Do you have a holding structure and are wondering how to properly handle your tax obligations? A new decision of the Supreme Administrative Court brings interesting interpretations on the topic of abuse of law that may be of interest to you. In this article, we look at the key points of the decision and their practical implications. In a recent judgment of the Supreme Administrative Court ("SAC") of 23 July 2024, Case No. 10 Afs 16/2023, the issue of abuse of law in relation to income tax in the context of the establishment of holding structures has once again surfaced.
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The SAC has ruled on holding companies and tax exemptions before. It dealt with the interrelationships of the companies in the holding company and how this affects the tax liability. However, the current case is factually different from the previous decision-making practice of the SAC (in particular 6 Afs 376/2018, in which the actual economic purpose of the transactions carried out was not proven), and it places emphasis on the individual assessment of each case by the tax authorities.
According to Article 8(4) of Act No. 280/2009 Coll., the Tax Code ("Tax Code"), legal actions and other facts relevant to the administration of taxes, the predominant purpose of which is to obtain a tax advantage contrary to the meaning and purpose of the tax legislation, shall not be taken into account in the administration of taxes . I.e., if something is "done for show", it is still taxed.
However, this does not restrict you as a taxpayer from choosing the structure of your business and therefore you can tailor your business to minimise your tax liability. The SAC itself has already ruled that a distinction must be made between a tax entity's choice for a legitimate tax-advantageous alternative and a situation where the only purpose of the transaction is an illegitimate tax advantage.
It is therefore true that the main purpose of the business, or of the individual transactions, must not be to obtain an illegitimate tax advantage and that the economic justification of the actions taken or the main purpose of the transactions must be different from the tax purpose.
After all, this was also the case in the crown bonds case, where if the purpose of issuing the bonds was proven (not only that they were intended to reduce tax), the tax administrator terminated the audit with a negative result.
To assess the existence of an abuse of rights, the so-called two-step test was introduced, consisting in the assessment of the fulfilment of two criteria, namely the objective and subjective element of abuse of rights, where these must be fulfilled simultaneously.
The so-called objective element consists in the purely formal fulfilment of the conditions set out in the relevant legislation, but does not fulfil the purpose of the legislation in question. Thus, the conditions are fulfilled 'on the face of it', but contradict the purpose pursued by the regulation.
The so-called subjective element is then assessed as an intention to obtain an advantage by artificially creating the conditions for achieving it. That is to say, it is conduct aimed at obtaining an advantage without the conditions for obtaining it actually being met.
It follows, therefore, that a taxpayer can be denied a right (e.g. a tax exemption) on the grounds of abuse of a right only if his economic activity has no other purpose than obtaining a tax advantage and the granting of that right would be contrary to the purpose of the law.
A holding company is generally one of the ways in which a business can be structured - it is generally formed by a parent company that controls subsidiaries aimed at carrying out the main business - however, Czech law does not recognise this concept and does not regulate it. In view of this fact, it is not possible to cling to precise categories of what a parent company may or may not do.
In its decision, the SAC thus outlined that the tax authorities, when assessing tax aspects, must focus rather on what the legislation prohibits for the particular corporate structure under tax examination. Here, the legal, tax, economic and other relevant aspects of the transactions under review must be taken into account. Particular emphasis is placed on the individual and overall assessment of whether or not the tax entity has behaved in a permissible manner.
In the present case, the SAC held that the mere fact that the result of the transactions carried out is undesirable from the point of view of tax law, and therefore the fulfilment of an objective element, is not sufficient to conclude that the law has been abused (the existence of a subjective element must also be established).
The SAC also stated that a holding company can only be an umbrella structure which does not have to manage the subsidiaries at all.
In conclusion, the creation of a holding structure is not in itself an abuse of law and the tax authorities must always assess the specific case using the above test and the fulfilment of both elements.
Importantly, the creation of the holding company should have a legal, economic and financial reason (the only reason must not be tax avoidance). Typical reasons for the creation of a holding company may be, for example, future acquisition or divestment activity, scope for entry or exit of a new shareholder, diversification of risk, facilitation of administrative processes and centralisation of management.
Responsible Attorney: JUDr. Jakub Dohnal, Ph.D., LL.M., Kateřina Chaloupková collaborated on the article.
