Czech Republic vs D. D. D. SERVIS OPAVA v. o. s., August 2021, Supreme Administrative Court, Case No 1 Afs 109/2021 – 67

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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 parties to the transactions were “otherwise related” within the meaning of the Czech arm’s length provisions in § 23 par. b) point 5 of the Income Tax Act.

SERVIS OPAVA filed an appeal against the assessment claiming that the tax authorities did not established the existence of a relationship between the parties and therefore had no legal basis for the adjustment.

The Regional Administrative Court dismissed the appeal and upheld the decision of the tax authorities.

An appeal was then filed against this decision with the Supreme Administrative Court

Judgement of the Supreme Administrative Court

The court decided in favour of SERVIS OPAVA.

The prerequisite for the adjustment of the tax base pursuant to Section 23(7) of Act No. 586/1992 Coll., on Income Taxes, is the determination that the relationship is between related persons. Only after the tax administration has carried the burden of proof in relation to this condition may it proceed to assess whether the prices agreed between related parties differ from the prices that would have been agreed between unrelated parties in normal commercial relations under the same or similar conditions. Therefore, the conclusion that the parties to the legal relationship are otherwise connected persons within the meaning of section 23(7)(b)(5) of the Act cannot be drawn solely from the fact that in the case under examination there is a difference between the agreed price and the normal price.

The tax administrator is obligated to examine the possible existence of other circumstances which would indicate that such a relationship was established mainly to reduce the tax base or increase the tax loss, i.e. that the companies are otherwise related as defined by § 23 para. 7 b) of the Czech Income Tax Act.

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Czech NSS 1 Afs 109-2021 – 67