Following an audit the tax authorities issued an assessment of additional income resulting from an adjustment of the tax deductions related to marketing expenses. According to the tax authorities the price agreed between the related parties for advertising space was excessive and not determined in accordance with the arm’s length principle.
ANITA B s.r.o. filed an appeal against the assessment.
The Regional Court dismissed the appeal as unfounded by judgment of 26 October 2021, No. 62 Af 70/2019-48. The Court concluded that the tax authorities had established that the price agreed between ANITA B s.r.o. and its supplier (ELAPROMO) differed from the price that would have been agreed between unrelated parties. The Court upheld the method chosen by the tax authorities and concluded that ANITA B s.r.o. had failed to prove that the advertising costs claimed were justified in full.
An appeal was then filed with the Supreme Administrative Court
Judgement of the Supreme Administrative Court
The court decided in favour of the tax authorities and upheld the decision from the Regional Court.
Excerpt
“[40] In its judgment of 26 March 2014, no. 9 Afs 87/2012-50, the Supreme Administrative Court explained that “[t]he purpose of the provision in question is to prevent the unwanted shifting of part of the income tax base between individual income taxpayers and to enable the sanctioning of abusive price speculation in business relations. It also concerns the so-called “profit shifting” between persons with different tax burdens, which usually occurs when such persons charge each other prices lower or higher than the prices used between independent persons in normal business relations, and the result of such transactions is an increase in costs or a decrease in sales for the company with the higher tax burden and a siphoning off of part of the profits to the company with the lower or zero income tax rate. It further summarised that ‘a material difference from normal prices occurs when sales are made too cheaply or purchases are made too expensively; in such cases, such a difference must always be satisfactorily documented’.
[41] In that connection, the complainant pointed out that TOP Reklama was the exclusive purchaser of the advertising space, which significantly affected its subsequent bargaining position. However, that argument cannot be accepted. The Regional Court dealt with it in paragraph 29 of the judgment under appeal and the Supreme Administrative Court fully agrees with its view. That argument certainly cannot be regarded in the present case as satisfactory evidence of a price difference within the meaning of Article 23(7) of the ITA. As regards the argument concerning the importance and fame of the sports grounds in question, it cannot be accepted either, since any exclusivity is already included in the price at which SK Vodova Brno and FC Zbrojovka Brno lease the advertising space to TOP Reklama. The Supreme Administrative Court therefore has no other explanation than that the price was overestimated in order to obtain a tax advantage.
[42] Furthermore, the complainant has repeatedly stated that it is an entrepreneur in the field of development, production and trade in sewing machines and cannot be required to have knowledge of the advertising market. However, this and subsequent arguments are again unhelpful as they do not explain the substantial difference from normal prices. At the same time, the Supreme Administrative Court reiterates at this point that it is irrelevant to the case whether the complainant was knowingly involved in the chain of connected persons.
[43] In view of the foregoing, the tax administrator proved that the case involved related persons within the meaning of section 23(7)(b)(5) of the ITA, that the prices agreed between those persons differed from the prices that would have been agreed between independent persons in normal business relations under the same or similar conditions, and that the complainant did not specifically explain and document the difference between the agreed price and the normal price. In such a situation, the tax administrator was entitled to adjust the tax base by the difference between the above-mentioned prices in accordance with Article 23(7) of the ITA.
[44] It can therefore be summarised that the Regional Court assessed the relevant legal issues correctly and based itself on the facts of the case duly established by the tax administration authorities. The grounds of appeal set out in Article 103(1)(a) and (b) of the Code of Civil Procedure were therefore not met.”
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