The Supreme Administrative Court (the “SAC”) dealt with a dispute between an individual (the plaintiff) and the Appellate Financial Directorate (the defendant) in the cassation complaint 8 Afs 220/2022-40. The subject-matter of the dispute was the possibility of applying flat-rate expenses for income tax purposes at the rate of 60 % instead of only 40 % in the case where the plaintiff operated a business without a trade licence.

In her personal income tax return, the plaintiff claimed flat-rate expenses of 60% against her income from translation and interpreting activities under Section 7(7)(b) of the Income Tax Act (“ITA”). As she did not hold a trade licence for this activity, the tax administrator assessed income tax on her after conducting evidence. The plaintiff appealed against the payment assessment, but the defendant rejected the appeal and upheld the tax administrator’s decision.

Arguments of the plaintiff

• In her appeal, the plaintiff states that if she was engaged in an activity, for which it is possible to obtain a licence, she is entitled to have the income from that activity taxed as income from a trade.
• She also relies on judgment 5 Afs 73/2012-41 of 13 March 2013, where the Supreme Administrative Court (SAC) concluded that the actual content of the activity is more important than the formal registration in the Company Register when assessing whether the conditions for tax exemption are met, and therefore the tax administrator should prioritise the content of the activity over its form.
• According to the plaintiff, the registration of a trade with the trade licensing authority is an obligation of the entrepreneur, not a condition for him to be able to operate his business.
• Finally, the plaintiff adds that if the tax authorities refused to treat her activity as a trade and assessed her tax at a lower flat-rate, they punished her for not having obtained a trade licence in time. Operating a trade without a trade licence is primarily sanctioned as an offence under Section 61(3) of the Trade Licensing Act. This means that if she has incurred an offence liability, it is not fair that she should be punished further by not being allowed to claim the higher flat-rate costs.

Assessment by the SAC

• The Supreme Administrative Court (SAC) has repeatedly considered the applicability of 60 % of expenses in the case of a person who does not hold a trade licence. In doing so, it has always reached the conclusion that if an individual, even if for a long time and independently, carries on a continuous activity under his/her own name and responsibility without having a trade licence, it is not the operation of a trade within the meaning of Section 2 of the Trade Licensing Act.
• Pursuant to Section 7(7)(b) of the ITA, the complainant can claim a flat rate of 60 % only from a trade business, not from an unauthorised business, even if it corresponds to a trade. Therefore, she is not entitled to claim flat-rate expenses in this amount.
• With regard to the principle of double jeopardy, the SAC notes that the plaintiff mentioned the violation of the prohibition of double jeopardy only as a hypothetical consequence, as the proceedings for the offence had not been initiated at all. The payment of taxes is not in the nature of a criminal sanction, the purpose is to raise funds for the public budget. It follows that the reduction of the claimed flat-rate expenses cannot be regarded as an administrative penalty.
• The aforementioned judgment of the complainant, which gave priority to substance over form, does not take into account the essential difference in the two cases. According to SAC, the text of the provision in question (of the already repealed law) also allowed, without significant doubt, the possibility that the subject merely carries out the activity in fact. This was a statutory criterion for claiming tax exemption in connection with business activities. In the present case, however, the decisive issue is whether the complainant’s income can be classified as income from a trade business. In the judgment referred to, therefore, the fulfilment of completely different statutory criteria was considered.

The SAC concludes that the complainant did not exercise a trade within the meaning of Section 2 of the Trade Licensing Act, as she did not have a trade licence. Activity without a trade licence is not a trade business, but on the contrary an illegal business. The condition of having a trade licence thus clearly follows from the systematics, meaning and purpose of the law. For these reasons, the Arbitral Tribunal agreed with the conclusions of the previous case law of the Supreme Administrative Court, according to which the condition for trade business is having a trade licence.

The cassation complaint is therefore unfounded and the SAC dismissed it.