an exorbitant price but also on other circumstances which suggest that the transaction was unusual. In its previous judgment, the Regional Court did not deal with them in detail, as it relied on the view, held by case law at the time, that the finding of an exorbitant price without a satisfactory reason was sufficient for the conclusion of connected persons within the meaning of Section 23(7)(b)(5) of the Income Tax Act (e.g. Supreme Administrative Court judgments of 13 June 2013, no. 7 Afs 47/2013-30, 28 January 2021, no. 3 Afs 393/2019-43 or 20 August 2021, no. 2 Afs 313/2019-43). The Court therefore found the applicant’s objection with regard to them irrelevant. In view of the question submitted to the Extended Chamber, its irrelevance is no longer apparent and the Regional Court will comment on them below, but there is no reason to wait for the decision of the Extended Chamber; even if it were to prevail that the definition of connected persons includes, in addition to the exorbitant price, the presence of such facts in the conduct of the tax entity as to indicate the unusual nature of the transaction, that could not have a favourable effect on the applicant’s procedural success in the case now under consideration. 40. In the case at hand, the tax authority raised doubts about the claimed costs, finding that the total costs incurred by the applicant’s suppliers PRESSTEX and PAMBROKE for advertising and promotional services for the year 2013 for the applicant amounted to CZK 56 104, while the applicant booked costs of CZK 6 000 000, representing 107 times the price paid by the suppliers PRESSTEX and PAMBROKE. The tax administrator’s doubts were also raised by other “non-standard circumstances” mentioned in the Tax Audit Report on pages 23-25, which are: – a change in the contractual terms, as the documents on the performance of the subject matter of the contract were delivered to the applicant after the end of the contractual relationship – discrepancies between the contract and the invoice and between the photographic documentation and the invoice (different size of the banner, failure to indicate advertising in the Golf Arena Ostrava, invoicing for advertising services even for months when no matches were played) – the applicant’s failure to comply with the payment terms – failure to verify the effectiveness of advertising costs – non-standardisation of the applicant’s suppliers PRESSTEX and PAMBROKE (non-contactability of PRESSTEX, virtual headquarters, cash withdrawals of large sums, company without a statutory body) – the failure to verify the price quotation, since the applicant accepted the price proposed by PRESSTEX without further investigation of the more advantageous quotation, even though the applicant could have recognised the overestimation of the price because it has long been active in the sports and business environment. 41. On the basis of the foregoing, the tax administration found that there was a relationship between the applicant and PRESSTEX and PAMBROKE corresponding to Article 23(7)(b)(5) of the Income Tax Act, and the defendant agreed with its assessment (see paragraph 90 of the contested decision). 42. The ...

Italien fashion group, Dolce & Gabbana s.r.l. (hereinafter DG s.r.l.), the licensee of the Dolce&Gabbana trademark, entered into a sub-licensing agreement with its subsidiary Dolce&Gabbana Industria (hereinafter DG Industria or Industria) whereby the former granted to the latter the right to produce, distribute and sell products bearing the well-known trademark throughout the world and undertook to carry out promotion and marketing activities in return for royalties. DG s.r.l., in order to carry out promotion and marketing activities in the U.S.A., made use of the company Dolce&Gabbana Usa Inc. (hereinafter DG Usa) with contracts in force since 2002; in particular, on March 16, 2005, it entered into a service agreement whereby DG Usa undertook to provide the aforesaid services in return for an annual fee payable by DG s.r.l.; this consideration is determined on the basis of the costs analytically attributable to the provision of the agreed services in addition to a mark up, i.e. a mark-up, determined in a variable percentage based on the amount of the cost. In order to verify the fairness of the consideration, the parties have provided for the obligation of analytical reporting as well as an amicable settlement procedure through an auditing company. Lastly, DG s.r.l., DG Usa and DG Industria entered into another agreement, supply agreement, whereby DG Industria appointed DG Usa as its distributor for the USA in mono-brand shops, DG Usa committed to DG s.r.l. to adapt the shops to its high