In judgment 4 Afs 490/2019-34 of 22 November 2021, the Supreme Administrative Court (“SAC”) dealt with a dispute between the Regional Court in České Budějovice (“Regional Court”) and the plaintiff. This was a case where the Financial Office for the South Moravian Region levied personal income tax on the plaintiff by means of a payment assessment on the basis of a procedure to remove doubts. The plaintiff defended against this fact by bringing an action before the Regional Court, which was subsequently dismissed, following which the applicant lodged a cassation complaint with the Supreme Administrative Court.

The dispute concerned the tax liability of a cooperating person within the meaning of article 13 of the Income Tax Act. The plaintiff (‘the complainant’) interpreted the legislation in his own way and transferred part of the income to a cooperating person in the tax return, with both the ‘main tax entity’ and the cooperating person subsequently setting flat-rate expenses for the income thus distributed. Under the legislation, the complainant should first have applied the expenses as the ‘principal entrepreneur’ and only then could he divide them between himself and the collaborating person.  

The complainant disagrees with this approach and adds that if the cooperating person assists in the business activity, derives income from it and the cooperating person becomes a personal income tax payer, that person should also be responsible for the correctness of the tax return and be liable for the payment of the tax. According to the complainant, there is an absurd result if the cooperating person is bound only by what the ‘principal tax entity’ imposes on him in this respect. 

Further, the complainant argues that the Regional Court did not take into account the fact that under article 7 paragraph 4 and 5 of the Income Tax Act, for example, a completely opposite procedure is set for persons doing business jointly as a public partnership or limited partnership. In the case of the above-mentioned persons, instead of the income and expenses of the “main tax entity” and the subsequent allocation, an initial allocation of business income is made among the individual partners and the income and expenses are then determined. 

Conclusions of the SAC

The SAC has dealt with the issue of the tax liability of cooperating persons many times in the past and has always concluded that the tax liability of a cooperating person is closely linked to the tax liability of the so-called “main tax entity”, which in this case is the complainant. According to the legislation, the latter should distribute income and expenditure only according to the statutory shares. In addition, these persons must always have the same share of income and expenses. According to the SAC, the Regional Court decided correctly, as it is clear from this interpretation that the cooperating person must first determine the amount of income and expenses of the “main tax entity”, then determine the share of the cooperating person’s income and expenses from that amount according to the rules of article 13 of the Income Tax Act, and then determine the cooperating person’s own tax liability. The SAC adds that no ambiguities arise from the applicable legislation which would give rise to considerations of an interpretation different from that adopted by the Regional Court.

The SAC further states that although it is possible to agree with the complainant that the cooperating party cannot be denied the right to its independent procedural status in tax proceedings, including the option to exercise all the rights granted by the procedural rules to the “principal taxpayer”, this does not change the basic fact that the tax liability of the cooperating party is entirely dependent on the outcome of the (additional) tax assessment of the “principal taxpayer”.

As regards the complainant’s argumentation regarding the taxation of the main entity and the cooperating person in the company (without legal personality) within the meaning of article 12 of the Income Tax Act, the Regional Court found this argumentation completely irrelevant for the assessment of the case, as it could not change the adopted conclusions. 

In conclusion, the SAC adds that, for the reasons set out above, the cassation complaint is not well-founded and is therefore dismissed.  

Author: Roman Burnus, Marek Toráč