The Supreme Administrative Court (“SAC”) issued a judgment on the cassation complaint 7 Afs 145/2020-25 of 16 August 2022, which dealt with a dispute between an individual (“the complainant”) and the Appellate Financial Directorate (“the defendant”). This was a situation, where in 2015 the tax administrator assessed the complainant with personal income tax for the tax year 2013 and imposed an obligation to pay the positive difference between the assessed tax and the tax claimed in the tax return. The parties to this dispute disagree on the interpretation of article 7 paragraph 1 letter b) of the Income Tax Act (“ITA”). The plaintiff has became a Czech tax resident and among other things received income from consulting activities in the United States of America (“USA”). According to the Double Taxation Treaty between the Czech Republic and the USA, this income is taxed only in the Czech Republic. According to the tax authorities, this income cannot be declared in the tax return as income from a trade under article 7 paragraph 1 letter b) of the ITA, but as other income under article 10 of the ITA, because the complainant does not hold a Czech trade licence. For this reason, the tax authorities disagreed with the plaintiff’s actions in using expenses at a flat rate against the US consulting income on his tax return. 

The complainant argued that he was not obliged to obtain a trade licence to perform the activity in question in the USA and that he performed the consultancy services quite legally. He assumed that the ITA treats entrepreneurs, who perform activities abroad, in the same way as entrepreneurs carrying out activities in the Czech Republic and therefore gives both groups the option to use all the statutory provisions, i.e. to declare such income in accordance with article 7 of the ITA and to apply expenses at a flat rate. He therefore expected that his taxation would not be discriminatory compared to the taxation of income from identical activities performed in the Czech Republic. The complainant further complains that he became a Czech tax resident only after a retrospective assessment of the period of his residence and the focus of his interests in life. In this respect, the complainant sees the biggest difference compared to a citizen of the Czech Republic, who is a lifelong taxpayer abroad; for these reasons, the plaintiff refers to article 8 paragraph 2 of the Tax Code, according to which the tax administrator must ensure that no unjustified differences arise, when deciding identical or similar cases. 

Conclusions of the SAC

The SAC responds to the argumentation of the plaintiff, who claims that he acted legally and did not need a trade licence to perform his activities abroad. However, the general fact that, in the case of the activity performed in the United States, the legislation in the place of activity did not require a special permit to carry on the activity was not sufficient to classify the income as business income. The tax administrator does not disqualify the complainant in any way in terms of the possibility of claiming actual expenses; it only prohibits the possibility of claiming expenses as a percentage of achieved income. Thus, nothing prevented the applicant from claiming actual expenses in his tax return.

Furthermore, the SAC agrees with the actions of the tax administrator, who cannot assess the content of the activity performed by the plaintiff abroad nor whether or not the plaintiff performed the activity in question in accordance with foreign regulations and subsequently compare this activity with the categories of trades under Czech law. The absence of a trade licence for the purposes of claiming expenses at a flat rate could not be compensated for by proving what activities the plaintiff had actually performed abroad. 

The case law of administrative courts has long stabilized on the conclusion that the existence of a corresponding appropriate trade license is a prerequisite for classifying income as income from a trade. If the taxpayer did not have a trade licence, his income could not be regarded as income from a trade. The fact that the assessed income can be classified as income from a trade leads to the possibility of applying flat-rate expenses under article 7 paragraph 7 of the ITA.

Finally, the SAC adds that it did not find discrimination in the tax authorities’ procedure, because the applicant received the same treatment as any other taxpayer in the Czech Republic.

Author: Roman Burnus, Marek Toráč