quality standards functional to increasing brand awareness, and DG s.r.l. committed to pay a service fee. The service contribution was recognised in relation to the costs exceeding a percentage of the turnover realised through the mono-brand sales outlets. In the course of an audit, the Italian Revenue Agency made the following findings in relation to the tax year 1 April 2004 to 31 March 2005: first, it denied the deductibility from the taxable income for IRES and IRAP purposes of part of the fees paid by DG s.r.l. to DG USA under the service contract and precisely: a) of the costs of certain services (in particular, it recognised the costs for commercial sales, executive consultant, advertising Madison sales, advertising all others and not the others), because, provided that these were generic services, falling within the normal activity of the reseller of goods, remunerated by the resale margin, and that the reimbursable costs were defined generically, without provision of a ceiling, a reporting method and prior approval by DG s.r.l., it pointed out that it could only recognise the costs rendered in the interest >>also of the parent company<<; b) the portion corresponding to the chargeback of the mark-up, referring to Revenue Agency Circular No. 32/80 on intra-group services, where it provides that the mark-up in favour of the service provider is recognisable only where the services constitute the typical activity of the service provider and not for those services rendered by the parent company that have no market value or are attributable to the general management or administrative activity of the parent company; secondly, it denied the deductibility of the consideration paid by DG s.r.l. to DG Usa under the supply agreement, pointing out that the costs to be considered for the purposes of the contribution would be generically identified, there would be no obligation of adequate reporting or prior approval, which would in fact transfer to DG s.r.l. the risk of substantial inefficiencies of DG Usa, a risk that no independent third party would have assumed, and that the party had not adequately demonstrated that the costs corresponded to the normal value of the costs inasmuch as the documentation produced, relating to other fashion groups, concerned persons who were also owners of the mark, directly interested in its development and promotion. DG s.r.l. brought an appeal before the Provincial Tax Commission of Milan, which rejected it. An appeal was then brought before the Regional Tax Commission of Lombardy which was likewise rejected. In particular, the Regional Tax Commission, for what is relevant herein rejected the preliminary objections (failure to contest the recovery by means of a report; insufficiency and contradictory motivation); reconstructed the subject matter of the dispute, pointing out that the Agency had contested some costs of the service agreement, excluding their inherent nature; for the costs deemed inherent, it had recalculated the amount, excluding the mark-up; for the supply agreement, it had re-taxed the costs, excluding their deductibility due to lack of inherent nature in relation to the service agreement, it confirmed that the costs for the excluded services were not inherent, because: a) DG Usa also carried out activities pertaining to the retailer DG Industria, distributor of Dolce&Gabbana branded products in the U.S. and the costs were connected to this marketing activity; b) the correlation deducted by the company between the costs recharged to DG s.r.l. and the revenues that the latter obtains as a result of the royalties paid by DG Industria, because the costs connected to services intended to increase sales are those of the retailer and not of the licensee of the trademark, to which are inherent only the costs intended to increase the prestige of the trademark itself; c) the costs incurred in the interest of both DG s.r.l. and DG Usa is not relevant and the only cost items recognisable in favour of the former are those pertaining exclusively to its relevance; d) for the purpose of proving congruity, the expert’s report by Prof. Lorenzo Pozza and the certification by Mahoney Cohen & company were irrelevant, since they were mere opinions that were not binding on the administration; (e) the mark up was not deductible since the services rendered by DG USA were rendered in the interest of both DG s.r.l., licensee of the mark, and DG Industria, reseller, and it was not possible to take into consideration the actions of the latter in favour of Itierre s.p.a., reseller and therefore different from DG s.r.l.; (f) the recharging of costs to DG s.r.l. was formally obligatory in the antero but largely ...

