The tax authorities had issued an assessment in which the value of shares transfered between related parties had been adjusted by application of the arm’s length principle. The assessment was appealed to the Administrative Court, which upheld the assessment. An appeal was then filed with the Administrative Court of Appeal. Judgement of the Court The Administrative Court of Appeal upheld the judgement issued by the Administrative Court and decided in favour of the tax authorities. Excerpt “It should be remembered here that at the time of the facts the law did not provide for the use of any method, although there were already some guidelines from the OECD to this effect, and the Tax and Customs Authority researched and used a methodology close to the “comparable price” of the sale of shares closest to a shareholder to the company, making reference to the fact that this shareholder tried to sell the shares on the market. In its appellate submissions and conclusions, the appellant puts forward arguments for its dismissal based on the unreliability of the values thus obtained, giving reasons for not taking into account the values set in the deal with the shareholder M…, concluded in the same year, 1997, namely due to the animosity of relations between this partner, the company and the members of the management bodies, but the truth is that it does not effectively rule out the fact that the shareholder had previously tried to sell the shares in a fully competitive market or that this had an influence on the price reached. In fact, although the Appellant emphasises the differences between the deals concluded, the first with the shareholder M…and the others at issue here, with the Carreira C…and M… families, the truth is that both acquired their own shares and for very different amounts, but it is true that, contrary to what the Appellant argues, the objects of the deals are in themselves comparable: the sale of shares. Therefore, the judgement under appeal does not deserve censure when it disregards the values ascertained in the expert report carried out more than 25 years after the facts, in a context of significant time lagsand which uses the equity method and validates the result calculated using the methodology used by the Tax and Customs Authority, for the reasons described above. In fact, in addition to not really calling into question the conclusions and methods used by the Tax and Customs Authority, the figures found in the expert’s report are not intended to replace the reasoning behind the corrections it made, nor to lead to new formulas for determining the tax base. The truth is that the factual situation described in the STA judgement cited by the Appellant is very different from the case under consideration in the present proceedings, since in addition to the fact that the existence of relationships different from those that would normally be agreed between independent peopleIn addition, the values that served as the basis for the contested settlement were not corrected on the basis of the application of the coefficient of monetary correction to the acquisition price of shares. Thus, and with greater assertiveness or development, we cannot see how the interpretation accepted violates the principle of taxing companies on their real income (article 104/2 of the Constitution), given that the law, in the aforementioned article 57/1 CIRC, allowed the Tax Authority to make corrections to the declaration [see conclusion Y) of the pleadings on appeal]. In fact, this is not about the presumption of veracity enjoyed by the Impugnant’s and now Appellant’s accounts, but rather about preventing the erosion of the tax base and tax avoidance through price manipulation by verifying the existence of special relationships between the people involved in the deal with the ability to influence the conditions and the way in which the price was determined. The Appellant is therefore wrong on these points.” Click here for English translation. Click here for other translation ...

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 ...

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. Judgment of the Regional Court The Court dismissed the appeal and upheld the decision of the tax authorities. The court first dealt with the interpretation of § 23 par. b) point 5 of the Income Tax Act. In this regard the court stated that was clear from the content of the administrative file that the applicant had a duly concluded contract with the supplier. The court therefore rejected the argument that the tax administrator should have proved the existence of a contractual relationship between economically or personally or otherwise connected persons. In this connection, the court referred to the judgment of the Supreme Administrative Court of 13 June 2013 No. 7 Afs 47 / 2013-30. The court did not consider the objection that there was no so-called “profit spillover” in the plaintiff’s case. He inferred this from the fact that he had increased his tax burden because, while the advertising supplier was required to pay value added tax on the supply, he himself was required to pay personal income tax. The Court emphasized that the applicant was ultimately the which reduced the tax base by amounts many times higher than the current price for similar services. The court described the allegation that the tax authorities were influenced by the publicity of certain court decisions in the case of PAMBROKE’s advertising in assessing the case as speculative and unsubstantiated. Last but not least, the court found the objection concerning the evaluation of the contracts submitted by the plaintiff to the defendant also unfounded. It stated that the defendant had duly justified its conduct in the contested decision, stating that the contracts submitted were not comparable to the conditions on the part of the applicant as regards the scope of the services provided or in terms of time. In those circumstances, it was superfluous for the defendant to consider comparing the contract prices in those contracts with the price of the service provided to the applicant. Click here for English Translation Click here for other translation ...

The issue in this case was the pricing of advertising services acquired by ACTRAD s.r.o. from related parties PRESSTEX PRINT and PRESSTEX MEDIA . According to the authorities ACTRAD instead of acquiring advertising and promotional services directly from the sports clubs (which was possible), used the services of intermediaries PRESSTEX PRINT and PRESSTEX MEDIA, who increased the price of the services provided significantly (290, 229 and 102 times), without adding any value to the transaction. The final price paid for the advertisement thus increased 290 times in 2011, 229 times in the first half of 2012 and 102 times in the second half of 2012 compared to the initial invoice. This increase occurred while the content, scope and form of the services remained unchanged. The result of the arrangement was a reduction in the tax bases of ACTRAD s.r.o. The tax authorities issued an assessment of additional income taxes for FY 2011 and 2012 in a total amount of ~CZK 80.000.000. ACTRAD s.r.o. disagreed with the assessment and brought the case to court. The regional court ruled in favor of the tax authorities and this decision was then appealed the decision to the Supreme Administrative Court. Judgement of the Supreme Administrative Court The Supreme Administrative Court dismissed the appeal of ACTRAD s.r.o. as unfounded. “As has been repeatedly stated above, the tax authority, in full compliance with the wording of the law and the relevant case-law, sought out the entities to which advertising was also provided at the time and in the places in question (or, alternatively, obtained the prices of advertising directly from the provider). He then determined the reference price as the highest amount of the range found. This procedure does not require any expertise beyond that which is normally available to the tax authorities’ officials. The Court of Cassation also finds no merit in the complainant’s objection that the Regional Court should have departed ‘from the established judicial practice of evaluating expert reports’.” “In the opinion of the Supreme Administrative Court, the tax administration authorities acted in full compliance with the legal provisions and did not commit any faults for which the Regional Court should have annulled their decision. In the light of the above (proof of the existence of connected persons and different prices), it was for the complainant to explain and substantiate to its satisfaction the difference between the prices found. The complainant did not fulfil that obligation, since during the tax (and court) proceedings it did not allege or prove rational reasons for incurring costs higher than the normal price between persons in normal commercial relations.” “The Supreme Administrative Court did not find any other defects in the decisions of the tax administration authorities and the Regional Court for which their decisions should be annulled. Their conclusions are fully supported by the legislation and the administrative file and are fully reasoned. The Court of First Instance agrees with their assessment and adopts it in full and refers to it in detail. For that reason, the Court of Cassation could not even find it possible for the applicant to dispute their reasoning.” Click here for English Translation Click here for other translation ...