The Supreme Administrative Court has laid down clear rules on the issue of abuse of VAT law

Have you created multiple companies and split the business between them to avoid VAT registration? The Supreme Administrative Court (SAC) judged such a case as an abuse of law and confirmed that such an action can lead to tax assessment and penalties directly to the individual who designed the structure. This article discusses the key conclusions of the Supreme Administrative Court's decision of 22 January 2025, No. 6 Afs 193/2024-54, and explains what impact this decision will have on entrepreneurs and legal practice.

Author of the article: ARROWS law firm (Mgr. Filip Ondřej, office@arws.cz, +420 245 007 740)

The business model as a tool for circumventing VAT obligations? The court said a clear NO

The decision of the Supreme Administrative Court shows exactly where the line between tax optimisation and abuse of law lies. In the case at hand, the entrepreneur repeatedly set up new companies and transferred his business activity (sale of electronic cigarettes) to them in a chain so that each of them remained below the threshold for compulsory VAT registration.

There were 26 companies involved. All of them had:

• the same business activity,
• the same employees (contracting repeatedly with the new company),
• the same place of business,
• the same managing director and shareholder.

The tax administration and the courts concluded that they were not separate business entities, but a single business plan "spread" among several companies purely for VAT purposes.

Model situation

Imagine that all operations remain the same - warehouses, employees, suppliers, brand name - only the company name on the invoice changes every two months. The purpose is not the business itself, but the formal separation of turnover so that no company exceeds the statutory limit for compulsory VAT registration. The Supreme Administrative Court (SAC) has described such a practice as circumvention and abuse of the law.

How is abuse of law assessed and what is its essence

The basic question in tax optimisation cases is whether the chosen model pursues a legitimate economic objective - or whether the main (predominant) objective is to obtain a tax advantage that would not have occurred under the standard procedure.

The Court bases its assessment on a two-stage abuse of rights test:

• the objective aspect - whether the form of the conduct is contrary to the meaning and purpose of the legislation (even if it formally fulfils the conditions set out in the legislation),

• the subjective aspect - whether the intention of the entrepreneur was to obtain an advantage by artificially creating the conditions for achieving it.

In the above-mentioned case, the SAC found that, formally, each company was carrying on a separate business, but in reality it was an artificial construction with the sole aim of preserving the entitlement to VAT exemption intended exclusively for small businesses under Article 287 of Council Directive 2006/112/EC.

The Supreme Administrative Court (SAC) relied not only on the Czech case-law in assessing the possibility of application of abuse of law in tax law (SAC judgment of 10 November 2005, No. 1 Afs 107/2004-48, No. 869/2006 Coll. 8.2008, Case No II ÚS 2714/07), but also the case law of the CJEU (CJEU judgment of 14.12.2000 in Emsland-Stärke, C-110/99 or CJEU judgment of 21.2.2006 in Halifax Plc and Others, C-255/02). The SAC also cited, inter alia, the judgment of 4.10.2024 in UP CAFFE d.o.o., C-171/23, in which the CJEU clearly confirmed the view that tax advantages must be denied where an artificial corporate structure is used to achieve them.

Practical implications for entrepreneurs

The CJEU judgment brings several important conclusions with direct implications for practice:

• form is not enough - the purpose and material conduct of the entityis decisive . Although any company may be established in accordance with the law, if the factual purpose of the tax entity's conduct is to obtain a tax advantage, a problem may arise in the form of tax assessment,

• VAT may be charged on an individual. The court confirmed that if a businessman was in business on his own before the structure was created, and then artificially divided his activities between several companies, he may be assessed directly - as if he had not created the structure at all. The Supreme Administrative Court confirmed that the strict separation of legal and natural persons does not apply in tax law,

• mere references to "risks of doing business" are not sufficient. In the example above, the taxpayer claimed that he had set up the companies because of the risk associated with the import of electronic cigarettes. The court rejected such a claim as insufficient - unless the taxpayer can sufficiently demonstrate that the objective was not primarily a tax advantage, then the above reasoning does not stand.

Therefore, if the tax authority can prove abuse of the law, it can assess the tax retroactively for the entire period - including penalties. This is even in cases where none of the companies formally exceeded the statutory turnover.

Summary

The Supreme Administrative Court (SAC) judgment No. 6 Afs 193/2024-54 sends a clear signal - efforts to optimise VAT must not be based on artificial structures that circumvent the meaning and purpose of the law and whose sole aim is to obtain a tax advantage. The creation of chains of companies with the aim of avoiding VAT will most likely be considered an abuse of the law. And the penalties can be severe - including the assessment of tax and penalties on the entrepreneur as an individual.

Recommendations in conclusion

Don't underestimate the tax risks associated with the organisational structure of your business. If you use multiple companies, you can have us perform a legal analysis and we can help you identify the risk elements, make the right adjustments and avoid potential complications.

Today is the last day you'll ever have to solve this problem on your own - contact us!