5 Afs 34/2012 - 70

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CZECH REPUBLIC

R O S U D E K

J M E N E M E R E P U B L I C S

The Supreme Administrative Court (SACC), sitting as a panel composed of the President, JUDr. Lenka Matyášová, Ph.D., and the Judges, JUDr. Jakub Camrda, Ph.D. and JUDr. Ludmila Valentová, decided in the legal case of the applicant: P. S., represented by JUDr. Ing. Tomáš Matoušek, lawyer with registered office at Dukelská 15, Hradec Králové, against the defendant: Appellate Financial Directorate in Brno, with registered office at Masarykova 31, Brno (formerly Financial Directorate in Hradec Králové, with registered office at Horova 824/17, Hradec Králové), on the applicant's cassation complaint against the judgment of the Regional Court in Hradec Králové of 16 February 2012, Case No 31 Af 68/2011-46

as follows:

I. The appeal is dismissed.

II. Orders the defendant to pay the costs of the appeal.

C o n c l u s i o n s :

By supplementary payment order of 8 September 2010, No 220293/10/228913607594, the Tax Office in Hradec Králové assessed the applicant for personal income tax for the tax period 2006 in the amount of CZK 728 049 and also informed the applicant that it was liable to pay a penalty of CZK 145 609. The applicant lodged an appeal against that decision, which was rejected by the decision of the Financial Directorate in Hradec Králové of 8 April 2011, No 2318/11-1100-602177, and the contested decision was confirmed.

The applicant brought an action against the decision of the appeal authority, which the Regional Court in Hradec Králové dismissed by judgment of 16 February 2012, No 31 Af 68/2011 - 46.

By a timely lodged cassation complaint, the applicant (the complainant) seeks the annulment of the abovementioned judgment of the Regional Court. It submits that the reason for the additional tax assessment is the incorrect application of Article 23(7)(b)(5) of Act No 586/1992 Coll, According to the tax administrator, the prices agreed between the complainant 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, the complainant, together with her husband and Long Wave, are persons who have created a legal relationship mainly for the purpose of reducing the tax base.

The complainant considers the decision of the Regional Court, which accepted the opinion of the Tax Directorate, to be unlawful within the meaning of Article 103(1)(a) of the Code of Civil Procedure and, in part, unreviewable within the meaning of Article 103(1)(d) of the Code of Civil Procedure.

The applicant submits that her husband, Mr N.S.'s longstanding heavy workload caused him mental health problems which were aggravated in 2005 by the additional stress factor of a tax audit of Medinvest, s.r.o. ('Medinvest'). That fact was corroborated by the complainant's medical report by M.J.Z., a specialist in sexology and psychiatry, which shows that Mr S. was treated for depressive and anxiety conditions between 2004 and 2006, the main cause of which was stress from excessive workload.

Mr S.'s adverse health condition was then resolved by Mr and Mrs S. deciding to leave the operation and maintenance of the two buildings to another person. To that end, on 1 November 2005 the applicant and her husband, as landlords, and Long Wave, as tenant, concluded lease agreements for the rental of the two properties in question at a rent of CZK 120 000 per annum (SUDOP building) and CZK 240 000 per annum (Cotton building). The complainant points out that neither she nor her husband had any financial or personal connection with Long Wave and that the lease agreement was concluded on the assumption that Long Wave would in fact ensure the entire operation of the buildings. This was the case and the actual management of the buildings by the company was reliably established in the tax proceedings by the tax authorities' investigation of Long Wave and Medinvest and by the relevant testimonies, in particular that of Ing. P. of 15 June 2010, the testimony of Ing. H. of 4.5.2010 and the testimony of J. Š. of 11.2.2010. Medinvest, which had established relations with the subtenants, i.e. the actual users of the non-residential premises in both buildings, remained in those lease relations, since in relation to the subtenants it would have been legally very difficult to change the person of the landlord and, at the same time, from a commercial point of view, such a change would have caused the users of the premises in the buildings to distrust the stability of the contractual relations. For this reason, a lease agreement was also concluded between Long Wave and Medinvest, under which Long Wave provided all services and operations in both buildings and let the buildings to Medinvest, whose only role was to sublet the non-residential premises to the end-users, i.e. in effect to collect rent. According to this new scheme, the two buildings were in fact operated from 1 November 2005 and all the work related to the operation of the buildings was carried out by Long Wave.

