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. 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 ...

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 ...

According to the tax authorities, the prices agreed between the P.S. and her husband, as lessors, and Long Wave, s.r.o. (‘Long Wave’), as lessee, differed from the prices which would have been agreed between independent persons in normal commercial relations under the same or similar conditions. According to the tax authorities, P.S., together with her husband and Long Wave, are persons who have created a legal relationship mainly for the purpose of reducing the tax base. According to the appellant, P.S, the conditions laid down in the judgment of the Supreme Administrative Court of 31 March 2009, No 8 Afs 80/2007-105, were not met and the tax administrator’s procedure for determining the normal price was seriously flawed. Judgement of the Court The Supreme Administrative Court concluded that the appeal as a whole was unfounded and therefore dismissed it Excerpt “In the present case, the complainant was informed of the difference in the agreed prices and at the same time asked to explain or provide reliable evidence of the difference (notice of 27 February 2009, No 21645/09/228933601143). It responded to the tax authority’s doubts about the low rental price by submitting the above-mentioned medical report or by offering the testimony of the above-mentioned persons. However, these means of evidence do not prove the difference in prices (see above for their assessment) and the complainant did not offer any other relevant evidence in the evidentiary proceedings. The Supreme Administrative Court therefore concludes at this point that the complainant has failed to demonstrate to its satisfaction the reasonableness of the price difference established by the tax authorities. Lastly, the complaint that the complainant was deprived of its procedural rights in the hearing of the results of the tax audit pursuant to Section 16(8) of the Tax Administration Act must also be regarded as unfounded. As stated in the judgment of the Regional Court, it does not appear from the minutes of the oral hearing of 7 September 2010 that the tax administrator did not respond to the complainant’s objections and questions, or that he did not explain to her the reasons why he proceeded to apply Section 23(7) of the Income Tax Act. The Supreme Administrative Court agrees with that view and adds that the tax administrator dealt with the complainant’s objections in detail and recorded the individual statements and objections. It also communicated its views on them, as well as on the newly raised views, to the complainant. The mere fact that the complainant did not agree with the conclusions communicated to her cannot constitute a prejudice to her rights; nor can the infringement of the relevant provisions of the Tax Administration Act or the illegality of the tax administrator’s decision, alleged by the complainant, be inferred from that procedure for the termination of the tax audit. The Supreme Administrative Court did not find any fundamental errors in the procedure of the tax administrator or the Tax Directorate. The administrative authorities correctly applied Section 23(7)(b)(5) of the Income Tax Act to the sufficiently established facts, since it was established in the tax proceedings that the complainant was otherwise a person connected with the person to whom she provided the supply in the form of a lease, i.e. in an attempt, mainly for the purpose of reducing the tax base, she undervalued the supplies received in agreement with her business partner by negotiating rental prices outside the range of normal prices. Similar conclusions apply to that part of the 2006 tax year in which the complainant was to be regarded as a person linked by capital to Long Wave within the meaning of Article 23(7)(a)(2) of the Income Tax Act.” Click here for English Translation Click here for other translation ...