Following an audit the tax authorities issued an assessment of additional income resulting from an adjustment of the tax deductions related to marketing expenses. According to the tax authorities the price agreed between the related parties for advertising space was excessive and not determined in accordance with the arm’s length principle. ANITA B s.r.o. filed an appeal against the assessment. The Regional Court dismissed the appeal as unfounded by judgment of 26 October 2021, No. 62 Af 70/2019-48. The Court concluded that the tax authorities had established that the price agreed between ANITA B s.r.o. and its supplier (ELAPROMO) differed from the price that would have been agreed between unrelated parties. The Court upheld the method chosen by the tax authorities and concluded that ANITA B s.r.o. had failed to prove that the advertising costs claimed were justified in full. An appeal was then filed with the Supreme Administrative Court Judgement of the Supreme Administrative Court The court decided in favour of the tax authorities and upheld the decision from the Regional Court. Excerpt “[40] In its judgment of 26 March 2014, no. 9 Afs 87/2012-50, the Supreme Administrative Court explained that “[t]he purpose of the provision in question is to prevent the unwanted shifting of part of the income tax base between individual income taxpayers and to enable the sanctioning of abusive price speculation in business relations. It also concerns the so-called “profit shifting” between persons with different tax burdens, which usually occurs when such persons charge each other prices lower or higher than the prices used between independent persons in normal business relations, and the result of such transactions is an increase in costs or a decrease in sales for the company with the higher tax burden and a siphoning off of part of the profits to the company with the lower or zero income tax rate. It further summarised that ‘a material difference from normal prices occurs when sales are made too cheaply or purchases are made too expensively; in such cases, such a difference must always be satisfactorily documented’. [41] In that connection, the complainant pointed out that TOP Reklama was the exclusive purchaser of the advertising space, which significantly affected its subsequent bargaining position. However, that argument cannot be accepted. The Regional Court dealt with it in paragraph 29 of the judgment under appeal and the Supreme Administrative Court fully agrees with its view. That argument certainly cannot be regarded in the present case as satisfactory evidence of a price difference within the meaning of Article 23(7) of the ITA. As regards the argument concerning the importance and fame of the sports grounds in question, it cannot be accepted either, since any exclusivity is already included in the price at which SK Vodova Brno and FC Zbrojovka Brno lease the advertising space to TOP Reklama. The Supreme Administrative Court therefore has no other explanation than that the price was overestimated in order to obtain a tax advantage. [42] Furthermore, the complainant has repeatedly stated that it is an entrepreneur in the field of development, production and trade in sewing machines and cannot be required to have knowledge of the advertising market. However, this and subsequent arguments are again unhelpful as they do not explain the substantial difference from normal prices. At the same time, the Supreme Administrative Court reiterates at this point that it is irrelevant to the case whether the complainant was knowingly involved in the chain of connected persons. [43] In view of the foregoing, the tax administrator proved that the case involved related persons within the meaning of section 23(7)(b)(5) of the ITA, that the prices agreed between those persons differed from the prices that would have been agreed between independent persons in normal business relations under the same or similar conditions, and that the complainant did not specifically explain and document the difference between the agreed price and the normal price. In such a situation, the tax administrator was entitled to adjust the tax base by the difference between the above-mentioned prices in accordance with Article 23(7) of the ITA. [44] It can therefore be summarised that the Regional Court assessed the relevant legal issues correctly and based itself on the facts of the case duly established by the tax administration authorities. The grounds of appeal set out in Article 103(1)(a) and (b) of the Code of Civil Procedure were therefore not met.” Click here for English Translation Click here for other translation ...

