Czech Republic vs. P. S., March 2013, Supreme Administrative Court , Case No 5 Afs 34/2012 – 65

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According to the tax authorities, the prices agreed between the P.S. and her husband, as lessors, and Long Wave, s.r.o. (‘Long Wave’), as lessee, differed from the prices which would have been agreed between independent persons in normal commercial relations under the same or similar conditions. According to the tax authorities, P.S., together with her husband and Long Wave, are persons who have created a legal relationship mainly for the purpose of reducing the tax base.

According to the appellant, P.S, the conditions laid down in the judgment of the Supreme Administrative Court of 31 March 2009, No 8 Afs 80/2007-105, were not met and the tax administrator’s procedure for determining the normal price was seriously flawed.

Judgement of the Court

The Supreme Administrative Court concluded that the appeal as a whole was unfounded and therefore dismissed it

“In the present case, the complainant was informed of the difference in the agreed prices and at the same time asked to explain or provide reliable evidence of the difference (notice of 27 February 2009, No 21645/09/228933601143). It responded to the tax authority’s doubts about the low rental price by submitting the above-mentioned medical report or by offering the testimony of the above-mentioned persons. However, these means of evidence do not prove the difference in prices (see above for their assessment) and the complainant did not offer any other relevant evidence in the evidentiary proceedings. The Supreme Administrative Court therefore concludes at this point that the complainant has failed to demonstrate to its satisfaction the reasonableness of the price difference established by the tax authorities.

Lastly, the complaint that the complainant was deprived of its procedural rights in the hearing of the results of the tax audit pursuant to Section 16(8) of the Tax Administration Act must also be regarded as unfounded. As stated in the judgment of the Regional Court, it does not appear from the minutes of the oral hearing of 7 September 2010 that the tax administrator did not respond to the complainant’s objections and questions, or that he did not explain to her the reasons why he proceeded to apply Section 23(7) of the Income Tax Act. The Supreme Administrative Court agrees with that view and adds that the tax administrator dealt with the complainant’s objections in detail and recorded the individual statements and objections. It also communicated its views on them, as well as on the newly raised views, to the complainant. The mere fact that the complainant did not agree with the conclusions communicated to her cannot constitute a prejudice to her rights; nor can the infringement of the relevant provisions of the Tax Administration Act or the illegality of the tax administrator’s decision, alleged by the complainant, be inferred from that procedure for the termination of the tax audit.

The Supreme Administrative Court did not find any fundamental errors in the procedure of the tax administrator or the Tax Directorate. The administrative authorities correctly applied Section 23(7)(b)(5) of the Income Tax Act to the sufficiently established facts, since it was established in the tax proceedings that the complainant was otherwise a person connected with the person to whom she provided the supply in the form of a lease, i.e. in an attempt, mainly for the purpose of reducing the tax base, she undervalued the supplies received in agreement with her business partner by negotiating rental prices outside the range of normal prices. Similar conclusions apply to that part of the 2006 tax year in which the complainant was to be regarded as a person linked by capital to Long Wave within the meaning of Article 23(7)(a)(2) of the Income Tax Act.”

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