The complainant submits that the conclusion of the tax authorities that the result to be achieved by concluding lease agreements with Long Wave was the de facto non-taxation of a significant part of the rental income from the two buildings is incorrect. According to the complainant, the term 'de facto non-taxation of income' used by the tax authorities in that context is not a term defined by law and the argument formulated in that way cannot stand up at all because it is not anchored in the law. The statutory criterion is the criterion of reduction of the tax base. It is precisely this criterion, expressly referred to in Section 23(7)(b)(5) of the Income Tax Act, which has not been met, since there has been no unlawful reduction in the tax base of any of the persons concerned. As the complainant has already stated in its application, according to the judgment of the Supreme Administrative Court of 31 March 2009, No 8 Afs 80/2007 - 105, the aim of the provisions of Section 23(7) of the Income Tax Act is to prevent tax evasion in such contractual relationships where one party to the contract deliberately takes actions that are financially or otherwise disadvantageous to it, so that the other party, on the contrary, obtains a tax advantage consisting in a reduction of the tax base. Such a situation certainly did not arise in the present case, and the tax authorities and, subsequently, the court found no such thing.

In that connection, the complainant also pointed out that she and her husband were not connected in any way, either in terms of capital or personnel, with Long Wave, and it is not even possible to consider that the complainant and her husband benefited through the other party. Nor does the subsequent acquisition of a shareholding in Line Management, s.r.o. ('Line Management') in 2006 have any bearing on this, since the 'connection principally for the purpose of reducing the tax base' must already have existed at the time of the conclusion of the contractual relationship in question. However, this has not been proven, and on the contrary, evidence was produced during the tax proceedings (witness interviews, Long Wave's accounts) which directly contradicts the possibility of such a link at the time of the conclusion of the contractual relationship.

As regards the determination of normal prices by the tax authorities, the Regional Court found that the Tax Directorate had dealt with the issue in a lawful manner. According to the Court, the tax authorities took into account the issue of floor area, location, transport accessibility, the internal fittings of the leased properties and whether the lease was to an end-tenant or a lease for the purpose of letting, when selecting comparable entities. The fact that the tax authority included the SUDOP and Cotton buildings among the properties under examination was considered by the court to be correct and fair to the complainant. However, the complainant disagrees with that assessment, since the tax authorities identified six entities in the tax inspection report which they investigated with regard to the rental price. Of these, only three properties were identified as having been rented out at wholesale prices to other tenants who had yet to rent them out to end users. Thus, for only three properties did the tax authorities identify the same (or, rather, similar) relationships as in the complainant's case (a similar business chain consisting of three entities - in the complainant's case, four entities as of 1 November 2005).

According to the complainant, 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. For example, there is a large difference in the area of the leased non-residential premises between the complainant's buildings and the comparable property in Hradecká Street, the unreviewable reasoning about the operation of thirty companies in the building in Hradecká Street; the lease of the premises in the building in Hradecká Street does not seem to meet the conditions of equality of purpose (according to the financial authorities, this building is partly used as a secondary and higher vocational school); the SUDOP and Bavlna buildings are the complainant's buildings (there was therefore no selection of another entity's buildings, or only the building in Hradecká Street); the lease of the premises in the building in Hradecká Street is not the same as the lease of the building in Hradecká Street. is the building of another entity, so not enough other entities were selected, but only a single entity); for the SUDOP and Cotton buildings, only the rent up to 31 October 2005 was examined, i.e. the requirement to examine the price at the same time, i.e. in the present case from 1 November 2005, was breached; the complainant's own price established in the period before 1 November 2005 was declared to be the 'normal price'.