Following an audit the tax authorities issued an assessment of additional income resulting from an adjustment of the tax deductions related to marketing expenses. According to the tax authorities the parties to the transactions were “otherwise related” within the meaning of the Czech arm’s length provisions in § 23 par. b) point 5 of the Income Tax Act. SERVIS OPAVA filed an appeal against the assessment claiming that the tax authorities did not established the existence of a relationship between the parties and therefore had no legal basis for the adjustment. The Regional Administrative Court dismissed the appeal and upheld the decision of the tax authorities. An appeal was then filed against this decision with the Supreme Administrative Court Judgement of the Supreme Administrative Court The court decided in favour of SERVIS OPAVA. The prerequisite for the adjustment of the tax base pursuant to Section 23(7) of Act No. 586/1992 Coll., on Income Taxes, is the determination that the relationship is between related persons. Only after the tax administration has carried the burden of proof in relation to this condition may it proceed to assess whether the prices agreed between related parties differ from the prices that would have been agreed between unrelated parties in normal commercial relations under the same or similar conditions. Therefore, the conclusion that the parties to the legal relationship are otherwise connected persons within the meaning of section 23(7)(b)(5) of the Act cannot be drawn solely from the fact that in the case under examination there is a difference between the agreed price and the normal price. The tax administrator is obligated to examine the possible existence of other circumstances which would indicate that such a relationship was established mainly to reduce the tax base or increase the tax loss, i.e. that the companies are otherwise related as defined by § 23 para. 7 b) of the Czech Income Tax Act. Click here for English Translation Click here for other translation ...

LCN Group had deducted costs in its taxable income for marketing services provided by related parties – PRESSTEX MEDIA SE and TARDEM Media s.r.o. and PAPILIO. The claimed advertising costs from PRESSTEX in FY 2012 was produced and implemented by PAPILIO and subsequently invoiced to LCN Group, virtually unchanged, at a price 23 times higher than the price of the advertising, without the corresponding value added being justified. In relation to FY 2013, LCN Group claimed advertising costs from TARDEM in a similar pattern where the price was increased by up to 56 times. In both tax periods, LCN Group’s advertising/promotion costs were related to sporting events (gymnastics world cup, tennis tournament and golf tournaments). The tax authorities concluded that the prices agreed between the parties was not at arm’s length and issued an assessment. The Regional Court annulled the assessment. It argued that the tax authorities had not sufficiently dealt with the identification and description of the conditions under which the prices of the controlled transactions had been agreed. The tax authorities had not considered the “commercial strength” and “advertising capacity” of the parties. The tax authorities brought this decision to the Supreme Administrative Court. Judgement of the Supreme Administrative Court. The Supreme Administrative Court set aside the decision of the Regional Court and refered the case back to that court for further proceedings. The arm’s length price is the price applied between independent entities or, if no such data exists or is not available, a hypothetical estimate based on logical and rational considerations and economic experience. As regards the “commercial strength” of the parties, the Regional Court did not specify that concept, did not indicate what aspects should be taken into account in the context of that condition, or how that condition affects the prices for advertising services. With regard to the alleged lack of consideration of advertising capacity at the time the contracts were concluded, it may be noted that this aspect may be relevant in assessing the reasons for the difference in prices between the related parties and those agreed in normal commercial relations. However, the possible proof of this fact falls within the scope of the assessment of whether the tax payer has satisfactorily substantiated the price difference. The Regional Court did not deal with this issue. Click here for English Translation Click here for other translation ...

LCN Group s.r.o. had deducted costs in its taxable income for marketing services provided by related parties. Following an audit, the tax authorities concluded that the prices agreed between the parties was not at arm’s length and issued an assessment. Decision of the Regional Court The Regional Court annulled the assessment and decided in favor of the LNC Group. The court held that the tax authorities had not sufficiently dealt with the identification and description of the conditions under which the prices of the controlled transactions had been agreed. The tax authorities had not considered the “commercial strength” and “advertising capacity” of the parties. Click here for English Translation Click here for other translation ...

