Narcea Producciones y Promociones SL managed the economic rights, representation commissions and the image and TV rights of a football player. The image and TV rights were transferred to a related party free of charge. Following an audit, the tax authorities issued an assessment where profits from the transfer had been added to the taxable income based on the arm’s length principle. Not satisfied with this decision Narcea Producciones y Promociones, S.L. filed an appeal. Judgement for the Tribunal Superior The Tribunal Superior dismissed the appeal and decided in favor of the tax authorities. Excerpts: “In accordance with Article 16.1.1º and 2º and 4.1º a) of the TRLIS, related-party transactions shall be valued at market price between independent parties in conditions of free competition and this allows the tax authorities to check this valuation and make the corresponding valuation corrections with regard to transactions subject to Corporate Income Tax, Personal Income Tax and Non-Resident Income Tax, with the limit of not determining a higher income than that effectively derived from the transaction for all the persons or entities that have carried it out and the value that is set is binding for the former in relation to the rest of the related persons or entities. In this case there has been a lower taxation than that which would have resulted from valuing the transaction at market price, considering that there was no remuneration whatsoever by the company to the member for the transfer of his image and TV rights compared to the value paid by the football club to the plaintiff company for said transfer. In relation to the valuation itself, among the means provided for this purpose by the Law, is the method of the free purchase price, article 4.1º.a) of the TRLIS, which in this case has been applied by the Inspectorate, taking as the value of the transaction the amounts received for the transfer of the image and TV rights, deducting the expenses necessary to obtain them, taking into account the percentage represented by the amounts paid by Hercules for the transfer with respect to the total income obtained by the company and the total expenses. The Inspectorate, in our opinion correctly, after analysing the peculiarities of the service provided, which takes into account the personal qualities of the partner and is the reason why the service is contracted, the assumption by the partner of the service and of the main risks and the characteristics of the market, applies the method provided for in article 16.4.1º. a) of the TRLIS, taking as market value between independent parties and in free competition the amounts received by the company that were agreed with Hercules for the transfer of the image and TV rights of the professional footballer partner, corrected with the deduction of the expenses that were necessary to obtain them, duly accredited, without the presumption of having valued the operation at market price being applicable in this case, as the requirements established in article 16. 6 of the RIS, as the company lacked the material and human resources to provide the services beyond the shareholder and did not remunerate the latter in any amount for such a transfer. This valuation method as applied by the tax authorities complies with the OECD transfer pricing guidelines of 22/0/2010, as the characteristics of the services, the functions and risks assumed by the parties, the contractual terms of the transactions and the economic circumstances of the market were taken into account. According to the appellant, the valuation method applied does not satisfy the comparability requirements of the method of Article 16(4)(a), because no basis for comparison is taken, but it is the value agreed between independent parties consisting of the amount which each year the football club was prepared to pay for the transfer of the image and TV rights of the footballer, a single person for that purpose without any comparable. Furthermore, the legal qualification made by the Inspectorate of the business carried out as a related transaction is correct as has been seen for the purposes of Article 13 of Law 58/2003 and it was not necessary to resort to the figure of the relative simulation of Article 16 of the same Law, which requires an appearance of a business other than the real one and wanted by the parties, nor the conflict in the application of the rule, whose requirements are not met given the wording of Article 15 of the same Law, which requires that the transactions are notoriously artificial or improper for the result obtained and that they do not result in relevant legal or economic effects other than the fiscal savings and the effects of the usual or proper transactions.” Click here for English translation Click here for other translation ...

According to the Regional Court, it follows from Section 2 of the Income Tax Act that a footballer is subject to tax in the Czech Republic by reason of his residence, permanent home or other similar criteria if he had resided in the Czech Republic (continuously or in several periods) for at least 183 days in 2011 or if he had a permanent home in the Czech Republic in circumstances from which it can be inferred that he intended to reside there permanently. If at least one of these conditions is met, the footballer would be a Czech tax resident within the meaning of Article 2(2) of the Income Tax Act and would be liable to tax on the basis of that (i.e. residence, permanent home or similar criteria). He would therefore also be a resident of the Czech Republic within the meaning of Article 4(1) of the Double Taxation Treaty. The Regional Court did not find any reason to apply Article 5 or Article 3(2) of the Double Taxation Treaty, since the contested decision is based, quite correctly, on the interpretation of Article 4 of the Treaty and, in particular, on the fact that the applicant did not bear the burden of proof to establish that the footballer was a tax resident of the Czech Republic. With regard to the objections challenging the procedure under section 38s of the Income Tax Act, the Court states that that provision does not give the tax authorities any margin of appreciation when it comes to determining the basis for calculating the tax levied or withheld. It clearly states that the basis for calculating the amount of tax levied or withheld, including advances, is the amount which, after collection or withholding, would have remained after the amount actually paid by the taxpayer to the taxpayer. It is therefore irrelevant what amount the footballer invoiced to the claimant, but only what amount was actually paid to him. At the same time, the applicant’s argument that, if the tax had not been paid by a domestic person, only the actual income would have been the taxable amount is not valid. Such a situation cannot arise at all in the case of a procedure under section 38s of the Income Tax Act. Therefore, in the Court’s view, the tax authorities did not err in failing to address the question of actual income as the applicant had envisaged it and in relying only on the amounts paid by the applicant to the footballer. An appeal was filed with the Supreme Administrative Court. Judgement of the Court The Supreme Administrative Court found the first ground of appeal (failure to discharge the burden of proof) to be well-founded and therefore set aside the judgment of the Regional Court under appeal. Since the defects complained of cannot be remedied in the proceedings before the Regional Court, but can only be remedied in the proceedings before the administrative authority, the Supreme Administrative Court also annulled the defendant’s decision, which is bound in further proceedings by the legal opinion expressed above (in particular paragraph [55] of the judgment). [88] As the Supreme Administrative Court annulled the judgment of the Regional Court and at the same time annulled the decision of the administrative authority pursuant to Article 110(2) of the Code of Civil Procedure, it is obliged to decide on the costs of the proceedings preceding the annulled decision of the Regional Court (Article 110(3), second sentence, of the Code of Civil Procedure). In this case, the costs of the proceedings on the action and the costs of the proceedings on the appeal form a single unit and the Supreme Administrative Court decided on their compensation in a single judgment based on Article 60 of the Code of Civil Procedure (cf. judgment of the Supreme Administrative Court of 19 November 2008, No 1 As 61/2008 98). [89] The defendant was unsuccessful in the case and is therefore not entitled to reimbursement of its costs. The complainant was fully successful in the case, therefore the Supreme Administrative Court awarded him compensation for the costs of the proceedings against the defendant pursuant to Article 60(1) of the Code of Civil Procedure in conjunction with Article 120 of the Code of Civil Procedure. Those costs consisted of CZK 8 000 for court fees (court fee for the application of CZK 3 000 and court fee for the appeal of CZK 5 000). “…” Click here for English Translation Click here for other translation ...