The complainant also disagrees with the Regional Court's conclusion that the tax administrator did not infringe its rights guaranteed by Article 16(8) of Act No 337/1992 Coll., on the Administration of Taxes and Fees ('the Tax Administration Act'). In fact, the complainant expressly requested the tax administrator to provide her with its arguments in favour of the conclusion that she and Long Wave were connected persons within the meaning of section 23(7)(b)(5) of the Income Tax Act at the time the lease agreements were concluded. However, the tax authorities failed to do so. In the protocol of 7 September 2010, the tax administrator did add a description of the property in Hradecká Street, but the evaluation of the data on the property in question is not apparent from the protocol. The complainant was thus deprived of her right, since all the conclusions of the tax administrator must be apparent from the tax inspection report (see the Constitutional Court's ruling of 27 August 2011, Case No IV. ÚS 121/01).

In view of the above, the complainant therefore requests that the judgment of the Regional Court appealed against be annulled and the case be returned to the Regional Court for further proceedings.

In its written observations on the appeal, the original defendant made full reference to the judgment under appeal and requested that the appeal be dismissed.

In its rejoinder, the applicant maintained its complaints and added further arguments.

The Supreme Administrative Court first examined the formal requirements of the cassation complaint and found that the complaint was lodged in time, as it was lodged within two weeks of the delivery of the contested judgment (Article 106(2) of the Code of Civil Procedure), was lodged by a person entitled to lodge a complaint, as the complainant was a party to the proceedings which gave rise to the contested judgment (Article 102 of the Code of Civil Procedure), and was represented by a lawyer (Article 105(2) of the Code of Civil Procedure).

The Supreme Administrative Court then proceeded to examine the cassation complaint within the limits of its scope and the grounds put forward, examining whether the contested decision suffered from any defects which it would have to take into account of its own motion (Article 109(3) and (4) of the Code of Civil Procedure), and concluded that the cassation complaint was not well-founded.

First of all, the Court of First Instance notes that the principle applies in tax proceedings that it is the taxpayer who bears the burden of proof in relation to its tax liability and the burden of proof in relation to its allegations. The issue of the burden of proof and its distribution in tax proceedings has been dealt with by the Supreme Administrative Court in a number of its decisions (e.g. in its judgment of 20 May 2005, No 5 Afs 29/2003-85, its judgment of 30 January 2008, No 2 Afs 24/2007-119, and a number of others, all available at www.nssoud.cz). It follows from the settled case-law on this issue that, in principle, the burden of proof and the burden of allegation is borne by the taxpayer in the course of the evidence. In some cases, however, this general rule does not apply and the burden of proof and the burden of proof is instead borne by the tax administration. This is precisely the case in the application of the first sentence of Section 23(7) of the Income Tax Act (e.g. the judgment of the Supreme Administrative Court of 20 May 2005, No. 5 Afs 29/2003 - 85 or the judgment of 21 December 2005, No. 5 Afs 5/2005 - 85).

Therefore, the tax administrator may adjust the tax base only if the legal conditions for such a procedure exist. Pursuant to the quoted Section 23(7) of the Income Tax Act, the tax administrator shall adjust the taxpayer's tax base if the prices agreed between related parties differ from the prices agreed between independent persons in normal business relations under the same or similar conditions and if this difference is not satisfactorily documented. The term 'connected persons' is further explained in points (a) and (b) of the above provision. According to point (b)(5), otherwise related persons are those who have formed a legal relationship principally for the purpose of reducing the tax base or increasing the tax loss. The purpose of this provision is to prevent the unwanted shifting of part of the income tax base between different income taxpayers and to sanction abusive price speculation in business relationships. It also refers to the so-called "profit shifting" between persons with different tax burdens, which usually occurs when these 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 a lower or zero income tax rate.

Normal business relationships are then to be regarded as those which are formed in conditions of undistorted competition. Normal commercial relations give rise to a normal market price. It is a price which does not result from an abuse of the seller's or buyer's position to obtain an undue economic advantage. In both commercial and civil law, the normal price is understood as a reasonable price, agreed at a given place and time for the sale of goods or services, comparable to similar prices at the time of conclusion of the contract under similar conditions. It can therefore be stated that a substantial difference from normal prices occurs when selling too cheaply or buying too dearly; in such a case, such a difference must always be satisfactorily documented.

