In an appeal, the Supreme Administrative Court (“SAC”) dealt with a dispute between a trading company (“the plaintiff”) and the Appellate Tax Directorate (“the defendant”), where the tax administrator assessed the applicant for direct payment of withholding personal income tax for the tax years 2014, 2015 and 2016 and the defendant confirmed these payment assessments. The reason for the issuance of the payment orders was that the assessed tax base was not recognized in a manner effectively allowing the interest income from the bonds not to be taxed. The tax administration authorities were of the opinion that the transactions carried out had tax benefits as their main objective, contrary to the purpose of the legislation, and therefore assessed tax additionally.

The Regional Court upheld the decision of the tax administrator and dismissed the action, therefore the complainant filed a cassation complaint against the judgment of the Regional Court. In his appeal, the complainant states that the tax authorities based their conclusions solely on assumptions and disagrees with the assertion that, if the tax is assessed on the basis of an abuse of rights, the burden of proof should not shift to him. He further argues that if he abused the law, he should be the one who also received the tax benefit, which, according to the plaintiff, did not happen. He states that he could not obtain a tax advantage because in this case he was in the position of a taxpayer and would only have deducted and paid the tax in question to the tax authorities. Only taxpayers, i.e. recipients of interest income, could be enriched. Therefore, he is not the one who could have obtained a tax advantage by not paying the tax. 

Conclusions of the SAC

On the one hand, the SAC agrees with the complainant, saying that the burden of proof in proving that the conditions for the application of the abuse of rights institute are met lies with the tax administrator, unlike in “classical” tax proceedings. On the other hand, however, it adds that although the burden of proof lies with the tax administrator, the tax subject has sufficient room to explain and refute the facts established by the tax administrator. The SAC does not agree with the complainant that the tax authorities based their conclusions on mere indications and assumptions or that they shifted the burden of proof to the complainant. Although the complainant had the opportunity to provide evidence of economic substance and could prove that his aim was not to obtain an artificial tax advantage, the complainant did not sustain the burden of proof and was unable to prove certain facts. 

Furthermore, the SAC points to the fact that both the tax administrator and the defendant relied on a sufficient amount of concrete evidence. In view of the overly general cassation objection, the SAC first dealt with the text of the tax audit performed, which established that the issuer of the bonds (i.e. the complainant) and the underwriters of the bonds were related parties – the complainant’s managing directors and partners acquired bonds as well. It also emerged that the funds for the purchase of the bonds were obtained by the underwriters in the form of a loan from another trading company, which is also closely linked to the complainant. The analysis also revealed that the funds raised through the issue of the bonds merely “flowed” through the complainant and were immediately sent to the aforementioned trading company. The tax authorities also pointed out that the projects, for which the alleged funds from the bonds were to be used, had been postponed or had already been performed before the bonds were issued. It was also established that the complainant had subsequently arranged loans from banks for some of the projects in question. 

The aforementioned facts established by the tax audit show that the tax administration authorities based their conclusions on sufficiently specific supporting documents. Accordingly, the SAC agrees with the defendant’s decision that the complainant committed an abuse of rights and dismisses the complaint as unfounded. 

Author: Roman Burnus, Marek Toráč