The Supreme Administrative Court (“SAC”) dealt with a cassation complaint 10 Afs 61/2022-41 between a legal entity (“the plaintiff”) and the General Tax Directorate (“the defendant”) concerning the taxation of financial incentives for employees for the sale of a certain brand of goods, where the rewards are provided by a person other than the employer. In this case, the financial incentive was paid by the producer of the goods, who rewarded employees of his customers.

At the heart of the dispute is the benefits programme provided by the plaintiff to sellers of its products. The plaintiff’s sales representative handed out chequebooks, in which store clerks collected points for each product sold. Whenever the salesman decided he had enough points, he had the bonus cashed out by the plaintiff. She provided bonuses in cash – cash, via postal order or bank transfer. On the aforementioned cheque books, the sellers gave their personal details and it was also stated that it was the recipient’s responsibility to tax the bonuses paid.

The tax office assessed the plaintiff with personal income tax and penalties, as the benefit provided was, according to the tax administrator, income from employment pursuant to Section 6(1)(d) of the Income Tax Act (“ITA”). The plaintiff appealed to the Appellate Financial Directorate, which upheld her appeal and cancelled the taxation under section 6(1)(d). The tax administrator then filed a petition for review and the defendant granted the petition. The Appellate Financial Directorate subsequently upheld the original payment assessments. The plaintiff disagreed with these conclusions and lodged a cassation complaint with the SAC.

The plaintiff’s arguments

According to the plaintiff, it is incorrect to view the bonus scheme as income from employment since not all the beneficiaries were in an employment relationship to its customers and the bonuses were also paid to other people. The plaintiff allegedly did not tie the payment of the bonus to any employment relationship and the bonus programme was presented publicly and the end customer could also join. Furthermore, the plaintiff argues that all bonuses paid should be subject to the same tax regime, i.e. according to section 7 or section 10 of the ITA. Examples of other merchants providing similar loyalty programmes are also highlighted. According to the plaintiff, no one wants these traders to pay income taxes and insurance for the employees of others. Finally, she adds that she had already been subject to a tax audit in the past and the tax administrator had no objections to the operation of the benefit programme. In view of that, the plaintiff assumed that her procedure was in order.

Conclusions of the SAC

First of all, the SAC emphasizes that the remuneration from the benefit programme was income from employment in the sense of Section 6(1)(d) of the ITA. The wording of the law is clear, income can also come from a third party, which is not an employer, “under labour law”, but it must be related to the performance of the main dependent activity. According to the tax authorities, these salesmen sold the products in question during their working hours, in the shops of their employers, thus fulfilling their work obligation. The Regional Court had already correctly stated that the benefit programme was aimed only at dealers of business partners and not at the general public or consumers, as wrongly argued by the plaintiff. The investigation clearly showed that the conditions of the cheque book do not count on customers at all. The text was directed to the fact that it was an incentive for the sale of the plaintiff’s products.

The SAC also responds to the repeated objection that not all beneficiaries of the benefit scheme were employed and engaged in dependent activities. According to the findings of the tax authorities, the recipients of these benefits were Slovak citizens in shops in Slovakia, who were not domestic tax residents and self-employed persons in Czech shops. However, no tax was levied on the plaintiff for them.

The SAC responds to the plaintiff’s argument to assess the taxation of this income as income under Section 7 and Section 10 of the ITA as follows. Taxation under Section 7 or Section 10 of the ITA can only be applied if the income in question does not fall under Section 6 (Section 7(2) of the ITA opens with the words income from other self-employment, if it does not fall under Section 6 ..., Section 10(1) open similarly, creating a residual category of other income). Both categories therefore work on the same principle. The other provisions of the Income Tax Act apply only if the income at issue does not fall into any of the previous categories. Since all the income, on which the tax was assessed, fell within the definition of employment income in section 6 of the ITA, neither section 7 nor section 10 of the ITA could be applied to this case.

Finally, the SAC briefly comments on the plaintiff’s argument that other companies have incentive schemes. The examples cited by the plaintiff cannot be considered relevant, as these programmes are aimed at customers. Therefore, the logic of Section 6(1)(d) of the ITA cannot be applied to these programmes.

Author: Roman Burnus, Marek Toráč