Our tax legislation and the Tax Code do not currently explicitly provide a generic regulation for the abuse of rights, or else a generic regulation for the abuse of the Tax Code, inasmuch as it is required by the adopted Anti-Tax Avoidance Directive of the European Council“.

Together with the implementation of other measures for aggressive tax planning, adopted into the Czech law in relation to the ATAD, a new section 4 is suggested to be added in Article 8 of the Tax Code which reads as follows:

“(4) Procedures of tax administration do not take into account legal transactions and other realities decisive for tax administration where the main aim is the acquiring of a tax benefit in contradiction with the meaning and aim of the tax legislation.”

At the same time, there is the suggestion to add part f) into Section 5 of Article 92, based on which the tax administration shall upon proving provide:

“f) realities decisive for the assessment of legal transactions and other realities decisive for tax administration where the main aim is the acquiring of a tax benefit in contradiction with the meaning and aim of the tax legislation.”

The explanatory memorandum for the Tax Code Amendment reminds that the Tax Code already includes the principle of substance over form which overlaps with the rule against the abuse of rights. The memorandum also reminds that the Czech legal doctrine recognizes the institute of abuse of rights. In the field of tax, this institute is also used by the tax administration when tackling dishonest tax behaviours. There is a lot of judicature regarding these issues both national and of the European Court of Justice (ECJ) in the field of both direct and indirect taxation.

The most famous judgement applied in the practice of the Czech courts is the Halifax judgement of the ECJ. In it, the ECJ defined for the first time the criteria of abuse of rights in the field of value added tax. This criteria of abuse of rights defined in the ruling were subsequently transposed into the non-harmonized field of direct taxation, that was done by the judgement of 12 September 2006 in case C-196/04 (Cadbury Schweppes). According to the test used in the mentioned judgements of the ECJ, abuse of rights happens when (i) “the accrual of a tax advantage constitutes the principal aim of the transaction at issue”, and (ii) “the grant of which would be contrary to the purpose of these provisions”. The principles of the ECJ judicature are applied in the judgements of the Supreme Administrative Court and the Constitutional Court of the Czech Republic. Specific judgements are also cited by the explanatory memorandum to the Tax Code amendment.

Abuse of rights is generally understood as such a situation where somebody exercises their subjective right to an unjustified detriment of someone else or the society. Such behaviour, which results is acts illegal apparent, is only apparently legal. This is so because the objective legislation does not recognize behaviour legal and illegal at the same time. Since it follows from the lex specialis derogat legi generali principle that the prohibition of abuse of rights is stronger than what is legal by given provisions, such behaviour is outside the law and considered illegal.

What does the proposed amendment mean for taxpayers?

For a specific behaviour to be classified as abuse of rights, it would have to be – besides other things – in contradiction with the principal aim of the relevant provisions. The courts then decide for each situation, whether the activities of the tax subject were in contradiction with the system and principles of society, ensuring its reproduction, its values, general societal interests, and with the sensible social organization. Taxation is undeniably a significant interest and principle on which the way our society works is built.  Therefore, if some activity is in contradiction with these principles, with the sensible social organization, it is viewed as abuse of rights.

According to the new legal provision, it suffices if the activity is in contradiction with the meaning and aim of tax legislation. As we all might suspect, the aim of tax legislation is the collection of taxes. Let me reiterate that the collection of taxes must be just and that the Tax Code anchors most importantly the principle that taxes shall be collected in correct amounts.  However, in the mind of the tax administration, the correct amount of tax is often different to the one in the mind of the taxpayer.

Another key term is the “principal aim of the transaction”. Here, the view of the tax administration will surely differ, too. Thus, proving the aim of the transaction will be another task required of the taxpayer. The assessment of what is the principle aim of the transaction in a situation where the tax burden is being lowered will require a good analysis of the facts and legal analysis, together with an elaboration of the transaction. Preferably ex ante than ex post, of course.

In any case, we must suppose that the amendment gives the financial authorities a new kind of “weapon” which the tax administration will surely make use of when tackling dishonest tax behaviours. Thus, we have a lot to look forward to.

Ivan Fučík