As the Court of Justice has repeatedly held, most recently, for example, in its judgment of 23 January 2013 in Case No 1 Afs 101/2012-31, available at www.nssoud.cz, it must first of all be shown that the persons concerned are connected within the meaning of the cited provision, i.e. that they are connected economically, personally or in some other way functionally equivalent to an economic or personal connection. Where it is established that they are connected persons within the meaning of the above provision, it is for the tax authorities to prove that the prices agreed between them differ from those which would have been agreed between independent persons in normal commercial relations under the same or similar conditions.

The Supreme Administrative Court considers that the first question, whether the tax authority bore the burden of proof in establishing that in the present case the complainant created a legal relationship for the purpose of reducing the tax base, has been answered. It is undisputed that the complainant and her husband owned the properties at G. 504, H.K. (SUDOP) and V. 1343 and 1631, H.K. (Cotton), and that until 31 October 2005 they rented those properties to their own legal entity, Medinvest, without services. The rent for the SUDOP building was CZK 1 836 000 per year and for the Bavlna building CZK 4 320 000 per year. Services related to the use of the property were provided by Medinvest at its own expense. It leased the non-residential premises in both properties to the final tenants at agreed prices, which included both rent and service charges. Medinvest spent CZK 1 546 000 per year on the services purchased.

On 31 October 2005, the lease agreement was terminated and on 1 November 2005 new lease agreements were concluded with Long Wave for the lease of the two above-mentioned properties. However, the agreed rent was only CZK 120 000 per annum (for the SUDOP building) and CZK 240 000 per annum (for the Cotton building). At the same time, further lease agreements were concluded between Long Wave and Medinvest for both properties, under which Long Wave secured all services related to the use of the properties at its own expense and further leased both properties, including all services secured, to Medinvest, with the Cotton building for CZK 10 200 000 per annum and the SUDOP building for CZK 3 000 000 per annum. The end-users of the leased premises were the same tenants who had lease agreements with Medinvest prior to 1 November 2005, i.e. the agreements concluded between Medinvest and the individual tenants remained unchanged and valid.

It is clear from the above that the rental income of the complainant (and her husband) fell by CZK 5 796 000 per year, i.e. from the original CZK 6 156 000 per year (before Long Wave's entry) to a total of CZK 360 000 per year (after Long Wave's entry), for both properties. This was therefore a decrease in rental income of up to one fifteenth and one eighteenth of the original price, without the complainant having properly justified this decrease. The reduction in income of such a substantial amount was not offset by any change in the applicant's obligations or any other objective change which would have rationally justified the deprivation of the majority of the benefits of ownership or rental of the properties in question. As in its relationship with Medinvest, the complainant did not bear the burden of managing and maintaining the properties, it continued to lease the same properties and the profitability of the buildings in question did not change in any material way, e.g. by a fundamental change in the market situation, etc. By entering into a new relationship with Long Wave, it was this company which benefited from the lease, spending only CZK 360 000 on the lease and subsequently charging Medinvest CZK 13 200 000 for rent and services. The split of the profit or the amounts collected from the final tenants was 16 % for Medinvest, 82 % was collected by Long Wave (18 % was spent on the purchase of services, but 64 % could be described as 'profit') and only 2 % went to the complainant.

This disproportion in the distribution of profits is more than evident and shows that the prices charged by the complainant for renting the properties to Long Wave do not correspond to the normal prices that would otherwise be realised in normal commercial relations. In the view of the tax authorities, with which the Supreme Administrative Court agrees, the complainant reduced its tax liability by creating an artificial reality, i.e. by allowing another intermediate party, Long Wave, to enter into the business relationship with Medinvest, with which it negotiated very low rental prices. Such a business relationship would not have been established by unrelated entities in normal economic conditions, as it would not have been economically rational for them to do so (cf. e.g. judgment of the Court of Justice of 16 November 2010, No 5 Afs 85/2009-67, available at www.nssoud.cz). Therefore, the legal assessment made by the Financial Directorate, and upheld by the Regional Court, that in the case at hand there was an economically irrational business relationship can be upheld, since the complainant, as one of the owners of the real estate, by concluding a lease agreement with Long Wave, forfeited a significant part of the profits derived from the real estate by substantially undervaluing the rental price for the real estate in question, without there being any relevant circumstances for such an action.

