One of the main criteria for determining the extent of tax liability in personal income taxes in the Czech Republic (hereinafter “CR”) is the specification of tax residency of the taxpayer.

The income tax act (hereinafter “ITA”) lays down clear rules for how to proceed when determining the status of tax residency. A more complicated situation can occur in case the taxpayer is considered a tax resident abroad as well and a conflict between international treaties and Czech legislation thus occurs. According to article 37 of ITA, regardless of the wording of the national legislation, application of a declared international treaty is preferred, and this application supremacy represents a duty, not an option. In article 2 of ITA itself, too, which presents the conditions for tax residency of natural persons in CR, it is said that a taxpayer may be a tax non-resident also in a situation, when an international treaty stipulates this about him. 

The Supreme Administrative Court has also dealt with determination of tax residency with such an international aspect in its judgment now, which, more specifically, dealt with the question of assessment of tax residency according to a treaty between the Czech Republic and Bosnia and Herzegovina on prevention of double taxation and of tax evasion in terms of income and property taxes (hereinafter “TPDT”). In the given situation, it was a taxpayer originally from Bosnia and Herzegovina, who performed the profession of a football player on the territory of the Czech Republic based on a long-term contract on cooperation with FK Teplice.  

Taxation of sportsmen is in itself a relatively complicated matter already. In practice, we most frequently encounter a situation, when the income of sportsmen is classified as income from pursuing an independent profession and professional sportsmen thus fall into the category of self-employed persons (for more information see the article). This classification was not the object of the given dispute, though. 

The Supreme Administrative Court dealt with the question of determining the tax residency of the mentioned football player, and the related potential return of the withholding tax by the football club as the payer of the tax to the financial authority. In the course of the operation of the football player on the territory of the Czech Republic, the football club changed its attitude regarding taxation of the paid income. According to the financial administration, the unsubstantiated change raised doubts on the part of the tax authorities and was an impulse to launching an audit of withholding tax collected from the income of natural persons in the taxable period, during which the above-mentioned change of attitude to taxation occurred.

The form of taxation of the income of the sportsman from Bosnia and Herzegovina depends on the assessment of the question of his tax residency. The income from a personally pursued activity of a sportsman on the territory of the Czech Republic - regardless of what legal relation they ensue from – should, according to the ITA, be burdened with 15 % retention tax when paid by the tax payer (in the given case by FK Teplice). This applies only in the case that this is a tax non-resident in the Czech Republic. The football player, who receives income from self-employed activity as a result of the performance of sports activity and who is a tax resident at the same time, taxes his income only on the basis of the personal income tax declaration. 

For completion, we add that the scope of taxation of such income in the Czech Republic usually does not differ in case of a tax resident and a tax non-resident, because according to the stipulation of the TPDT, the income from personally pursued activity of a sportsman should be taxed in the country, where the given sports activity is pursued (regardless of the tax residency status of the given taxpayer). Following the form of taxation, though, there is a different determination of the tax base here and the option of applying related costs.

According to TPDT, a “resident of the contracting state” is “every person, which according to the legislation of that country is subject to taxation in that country due to its domicile, permanent residence, place of foundation, place of management or any other similar criterion...”

Following the mentioned stipulation of the TPDT, for the purposes of determining tax residency it thus needs to be examined, if the given person is subject to taxation in CR according to national legislation on grounds of domicile, permanent apartment and similar criteria. A natural person fulfils this condition in case, according to article 2 of ITA it usually stayed in CR (for at least 183 days in a calendar year) or had its domicile here, that is a permanent apartment under circumstances, from which it is possible to assume the person's intention to stay in this apartment permanently. Similar assessment also needs to be made according to national legislation of Bosnia and Herzegovina.

In case the person is considered a tax resident of both countries according to the national laws, its position is to be determined according to other criteria in TPDT. These say that the given country is to be a resident of the country, where it has a permanent apartment available. If the natural person has an apartment available in both countries, it is a resident of the country, to which it has closer personal and economic links, the so-called centre of vital interests. These two criteria were assessed by the financial authority and subsequently also within proceedings before court, although TPDT stipulates even further criteria for determination of tax residency, in case it is not possible to decide on the basis of those mentioned above. 

FK Teplice and the tax authorities reached a different conclusion within this question. By presenting the contract of lease to a specific apartment in the Czech Republic, the football club considered the tax residency of the football player proven, claiming that the only permanent apartment of this football player is this apartment in the Czech Republic. The Financial Administration determined the status of the foreign football player only by using another criterion of the TPDT, deducing that the football player had a permanent apartment available in both countries and indicated Bosnia and Herzegovina as the centre of his vital interests due to his origin and family links. In keeping with the ITA, the income of the football player – a tax non-resident should subsequently have been taxed by a special tax rate of 15 % and the withheld tax should have been returned by the payer of the tax (FK Teplice) to the respective local financial office. According to a decision of the Supreme Administrative Court, though, the bodies of the financial administration erred, though…

In its decision, the Supreme Administrative Court states that the tax administrator did not present any evidence that would prove the existence of another permanent apartment than that in the Czech Republic and said that the position of the tax authorities was a speculative one, without evidential support or relevant argumentation. It also adds that is not possible to base a determination of tax residency only on claims applicable for the preceding or following taxable periods, for example in case of determining a permanent apartment and the intention to stay in the country to reflect exclusively information on the origin of the taxpayer or his stay in the previous years or his situation and activities in the future without further examination of the current situation. In this respect, than, the Supreme Administrative Court states that the tax administrator was not able to sustain the burden of proof for proving the existence of a permanent apartment in Bosnia and Herzegovina, because the taxpayer cannot be forced to prove its nonexistence.

A comment that is no less important, which the Supreme Administrative Court had to settle, was the question of discrimination, to what extent the football club considered the action of bodies of the financial administration in the taxation of football players – non-residents stricter than an action, which is applicable towards a person that is a resident of the Czech Republic in the same “entrepreneurial” position.

The Supreme Administrative Court supported the correctness of approach of bodies of the financial administration in the discussed matter with article 23 of TPDT, which stipulates: “Citizens of one contracting country will not be subject to any taxation or any related obligations in the other contracting country, which are different or more  burdensome than the taxation and related obligations, to which citizens of this other country can be subject, who are, especially in terms of residence, in the same situation.” If any of the stipulations of the ITA were in conflict with the above-mentioned ban on discrimination, the tax administrator could not apply them, or would have to choose another procedure, which would not be discriminating. The Supreme Administrative Court deduced here, though, that the essential thing for the form of taxation of the foreign football player is his tax residence, not his citizenship. The bodies of the state administration thus did not proceed in conflict with the mentioned ban on discrimination.  

Authors: Soňa Hanigovská and Šárka Veselá