LAKUM KTL, a. s. had deducted from its taxable income costs for the purchase of advertising and promotional services from PRESSTEX MEDIA and PAMBROKE Media.
Following an audit, the tax authorities concluded that LAKUM had entered into a legal relationship with PRESSTEX and PAMBROKE for the purpose of reducing the tax base.
The tax authorities established reference prices on the basis that LAKUM could have entered into the contract for advertising and promotional services directly with the club concerned and, from the price range thus established, determined the arm’s length price for the services and increased the tax base accordingly.
Decision of the Regional Court
The Regional Court ruled in favour of the tax authorities on the pricing issue.
Excerpts
“37. The applicant first argued that the conditions for the application of the first sentence of Article 23(7) of the Income Tax Act were not met. According to that provision, if the prices agreed between related parties differ from the prices which would have been agreed between unrelated parties in normal commercial relations under the same or similar conditions, and if that difference is not satisfactorily substantiated, the taxpayer’s tax base is adjusted by the difference found. The concept of connected persons is defined in paragraph (b)(5) of the same provision as meaning that, for the purposes of this Act, connected persons are otherwise connected persons who have formed a legal relationship principally for the purpose of reducing the tax base or reducing a tax loss.
38. The applicant argued that a finding that the price obtained differs from the normal price is not sufficient to conclude that there are connected persons, otherwise the question of otherwise connected persons would be superfluous. At the same time, the applicant’s knowledge of that unreasonable increase must be established. He also argued that there was no profit on the part of the applicant, since he had actually spent the sums on advertising and the savings in the form of a reduced tax base were much smaller in relation to the costs incurred.
39. The Regional Court did not find any merit in this objection in its previous judgment. It has reached the same conclusion now. It did not consider it necessary to await the decision of the Extended Chamber in Case No 2 Afs 132/2020-56 of 22 December 2021 on the question whether ‘the finding of a significantly increased price of the subject-matter of the contract compared to the normal price without a satisfactory explanation of the difference is a sufficient condition for concluding that there is a combination of persons for the purpose of reducing the tax base or increasing the tax loss, or whether other facts in the conduct of the taxpayer indicating the unusual nature of the commercial transaction must be proved by the administration’. The reason for this is that the tax authorities based their conclusion that the parties were connected not only on the finding of an exorbitant price but also on other circumstances which suggest that the transaction was unusual. In its previous judgment, the Regional Court did not deal with them in detail, as it relied on the view, held by case law at the time, that the finding of an exorbitant price without a satisfactory reason was sufficient for the conclusion of connected persons within the meaning of Section 23(7)(b)(5) of the Income Tax Act (e.g. Supreme Administrative Court judgments of 13 June 2013, no. 7 Afs 47/2013-30, 28 January 2021, no. 3 Afs 393/2019-43 or 20 August 2021, no. 2 Afs 313/2019-43). The Court therefore found the applicant’s objection with regard to them irrelevant. In view of the question submitted to the Extended Chamber, its irrelevance is no longer apparent and the Regional Court will comment on them below, but there is no reason to wait for the decision of the Extended Chamber; even if it were to prevail that the definition of connected persons includes, in addition to the exorbitant price, the presence of such facts in the conduct of the tax entity as to indicate the unusual nature of the transaction, that could not have a favourable effect on the applicant’s procedural success in the case now under consideration.
40. In the case at hand, the tax authority raised doubts about the claimed costs, finding that the total costs incurred by the applicant’s suppliers PRESSTEX and PAMBROKE for advertising and promotional services for the year 2013 for the applicant amounted to CZK 56 104, while the applicant booked costs of CZK 6 000 000, representing 107 times the price paid by the suppliers PRESSTEX and PAMBROKE. The tax administrator’s doubts were also raised by other “non-standard circumstances” mentioned in the Tax Audit Report on pages 23-25, which are:
– a change in the contractual terms, as the documents on the performance of the subject matter of the contract were delivered to the applicant after the end of the contractual relationship
– discrepancies between the contract and the invoice and between the photographic documentation and the invoice (different size of the banner, failure to indicate advertising in the Golf Arena Ostrava, invoicing for advertising services even for months when no matches were played)
– the applicant’s failure to comply with the payment terms
– failure to verify the effectiveness of advertising costs
– non-standardisation of the applicant’s suppliers PRESSTEX and PAMBROKE (non-contactability of PRESSTEX, virtual headquarters, cash withdrawals of large sums, company without a statutory body)
– the failure to verify the price quotation, since the applicant accepted the price proposed by PRESSTEX without further investigation of the more advantageous quotation, even though the applicant could have recognised the overestimation of the price because it has long been active in the sports and business environment.
41. On the basis of the foregoing, the tax administration found that there was a relationship between the applicant and PRESSTEX and PAMBROKE corresponding to Article 23(7)(b)(5) of the Income Tax Act, and the defendant agreed with its assessment (see paragraph 90 of the contested decision).
42. The Regional Court also agrees with that assessment”
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