Although the complainant justified the reduction in income on the grounds of her husband's health, the medical report on his health cannot be regarded as relevant evidence to explain such an extreme reduction in the rental prices. As the administrative file shows, there may have been a temporary 'reduction in the work duties of the complainant's husband' when, as of 1 November 2005, the contractual obligations relating to rent and services were transferred to Long Wave. However, with the subsequent purchase of Line Management in January 2006, which was the sole shareholder of Long Wave, the complainant's husband rather increased his duties; in fact, he joined Long Wave as managing director and took up the same position he had held in Medinvest. In the complainant's case, there was virtually no relaxation of the obligations arising from the lease of the property, and it cannot be concluded that that was the reason for concluding contracts with such markedly low prices.

It is also necessary to reject the complainant's arguments that she and her husband were not persons connected in any way, either in capital or personality, with Long Wave and that there was no benefit to the complainant and her husband through the other party to the contract. As stated, for example, in the judgment of the Supreme Administrative Court of 31 March 2009, No 8 Afs 80/2007 - 105, to which the complainant also refers, the purpose of the aforementioned provision of Article 23(7) of the Income Tax Act is to prevent tax evasion in such contractual relationships where one party to the contract deliberately takes actions that are financially or otherwise disadvantageous to it, so that the other party, on the contrary, obtains a tax advantage consisting in a reduction of the tax base. In the opinion of the Court of Justice, such a situation arose in the present case. Account must be taken of the fact that Long Wave was not taxed on the income collected. It was that company which used the tax losses assessed for the previous tax year, from 1 January 2005 to 30 September 2006, as a deduction from the tax base for the financial year from 1 January 2005 to 30 September 2006, that period being the last opportunity to deduct the losses assessed for the years 1998 to 2000 under section 34(1) of the Income Tax Act. It emerged from the evidence that Long Wave had been engaged in activities exclusively related to telemarketing in the earlier periods and had no activity in the period immediately preceding the date of conclusion of the contracts (1 November 2005). Following the conclusion of the lease contracts, the assets recognised in the balance sheet increased, which is undoubtedly related to the income collected from the lease contracts. After the inclusion of personnel costs, other operating income and operating expenses, the above-mentioned company achieved an economic result which is not far removed from the amount of the loss deducted from the tax base for the financial year from 1 January 2005 to 30 September 2006. It can therefore be concluded that the deduction of the loss for 1998 from the tax base of Long Wave would not have been possible without the existence of that business relationship.

By concluding lease agreements with Long Wave, which provided for extremely low rents, the complainant and her husband transferred, without any rational reason, almost all the benefits of ownership of the property. At the time of the buy-out of the business shareholding in Line Management, which in effect amounted to a buy-out of Long Wave, the complainant and her husband recovered those benefits, except that the benefits in question (i.e. the income received from the final tenants less the remuneration for Medinvest and less the cost of acquiring the services) were set off against the tax loss of Long Wave for the previous periods. The tax liability on these benefits, which the complainant drew through Long Wave, was CZK 0. In the case of Medinvest (a legal entity with a 100 % shareholding by Mr and Mrs S.), there was also a significant increase in costs, since before entering into the contract with Long Wave, Medinvest spent CZK 1 546 000 on services and CZK 6 156 000 on rent (a total of CZK 7 702 000), and after Long Wave entered into the contract, it spent a total of CZK 13 200 000 on rent and services.

