The Supreme Administrative Court (hereinafter “the SAC”) issued judgment 8 Afs 246/2019-67 on 31 August 2021regarding the time test for the exemption for shares issued due to registered capital increase from own resources.

This was a situation where the taxpayer acquired shares in a trading company in 2009. In 2014, the Company decided to increase the registered capital from its own resources and at the same time decided to exchange the shares for new ones with higher nominal value. In 2016, the taxpayer sold these shares and filed regular tax return for this period, reporting the income from the sale of shares in accordance with the stipulation of article 10 of Act No. 586/1992 Coll., on Income Taxes (hereinafter “the ITA”). He later submitted additional tax return, in which he did not include the income from the sale of the shares. Upon summons from the tax administrator to remove doubts, the taxpayer argued that the sale of his shares was exempt under the stipulation of article 4 paragraph 1) letter (w) of the ITA, referring to the conclusions of the Coordination Committee with the Chamber of Tax Advisors from 13 February 2008, contribution 199/21.11.07 (“KOOV”).

These arguments were first rejected by the tax administrator, the Regional Court and finally by the SAC as well.

The Regional Court stated that the exemption under the stipulation of article 4 paragraph 1) letter w) of the ITA applies only to situations where shares of the same nominal value are exchanged, not to cases where the share capital is increased by exchanging shares. It follows that if shares of different nominal values are exchanged, exemption from income tax no longer applies. The court also mentioned that the conclusion of the Ministry of Finance expressed in the minutes of the meeting of the KOOV refers only to the increase in the nominal value of the shares by means of stamping (marking higher nominal value on the existing share) and does not mean that this interpretation can be automatically applied to other situations where shares are exchanged.

Subsequently, the Supreme Administrative Court also commented on the dispute based on an appeal in cassation, which clearly stated that the time test is interrupted both by the exchange of shares for shares of a higher nominal value as well as by the so-called stamping process. One of the main arguments was that if the legislator deliberately decided to introduce a special rule for not interrupting the time test for share exchanges, see the stipulation of article 4 paragraph 1) letter w) of the ITA, it can be assumed that his intention was to interrupt the time test in other cases.