In this article we focus on current case-law of the Supreme Administrative Court (hereinafter “SAC”) relating to waiver of penalty under the stipulation of article 259a of act no. 280/2009 Coll., Code of Tax Procedures, as amended (hereinafter the “Code of Tax Procedures”), specifically in relation to tax fraud. In its recent judgments, the SAC reached the conclusion that the penalty relating to the taxpayer’s participation in tax fraud need not be waived, despite the fact that the criteria for its waiver have otherwise been fulfilled.  

According to the stipulation of article 259a paragraph 1 and 3 of the Code of Tax Procedures, the tax subject is entitled to ask the tax administrator to waive a part of the penalty if the tax, as a result of which the obligation to pay the penalty arose, has been paid. This request must be submitted no later than 3 months from the date of the legal force of the payment assessment, by which the obligation to pay the penalty was decided. The tax administrator will first assess according to the stipulation of article 259c paragraph 2 and 3 of the Code of Tax Procedures, if the request can be granted and the penalty remitted. Waiver of the penalty is not possible, if the taxpayer or a member of its statutory body has seriously violated tax or accounting regulations within the last three years.

If the tax administrator reaches the conclusion that waiver of the penalty is possible, he will proceed to assess the scope of this waiver, which may be up to 75 %, but the tax administrator may also reach the conclusion that no amount will be waived. To assess the scope of the waiver of penalty, the Code of Tax Procedures stipulates two criteria, one being cooperation of the taxpayer in the procedure leading to additional assessment of tax ex officio (see the stipulation of article 259a paragraph 2 of the Code of Tax Procedures) and the frequency of infringement of obligations in tax administration by the taxpayer (see the stipulation of article 259c paragraph 1 of the Code of Tax Procedures).

The SAC expressed its opinion on this statutory regulation on the waiver of penalty in its judgment from 2 August 2017, file no. 2 Afs 62/2017-37, file no. 3636/2017 Coll., where the SAC considered the question whether for the assessment of the obstacle to the waiver of penalty in the sense of the stipulation of article 259 paragraph 2 and 3 of the Code of Tax Procedures, i.e. serious violation of tax or accounting legislation, the conduct, which is the factual and legal basis for the imposition of the penalty for which the tax entity is requesting remission is also taken into account (in the case in question, it was a fine for an offence committed under the customs regulations with a top limit of  CZK 250,000 at minimum). The SAC concluded that it is not. At the same time, however, the SAC stated that the tax administrator may take into account the nature of the conduct in the context of its administrative discretion, and with regard to the nature, intensity or other circumstances of the violation, not to waive the penalty. 

This opinion of the SAC was subsequently reviewed by the Extended Chamber of the SAC in another case, confirming in its resolution of 26 January 2021, file no. 1 Afs 236/2019-83, No. 4141/2021 Coll. that when assessing whether the conditions under article 259c paragraph 2 of the Code of Tax Procedures are met, violation of tax regulations, which is the factual and legal basis for the imposition of the penalty, the waiver of which the taxpayer is requesting, is not considered. It further specified that the tax administrator takes into account this violation within the framework of administrative discretion under article 259a paragraph 2 of the Code of Tax Procedures and may not waive the penalty with regard to the nature, intensity or other circumstances of this violation. In other words, in the opinion of the Supreme Administrative Court, in addition to the criteria of the taxpayer's cooperation and the frequency of breaches of obligations, the tax administrator also takes into account the nature of the conduct that led to the imposition of the penalty.

The Enlarged Chamber of the SAC stated: "The argumentation, according to which the administrative discretion in the matter of remission of tax accessories should be limited to the extent of the taxpayer's cooperation with the tax administrator and the frequency of breaches of tax administration obligations, is incorrect. Precisely because it is based on administrative discretion, the regulation on waiver of tax accessories is based on a broader framework of values and principles than the criteria explicitly stated in the law. These values and principles, in addition to tax law as a whole, are also contained in constitutional law. (...) Therefore, it can be partially concluded that within the framework of article 259aparagraph 2 od the Code of Tax Procedures, the tax administrator makes a consideration whether to remit the penalty and in what amount, or whether not to remit the penalty. In this consideration, he must take into account not only the mandatory criteria but also the principles generally established by law and constitutional order."