The Supreme Administrative Court thus agrees with the conclusion on the existence of a case of otherwise connected persons (as reached by the administrative authorities and the Regional Court), since it is undoubted that the conclusion of the contracts with Long Wave and the termination of the relationship with Medinvest reduced the income tax base of the complainant (and her husband) by more than CZK 1 800 000. Although the agreed rent invoiced to Medinvest, which increased its annual costs by more than CZK 7 000 000 and thus reduced its tax base, was part of Long Wave's income, the tax base was covered by the deduction of the tax loss. The substantial reduction in rental prices and the takeover of a company with a taxable loss were therefore more than advantageous for the complainant (despite the purchase of Line Management by the complainant's husband for CZK 2 million), and meant a reduction in the complainant's tax base and thus a saving in the funds spent on her tax liability, as well as a reduction in the tax liability of the complainant's company Medinvest.

The Court of Justice adds that the mere purchase of a company with a loss from previous years could, in certain circumstances, be regarded as lawful (cf., to that effect, the judgment of the Court of Justice of the European Communities of 13 December 2005 in Case C-446/03 Marks & Spencer plc v David Halsey (Her Majesty's Inspector of Taxes) concerning the freedom of establishment provided for, in particular, in Articles 43 and 48 of the EC Treaty (now Articles 49 and 54 TFEU)). In the tax field, it is generally accepted that there is no obligation to carry on business in such a way as to increase the tax revenue of the State. Taxable persons may organise their business in such a way as to optimise their tax liability. On the other hand, such freedom exists only to the extent of the legal possibilities provided for by the Income Tax Act regime. Assuming that the complainant's rental prices had not fallen so drastically, far beyond the normal range, the purchase of a company with a loss from previous years could therefore be considered legitimate under certain conditions. However, that was not the case in the present case. On the contrary, it is clear from the facts established that the legal relationship was created mainly for the purpose of reducing the tax base. These conclusions cannot be refuted by the testimonies of Mr Š., Ing. H. and Ing. P., to which the complainant refers. From the witness statement of Ing. H. (the original managing director of Long Wave) of 4 May 2010, on the contrary, it follows that he had known the complainant's husband for approximately 20 years. The complainant (together with her husband) could therefore have been aware of Long Wave's performance (losses) over the years and at the time of the conclusion of the contractual relationship. This is all the more so if the complainant (together with her husband) intended to, and did, enter Long Wave as sole shareholder through Line Management.

The Supreme Administrative Court notes that in the present case the complainant's new lease resulted in a significant loss of rental income by the fact that she and her husband negotiated a rent that was extremely out of line with the prices in normal commercial relations, and that rent was significantly undervalued. The majority of the benefits of the Long Wave lease charged to the complainant's company Medinvest, which would otherwise have been subject to tax, were 'dissolved' in losses for previous periods, and those benefits were subsequently recovered by the complainant and her husband three months later by buying out the shareholding in Long Wave. Such conduct must be regarded as contrary to normal commercial relations in the course of business. In view of the above, the Supreme Administrative Court is of the opinion that the tax administrator, when assessing the evidence, acted in accordance with Section 2(3) of the Tax Administration Act, evaluated it in particular in its mutual context and rightly concluded that Section 23(7)(b)(5) of the Income Tax Act applied. There were such serious and reasonable doubts as to the normal nature of the agreed rent that it could not be regarded as economically rational and would not have been agreed by economic operators in normal commercial relations.

It should be added that the application of Section 23(7)(b)(5) of the Income Tax Act covered the period up to 26 January 2006. From that date, as already mentioned, Mr N.S. joined Line Management (the parent company of Long Wave) as managing director and bought out the shares of the two original shareholders (from 26 April 2006, Mr N.S. and the complainant were then entered in the commercial register as shareholders of Line Management, each with a 50 % share). On 20 February 2006, Mr S. joined Long Wave as managing director. It is thus clear and must be regarded as established, as the Financial Directorate also stated in its decision, that the complainant and her husband (as owners of the property) and Long Wave became capital-related persons within the meaning of Article 23(7)(a)(2) of the Income Tax Act.

As stated above, if it was established that they were related persons, it was further incumbent on the tax authorities to prove that the prices agreed between them differed from those that would have been agreed between independent persons in the ordinary course of business under the same or similar conditions. The administrative authorities also complied with this obligation and dealt with the question of normal prices in a reviewable manner.