For FY 2007, 2008 and 2009, JV had deducted expenses consisting in the payment for services pursuant to invoices issued by BP Property s.r.o. and TOP ZONEVIEW. The services consisted in the provision and implementation of an advertising campaign. Following an audit the tax authorities adjusted JV’s taxable income by the difference found, since pursuant to Article 23(7)(b)(5) of the Income Tax Act, the prices agreed differed from the prices which would have been agreed between unrelated parties in normal commercial relations under the same or similar conditions. JV contested the decision of the tax authorities but the appeal was dismissed by the Regional Court. The Regional Court held that the applicant’s objection – that he did not know and could not have known about the chain because he had dealt only with the managing director of Property Praha or B.V. – was unfounded. Section 23(7)(b)(5) of the Income Tax Act does not require proof of active conduct of all the entities and unifying intent. It is sufficient that the defendant has proved and demonstrated, on the basis of the invoicing of the advertising campaign prices and the flow of funds, as well as the negotiation, provision, collection and payment of the amount in each tax period, that the applicant was involved in the chain and that there was a flow of funds in connection with the supply to the applicant. The applicant’s involvement in the chain of trade conferred an advantage on the applicant in that it reduced its tax base by substantially increasing its expenditure. The decision of the regional court was appealed by JV to the Supreme Administrative Court. Judgement of the Supreme Administrative Court. The Supreme Administrative Court dismissed the appeal of JC and decided in favor of the tax authorities. Excerpts “The Financial Office for the Central Bohemian Region, by letter dated 24 August 2015, asked the complainant to prove and document the difference between the price claimed in the tax costs and the price established by the tax administrator. In its statement of 31 August 2015, the complainant justified the difference in prices by the increase in the company’s turnover in subsequent tax periods and emphasised its choice of a corporate promotion strategy, the success of which can only be assessed ex post. The defendant did not consider the complainant’s allegations to be economically rational and proven and the reasons why the prices between otherwise related parties differed from the reference price to be substantiated… At the hearing before the Regional Court on 23 March 2018, the complainant only noted that ‘the advertisement had the desired effect’ (see Minutes of the hearing, sheet number 103 of the Court file). However, he did not explain in detail how this claim rationally justified the difference between the agreed price and the reference price and did not offer any evidence for his claims, although he could have done so…” “However, a null and void decision is not an ‘ordinary’ unlawful decision, but a ‘decision’ which, because of its defects, cannot be regarded as a decision of an administrative authority with public authority at all and which is not capable of producing public law effects. Whereas, in the case of ‘ordinary’ defects in administrative decisions, those decisions are regarded, in view of the application of the principle of the presumption of validity and correctness of administrative acts, as existing and capable of producing the relevant legal consequences and thus affecting the sphere of rights and obligations of their addressees, that principle does not apply in the case of void administrative decisions. The nature of the defects giving rise to the nullity also gives rise to the relevant legal consequences. The most serious defects are thus necessarily associated with the most serious consequences. Therefore, no one is obliged to respect and comply with a null and void administrative decision. It is regarded as if it did not exist at all and is therefore an irremediable legal nullity. Nullity cannot be cured even by the lapse of time.” (Judgment of the Enlarged Chamber of 13 May 2008, no. 8 Afs 78/2006 – 74). Pursuant to Article 109(4) of the Code of Civil Procedure, the Supreme Administrative Court is entitled to declare an administrative decision void of its own motion, i.e. even without an express cassation objection. However, it found that the contested decisions do not meet the characteristics described above, do not lack a legal basis or factual basis, do not lack jurisdiction or the most serious defects of jurisdiction, do not suffer from an absolute lack of form, do not contain an absolute mistake as to the addressee, do not contain a requirement of criminal or factually impossible performance, are not vague or meaningless, so that, according to the settled case-law of the Supreme Administrative Court, they cannot be considered null and void.” Click here for English Translation Click here for other translation ...

In this case the court accepted the tax authorities’ procedure for determining the arm’s length price for advertising services, whereby the tax authorities took into account conditions such as the size of the advertising space, the type of event, the duration of the advertising, etc., when comparing controlled and uncontrolled transactions The appeal of JN Trans was dismissed by the court. Click here for English Translation Click here for other translation ...