The Enlarged Chamber concluded that the administrative discretion of the tax administrator must include the conduct (violation of tax or accounting legislation) that led to the imposition of the penalty, on the basis of the following considerations, among others: "The fine has the nature of a penalty (see Resolution of the Enlarged Chamber from 24 Nov 2015, file no. 4 Afs 210/2014 - 57, No. 3348/2016 Coll. of the SAC). It is designed as a one-time monetary penalty that is assessed without prior proceedings, by law, and as a percentage of the incorrectly claimed tax, tax deduction or tax loss, regardless of the nature of the specific tax violation. Its imposition is not subject to the administrative discretion of the tax administrator and the determination of the obligation to pay the penalty is thus "automatic" following the determination of the facts referred to in article 251 of the Code of Tax Procedures. The tax penalty thus goes beyond the usual principles associated with the imposition of a financial penalty. (...) The imposition of a penalty is generally based on two fundamental principles, the principle of the legality of the penalty and the principle of the individualization of the penalty. When individualising the punishment, it is examined whether and how all the specifics of the particular case have been taken into account and whether, within the framework of the statutory criminal sanction, the offender has been selected for a type and level of punishment that fulfils the purpose of the punishment and is not manifestly disproportionate. (...) the assessment of the infringement which is the factual and legal basis for the penalty for which the taxpayer seeks remission, in the context of the administrative discretion under article 259a paragraph 2 of the Code of Tax Procedures, with regard to the nature, intensity or other circumstances of the infringement, will bring the principle of individualisation of the penalty into play, but, given the statutory construction of the 'automatic' imposition of this penalty, only at the stage of its remission. This is the first and only opportunity to individualize the penalty imposed, including the administrative consideration of whether, or in what amount, to waive the penalty.

This opinion of the Enlarged Chamber was issued in the context of the proceedings concerning the decision of the tax administrator to reject the request for waiver of the penalty, which, referring to the judgment of the Supreme Administrative Court (SAC) file no. 2 Afs 62/2017-37, took into account the nature, intensity and other circumstances of the violation of tax legislation, which was the factual and legal basis for the penalty, in this case the participation in a chain tax fraud (acquisition of metallurgical material, lead and zinc). The tax administrator concluded that the taxpayer’s conduct could not be assessed as "a bona fide error (obvious mistake, error or misinterpretation of substantive tax law), but as involvement in a pre-set and organised fraudulent business model, which the tax subject should and could have known about and which, if it had taken rational and realistically available measures, it could clearly have avoided". In its judgment from 18 February 2021, file no. 1 Afs 236/2019 - 93 , the First Chamber of the SAC, bound by the legal opinion of the Enlarged Chamber, held that the tax administrator had acted in accordance with the law, and in the contested decision had described in sufficient detail the circumstances of the complainant's involvement in the VAT fraud, while explaining why it could not have been accidental. The SAC also expressed the opinion that it is irrelevant if the participation in the tax fraud was unknowing, since the tax administrator does not have to prove intentional involvement in the fraudulent VAT chain in the proceedings for the assessment of tax and the imposition of penalties. It is sufficient if it finds that the complainant knew or should have known and could have known that he was involved in tax fraud. At the same time, it is not clear for what reason the tax administrator should apply a higher standard when deciding whether to waive a penalty.

The aforementioned case law was followed by the current judgment of the SAC from 8 October 2021, No. 4 Afs 99/2021-34, in which the SAC, as in the previous case, confirmed the legality of the tax administrator's decision rejecting the request for remission of the penalty, although the criteria for remission were otherwise met. In this case, the tax administrator concluded that the tax entity in question had violated tax regulations in the period January and February 2011 with a high degree of intensity beyond ordinary violations of tax regulations, since by its nature it had knowingly participated in fraudulent conduct, or in engaging in a chain of transactions affected by fraud (specifically trading in gold ingots). Here, the SAC concluded again that the tax administrator had described the circumstances of the taxpayer's involvement in the VAT fraud in sufficient detail, explaining why it could not have been accidental. The SAC thus found the way, in which the tax administrator proceeded, was in compliance with the law.

With regard to the above-mentioned case-law of the SAC, in the case of additional tax assessment on grounds of denial of entitlement to deduct tax due to the tax subject's participation in tax fraud, of which the tax subject knew or should and could have known, it must be taken into account that the tax administrator will not remit the penalty related to the tax assessed in this way.