The Supreme Administrative Court (“SAC”) issued a judgment on a rather unusual and controversial legal dispute at the end of the year 2024. In its judgment No. 8 Afs 281/2023-53, the Court rejected the appeal of the Appellate Financial Directorate (“the defendant”) and upheld the judgment of the Regional Court in Ostrava, which found the defendant’s decision unreviewable. The dispute involved the question of whether or not the income of prostitutes is subject to income tax.

The tax administrator assessed additional tax for the individual (‘the plaintiff’) for the tax years 2012 to 2014, having reached the conclusion that the applicant had not taxed her income from escort. However, the plaintiff resisted the assessment and first appealed against the decision and then brought an action. She argued that taxing the proceeds of prostitution is procuration or the crime of profiting from prostitution under Section 189 of the Penal Code. According to the plaintiff, the taxation is also contrary to the 1951 New York Convention for the Suppression of the Traffic in Persons and of the Exploitation of the Prostitution of Others, to which the Czech Republic acceded and which it is bound by. This argumentation was supported by reference to Article 10 of the Constitution, which provides that international treaties take precedence in the Czech legal order if they are directly applicable.

The plaintiff also stated that there are public discussions in the Czech Republic about whether or not prostitution should be regulated and taxed, and these discussions regularly end with the conclusion that prostitution cannot be taxed. She therefore considered the tax administrator’s action to be surprising and contrary to the principle of legitimate expectations.

The Appellate Financial Directorate only settled the objection of a conflict with the New York Convention by arguing that the Czech Income Tax Act does not exclude taxation of income from prostitution. However, the SAC did not share this view and stated that the tax administrator should first of all deal with whether or not the New York Convention actually implies a prohibition on taxation of income from prostitution and whether or not the Convention is applicable under the Constitution. If the above assumptions were indeed confirmed, taxation would not be possible.

The SAC also disagreed with the defendant’s statement regarding objection about the offence of profiting from prostitution. The defendant unconvincingly stated that no law formally prohibits or permits prostitution and therefore it cannot be the proceeds of crime. It considered the plaintiff’s argument to be exaggerated and inconsistent with legal reality.

However, the SAC pointed out the true nature of the plaintiff’s objection, which was that profiting from prostitution, or deriving pecuniary benefit from prostitution practised by another, is criminal and by taxing prostitution, which is not criminal in itself, the state would become a procurer.

The SAC dismissed the appeal in cassation and ordered the Appellate Financial Directorate to deal with the plaintiff’s objections properly in further proceedings. The SAC emphasized that the courts cannot decide on their own whether prostitution is subject to taxation. This issue must first be resolved by an administrative authority in a reviewable decision.

The decision of the SAC highlights the importance of good reasoning in administrative decisions, especially when they concern controversial legal issues. This judgment thus opens the way for further debate on the regulation and taxation of prostitution in the Czech Republic.