EWE s.r.o first criticised the Regional Court for the lack of logical reasoning in the grounds of the judgment, based on evidence that it had established a legal relationship with another person mainly for the purpose of reducing the tax base. Although the facts adduced by the administrative court show that ‘some third parties’ created a relationship between them for that purpose, it does not indicate which evidence shows that it was she who created such a relationship for the purpose of reducing the tax base, as is intended by section 23(7)(b)(5) of the Income Tax Act. This defect in the court’s decision is all the more serious since she herself argued that no evidence was adduced in the administrative proceedings (in the tax inspection report) to show that she was knowingly involved in a chain of otherwise connected persons. It is thus merely the unproven assumptions of the tax authorities. No such evidence was presented by the Police of the Czech Republic in its complaint to the tax administrator. In so far as the Regional Court subsequently found such findings to be correct, its judgment is based on insufficient or incorrect findings of fact. If the administrative court accepted the conclusions of the administrative authorities that the conditions for the application of Section 23(7) of the Income Tax Act were met, it was obliged to state on what evidence it agreed with the conclusion of the Tax Directorate. However, the Regional Court failed to do so and its judgment is therefore unreviewable. This is also because no such evidence exists and was not adduced by the tax administrator, the Tax Directorate or the Regional Court. As far as it is aware, in other cases – for example, in the case of the appeal of STECOMTRA s.r.o., Tax Registration No:26847469 (another end customer of the chain in question), the Tax Directorate in Ostrava stated in its decision on the appeal that the tax administrator had failed to collect such evidence to show that the appellant knew or could have known that it was part of the chain (while it had the same documents from the police as the administrative authorities in its case). Since in her case it was not established that she was a person otherwise connected within the meaning of section 23(7) of the Income Tax Act, there was no legal reason for the tax authorities to ask her to prove the difference between her purchase price and the normal price. She was, therefore, not required to satisfactorily prove the alleged price difference. The tax authorities were therefore not legally entitled to adjust the tax base by the difference found. Any determination of the normal price was therefore irrelevant. The taxpayer’s normal price was the price at which it purchased the services from its supplier (Property). That company also offered its services to others at the prices paid to it. The price invoiced in her case was also the price for similar advertising in other media. The Regional Court therefore not only misinterpreted Section 23(7) of the Income Tax Act, but also incorrectly considered her burden of proof. If there were no material doubts on the part of the tax authority, there was no obligation on the tax authority to prove the differences between the prices. It cannot therefore be concluded that, as a taxable person, it did not satisfactorily document and prove the difference in prices between the services it purchased and similar services contracted between unrelated parties. The Regional Court thus erred in its consideration of the issue of the taxpayer’s burden of proof (Article 92(5)(d) of the Tax Code). Since the Regional Court, without giving any further reasons, merely followed the legal opinion of the Tax Directorate, thereby approving, inter alia, the unlawful procedure of the administrative authorities, its judgment is also unreviewable. By that defective procedure, the administrative court also infringed the applicant’s right to seek protection of her rights before an independent and impartial tribunal. In its written observations on the appeal, the Directorate of Appeal considers that the extraordinary appeal is unfounded. The judgment of the Regional Court is factually correct and not unreviewable. The objection that the Regional Court, like the administrative authorities, does not indicate which evidence shows that the appellant established a legal relationship with another person mainly for the purpose of reducing the tax base is entirely unfounded. Both the Regional Court and the administrative authorities have dealt with the question of otherwise connected persons and have duly established that fact. The complainant was at the end of the chain when it purchased advertising at 22 times the price charged by the first link in the chain, which provided the service at the normal price. Both the existence of this chain and the amounts invoiced in this chain were proven. The administrative authorities have thus met their burden of proof under Article 23(7) of the Income Tax Act and have established the objective situation, namely that the complainant was part of a chain of otherwise connected persons. The applicant therefore requests the Supreme Administrative Court to dismiss the appeal. Judgement of the Court The Court dismissed the appeal of EWE s.r.o. Excerpt “The Supreme Administrative Court notes that a person under section 23(7)(b)(5) of the Income Tax Act is any person who benefits from the actions of persons in a chain whose effect and purpose is predominantly to reduce the tax base or increase the tax loss (here, a 22-fold increase in the tax-effective expenditure). This does not change the complainant’s assumption that the Tax Directorate is obliged to prove the subjective aspect of such unfair conduct, i.e. her knowledge of such conduct (intent), i.e. that she entered into the contractual relationship with knowledge of a possible reduction in her tax base. The question of fault is relevant in criminal law, but not in the tax administration proceedings (tax law). Moreover, the fact that a possible expense originated with persons who are otherwise related does not in itself ...

