On 19 July 2024, the Supreme Administrative Court (“SAC”) issued a judgment No. 3 Afs 177/2022-49, which resolved a dispute between an individual (the plaintiff) and the Appellate Tax Directorate (the defendant) regarding the assessment of the time test for the exemption of income from the sale of securities.

On 12 January 2011, the plaintiff acquired a total of 33 shares, numbered 35-67, under a securities transfer agreement for consideration. On 12 October 2012, he exchanged 3 shares marked 35-37 for the same shares marked 68-70. In 2014, the joint-stock company increased its share capital from its own resources by increasing the nominal value of the existing shares and exchanging the original shares for new ones. The plaintiff subsequently transferred 30 shares marked 41-70 to a third party by contract of 13 November 2015 and reported the income from this transfer in the tax period as exempt pursuant to Section 4(1)(w) of Act No. 586/1992 Coll., on Income Taxes (“ITA”) as in force until 31 December 2016.

However, the tax administrator, as well as later the defendant and the Regional Court, concluded that the temporal test for exemption was not met and assessed the plaintiff with additional payment assessment. The plaintiff took the view that unless there was a change of ownership, the time test for exemption from income tax was not interrupted. Moreover, according to the plaintiff, the Regional Court should have also taken into account Section 4(1)(r) of the ITA relating to the transfer of shares in other business corporations, since according to this provision the time test is not interrupted if the amount of the share is maintained.

The tax administrator justifies the decision on the grounds that the time test for the exemption of income from tax is interrupted if the same nominal value is not maintained for the exchanged shares. If the share capital is increased by increasing the nominal value of the existing shares, the tax exemption cannot be applied. The technical method of increasing the nominal value is irrelevant, i.e. the interpretation is also valid for the so-called stamping. The important thing is that the value of the shares increases, thereby increasing the shareholder’s wealth, even though the stake in the company remains the same. According to the defendant, the wording of section 4(1)(r) of the ITA is irrelevant because the standard applied in (w) is specific and clear and the rule on the amount of the share in (r) is not referred to.

Although the law does not further define the term “acquisition of shares”, according to the Regional Court, it is clear that it includes acquisition by way of exchange and does not allow for any alternative interpretation. Moreover, the difference between the old and the new nominal value cannot be considered as an actual expenditure. The cost of the capital increase is a cost to the public limited company, not to the shareholder. According to the ITA, the acquisition price of such a share is only the price, at which the shareholder originally purchased it.

The SAC found the appeal unfounded and dismissed it, thus confirming established practice. The Constitutional Court reached the same conclusion in the past in the given case, in its judgment III. ÚS 2921/21 of 30 November 2021.