The Supreme Administrative Court (hereinafter the “SAC”) has issued a judgment in the proceedings on the cassation complaint of 12 June 2023, no. 2 Afs 94/2022-48, against the judgment of the Regional Court in Brno (hereinafter the “Regional Court”) of 28 February 2022, no. 30 Af 40/2020-91, concerning a dispute between a limited liability company (“the plaintiff”) and the Appellate Financial Directorate (“the defendant”).

The essence of the dispute between the parties was the assessment of the nature of the income and its subsequent taxation. During the tax audit, the tax office discovered that in April and August 2014 the plaintiff transferred funds totalling CZK 7,900,000 from the company’s bank account to the private account of the applicant’s sole managing director and shareholder. The managing director immediately used the funds to buy a stake in another company and to purchase a receivable. Immediately after the transfer of funds, the company recorded a redeposit to the plaintiff’s cash account.

The plaintiff classified the transfer of funds as a loan to the managing director. However, according to the accounting records submitted, the receivables from the managing director were not accounted for, nor were the relevant loan agreements submitted. The plaintiff’s accountant insisted at the hearing that the accounting was flawed. However, she did not produce the documents, on the basis of which the accounting was allegedly made, and claimed that she had only followed oral instructions from the managing director. The plaintiff thwarted the cash control, therefore the tax administrator considered the deposits fictitious and assessed the transfer of funds as income from employment under Section 6(1)(b) of the Income Tax Act.

The plaintiff insisted that the tax administrator had not sustained the burden of proving that the income was subject to tax on personal income from employment. The contract negotiated with the managing director of the company does not imply the possibility of achieving such income, since the remuneration agreed in the contract with the managing director only reaches CZK 10,000. The plaintiff claims that the administrative authorities should have dealt with the situation according to the procedure laid down in Section 23(7) of the Income Tax Act or, or should only have additionally assessed market interest. She further argued that if a state of facts is not established that would allow a proper legal assessment of the transaction, but at the same time it is clear that it is taxable income, it should be assessed as income under Section 10 of the Income Tax Act.

SAC conclusion

The SAC only agreed with the decision partly. It acknowledged that it was not sufficiently proven that the income was merely a loan, but annulled the decision of the appellate authority, as it did not give any reasons why it assessed the income as income from employment under Section 6 of the Income Tax Act. The SAC stated that the fact that an individual is a managing director or partner of a company does not automatically mean that any benefit received by that person is income under Section 6(1)(b) of the Income Tax Act, i.e. income for work as a partner of a limited liability company. The tax administrator is obliged to examine the nature of the income and the company is obliged to prove, on what legal grounds the amounts were paid.

Based on the above, the SAC found the appeal to be well-founded, annulled the judgment for lack of reviewability and returned the case to the defendant for further proceedings.

Author: Vladimír Toráč, Anna Beránková