Cheil Communications India Pvt. Ltd. is a subsidiary of a Korean based advertising agency, Cheil Communications. The Indian affiliate had excluded pass-through costs from its cost base when determining the arm’s length remuneration for its activities. The tax authority included the the pass-through costs in the cost base and issued an assessment for FY 2005-06 where these costs were also marked up. Judgement of the Tribunal The Tribunal annulled the assessment and ruled in favor of Cheil Communications India. Excerpt “(…)For performing the functions for and on behalf of associated enterprises, the assessee is remunerated by its associated enterprises on the basis of a fixed commission/charges based on expenses or cost incurred by the assessee for release of a particular advertisement. It is also to be noted that advertising space (be it media, print or outdoor), has been let out by third party vendors in the name of ultimate customers and beneficiary of advertisement. We have gone through the invoices and purchase orders from third party vendors and find that they contain customers’ name, and all the terms of advertisement are finalized after taking the approval from the customers. The assessee simply acts as an intermediary between the ultimate customer and the third party vendor in order to facilitate placement of the advertisement. The payment made by the assessee to vendors is recovered from the respective customers or associate enterprises. In the event customer fails to pay any such amount to the advertisement agency, the bad debt risk is borne by the third party vendor and not by the advertising agency i.e. the assessee. It is, thus, clear that the assessee has not assumed any risk on account of non-payment by its customers or associated enterprises. At this stage a useful reference may be made to ITS 2009 Transfer Pricing Guidelines accepted by the OECD where it is laid down that when an associate enterprises is acting only as an agent or intermediary in the provision of service, it is important in applying the cost plus method that the return or mark-up is appropriate for the performance of an agency function rather than for the performance of the services themselves, and, in such a case, it may be not appropriate to determine arm’s length price as a mark-up on the cost of services but rather on the cost of agency function itself, or alternatively, depending on the type of comparable data being used, the mark-up on the cost of services should be lower than would be appropriate for the performance of the services themselves. In this type of cases, it will be appropriate to pass on the cost of rendering advertising space, to the credit recipient without a mark up and to apply a mark-up only to the costs incurred by the intermediary in performing its agency function. These guidelines are as under:- 3.41 In applying the transactional net margin method, various considerations should influence the choice of margin used. For example, these considerations would include how well the value of assets employed in the calculations is measured (e.g. to shat extent there is intangible property the value of which is not captured on the books of the enterprise) and the factors affecting whether specific costs should be passed through, marked up, or excluded entirely from the calculation. 41. In the proposed revision of Chapter I-III of the Transfer Pricing Guidelines issue don 9th September, 2009 – 9th January, 2010 by OECD, it has been provided in Para 2.134 as under:- “2.134 In applying a cost-based transactional net margin method, fully loaded costs are often used, including all the direct and indirect costs attributable to the activity or transaction, together with an appropriate allocation in respect of the overheads of the business. The question can arise whether and to what extent it is acceptable at arm’s length to treat a significant portion of the taxpayer’s costs as pass- through costs to which no profit element is attributed (i.e. as costs which are potentially excludable from the denominator of the net profit margin indicator). This depends on the extent to which an independent party at arm’s length would accept not to be remunerated on part of the expenses it incurs. The response should not be based on the classification of costs as “internal” or “external” costs, but rather on a comparability (including functional) analysis, and in particular on a determination of the value added by the tested party in relation to those costs.” 