As a preliminary question in the present proceedings, the CJEU considered a situation, where an employer rewarded his best performing employees by providing them with a purchased service free of charge. Specifically, the purchase of vouchers (please note that in the relevant period, the current VAT rules for single and multi-purpose vouchers were not yet in force) to use at selected retailers. The employer, GE Aircraft Services, a UK company, claimed a VAT deduction on the purchase of the vouchers, providing them free of charge to its most efficient employees. The disputed issue was whether this gratuitous provision of vouchers should be taxed, or whether it was a gratuitous provision of services “for the personal consumption of the taxpayer or his employees or for purposes other than those related to the pursuit of his economic activities” within the meaning of article 14(4)(b) of the local VAT Act.

The Court considers that the primary purpose in the present case is to increase the motivation of the employees and thus their performance, leading to proper functioning and profitability of the company. According to the Court, the personal benefit that the employee thus receives is secondary to the needs of the company. Such free provision of vouchers is therefore not made for purposes other than those related to the pursuit of economic activities and is therefore not subject to VAT. Given that the decision of the Court is different from the current practice where, on the contrary, the employer either does not deduct input VAT on the acquisition of the service or additionally taxes the gratuitous provision of the service to the employee, we recommend to exercise some caution in similar matters for the time being and possibly wait for related interpretations by the Tax Administration. At the same time, please, do not hesitate to contact us when setting up employee incentive programs or other company benefits, we will be happy to help you set up suitable solutions.

In connection with vouchers for employees, we would also like to point out the perspective of the personal income tax, namely the stipulation of article 6(9)(d) of the Income Tax Act (“ITA”), which covers the conditions for the exemption of employee income from benefits provided by the employer, typically through the so-called cafeteria or similar employee benefit schemes or in the form of so-called flexi-passes. Income received by an employee in the form of a theatre voucher, for example, is exempt from employment income tax and the related social security and health insurance premiums, if the statutory purpose is fulfilled and if it is a non-monetary form of benefit (i.e. the benefit is provided in the form of a voucher or the employer pays the price of the service consumed directly to the service provider on behalf of the employee). In connection with the condition of the non-monetary form of the benefit provided, we would like to draw your attention to the recent judgment of the Supreme Administrative Court (“SAC”) No. 7 Ads 31/2021-28 of 15 November 2022, in which the SAC stated that the non-monetary form is absolutely crucial for the purpose of exempting the relevant employee benefit from employment income tax and cannot be confused with alternative forms such as cash or non-cash reimbursement of the voucher. According to the SAC, although the legal regulations do not explicitly define the term “non-monetary transaction”, this term appears to be absolutely unambiguous, since by the nature of the matter it is considered to be a benefit that is not provided in money or is not exchangeable for money or other similar means. We have summarised the most important points from this judgment in a separate article.

In light of the above-mentioned court decisions, we recommend that you pay close attention to the current setup of benefit and incentive programs for your employees in order to maintain a favourable tax regime for both employees and employers. In the light of the aforementioned case law of the Court of Justice of the EU, the acquisition of vouchers, or other transactions classified as the provision of services, for an employee may, on the one hand, preserve the right to deduct VAT for the employer, while if the conditions of the ITA are met, the employee’s income from such a voucher is exempt from income tax and insurance premiums. Employee benefit and incentive schemes are likely to become even more popular soon than they already are.

If you are interested in reviewing your employee incentive and benefit programs or implementing a new system, we will be happy to assist you.

Author: Petr Němec, Richard Knobloch, Vladimír Toráč