42. Further, OECD in ITS 2009 Transfer Pricing Guidelines has laid down as under:- “7.36 When an associated enterprise is acting only as an agent or intermediary in the provision of services, it is important in applying the cost plus method that the return or mark-up is appropriate for the performance of an agency function rather than for the performance of the services themselves. In such a case, it may not be appropriate to determine arm’s length pricing as a mark-up on the cost of the services but rather on the costs of the agency function itself, or alternatively, depending on the type of comparable data being used, the mark-up on the cost of services should be lower than would be appropriate for the performance of the services themselves. For example, an associated enterprise may incur the costs of rending advertising space on behalf of group members, costs that the group members would have incurred directly had they been independent. In such a case, it may well be appropriate to pass on these costs to the group recipients without a mark-up, and to apply a mark-up only to the costs incurred by the intermediary in performing its agency function.” 43. In the light of these guidelines, it would be, therefore, clear that a mark-up is to be applied to the cost incurred by the assessee company in performing its agency function and not to the cost of rendering advertising space on behalf of its associate enterprises. We further find that the method adopted by the assessee while submitting ...

If the assessment of the abnormal nature of a management act poses a question of law, it is, as a general rule, up to the administration to establish the facts on which it bases itself to invoke this abnormal nature. However, this principle can only be applied in compliance with the legislative and regulatory provisions governing the burden of proof in tax litigation. The determination of the burden of proof stems mainly, in the case of companies subject to corporation tax, from the nature of the accounting operations to which the management acts challenged by the administration gave rise. If the act contested by the administration has resulted, in the accounts, in an entry relating, as is the case here, to travel expenses, to charges of the nature of those referred to in Article 39 of the same Code and which are deducted from the net profit defined in Article 38 of the Code, the administration must be deemed to provide the proof which is incumbent on it if the taxpayer is not, himself, able to justify, in principle as well as in amount, the accuracy of the entry in question, even if, because of the procedure implemented, he would not have been required to provide such a justification in this respect. When there is a disagreement between the taxpayer and the administration on questions of fact, whether it concerns the materiality of the facts themselves or the assessment that should be made of the facts, particularly with regard to the real situation of the company or the trade or industry practices to which it belongs, this disagreement may, by virtue of the provisions of Article 1649 quinquies A of the CGI included in Article L.59 of the tax procedure book, be submitted to the assessment of the departmental commission of direct taxes and turnover taxes at the taxpayer’s initiative or that of the administration. When the latter has followed the duly expressed opinion of the commission, it is, in any case, up to the taxpayer to demonstrate, before the tax judge, the factual elements he is relying on. As the taxes were established in accordance with the opinion of the departmental commission, it is up to the company to prove the contrary, with regard to the adjustments made by the administration on the basis of Article 57 of the CGI. Excerpt from the Judgement “.. Considering that, with regard to the “commissions” paid by the company “BOUTIQUE 2M” to the Swedish company “Hennes-Mauritz AB”, the administration establishes the existence of the link of dependence of the former with regard to the latter, of which it avails itself, as well as the materiality and the amount of the payments; that, however, the company “BOUTIQUE 2M” justifies, for its part, that the Swedish firm gave it effective support to develop sales in France while invoicing it for the goods on the basis of its own purchase prices plus only transport costs; that, in view of the particularly advantageous conditions that it had thus been granted in the interest of its own business, ‘BOUTIQUE 2M’ provides proof that, contrary to what the departmental tax commission considered, the payments made to ‘Hennes-Mauritz AB’ actually involved commercial considerations of at least equivalent value for it, which prevented them from being reintegrated by application of the above-mentioned provisions of Article 57 ; that, consequently, the applicant company is entitled to maintain that it is wrongly that, by the contested judgment, the administrative court rejected its request insofar as it relates to the reintegration of the said commissions….” Click here for English translation Click here for other translation ...