The Supreme Administrative Court recalls here that the choice of criteria for assessing the 'normal' nature of prices is an administrative discretion. Reference may be made here, for example, to the decision of the Supreme Court of 11 February 2004, No 7 A 72/2001 - 53, published under No 576/2005 Coll. of the Supreme Administrative Court, the legal conclusions of which are also applicable to the present case; the Supreme Court thus, inter alia, ruled that the decision of the Supreme Court of 11 February 2004, No 7 A 72/2001 - 53, is not applicable to the present case. The Court of First Instance held that "if the mechanism for determining the normal price is not determined by a legal norm and the administrative authority is called upon to determine it, the determination of the normal price must be approached with special consideration and its amount must be determined on the basis of objective criteria and in such a way that the conclusions of the administrative authority lead to a reliable judgment and the method of its determination and the amount of the normal price itself can be reviewed. [...] It is not for the Supreme Administrative Court to interfere in the selection of criteria or to determine which of the criteria should be taken into account by the administrative authority for the determination of the normal price and it leaves the selection of criteria to the administrative authority [...]." Therefore, if the administrative reasoning does not deviate from the above-mentioned rules, the court respects it and does not replace it with its own reasoning.

In the present case, objective criteria were applied and the normal prices were determined by an appropriate comparative method, i.e. the floor area of the leased properties, the location within the territory of Hradec Králové, the transport accessibility and the internal equipment of the property (lift, level of interior equipment) were compared, including whether it was a lease for the purpose of further rental or a lease to final tenants. The conditions for examining the normal price at the same or similar time were also met, i.e. the rental prices in 2005 and 2006 were examined, including any changes and the composition of the price (e.g. inclusion of utilities and energy in the rental price), the type of rental (lease to the final tenant or lease for the purpose of subletting, due to the fact that rental prices were generally higher in cases of rental of non-residential premises by the owners directly to the final tenants). On the basis of the above-mentioned aspects, the Cotton and SUDOP properties were also examined until 31 October 2005, the tax administrator basing its reasoning on the fact that the prices of the leases of non-residential premises, although negotiated between persons related by capital (Mr and Mrs S. - Medinvest), were in their amount among those negotiated between independent persons in normal business relations.

Although the complainant disagreed with the inclusion of its SUDOP and Cotton buildings among the buildings under examination, the Court did not accept that argument. On the contrary, the Court considers that the tax administrator's chosen procedure is correct. According to the administrative file, the tax administrator compared a total of six buildings and found that in three cases the properties were leased to final tenants. The prices ranged from CZK 1 600 to CZK 2 200 per 1 m2/year. In the other three cases, the properties were rented out to tenants who sublet the premises, with prices ranging from CZK 960 to CZK 1 600 per m2/year. The tax administrator considered the lowest price found to be the normal price, i.e. CZK 960 per 1 m2/year, and, inter alia, respected the prices negotiated by the complainant itself with Medinvest (price range from CZK 960 to CZK 1525), and determined the lowest normal price as a result of the prices found. The above procedure is logical and the comparative methods used by the administrative authorities are in no way outside the logical framework of administrative reasoning.

The complainant's objection that the conditions for determining the normal price set out in the aforementioned judgment of the Supreme Administrative Court of 31 March 2009, No 8 Afs 80/2007-105, were not met cannot be upheld either. In that judgment, it was held that prices negotiated in normal commercial relations cannot be absolutized by a single figure, but must be determined at least by the range of prices most frequently realised. The determination of a specific price range must take into account whether the prices observed are within a wide or narrow range. It follows from the judgment cited that the tax authorities must define a certain range of normal prices and then base their determination of the normal price on that range. In the present case, the tax authority properly defined the price range for the rent, i.e. from the sample selected, it determined the range of prices which were negotiated with independent persons in normal commercial relations under similar conditions, quantified the difference between the prices negotiated between the related persons and other independent traders on the relevant market. As regards the alleged unsuitability of the building at ul. Hradecká due to the different size of the building, the absence of an assessment of the number of tenants and the purpose of the lease, this objection must also be rejected. It is clear from the administrative file that the area of the non-residential premises at the above-mentioned address was 7000 m2 , but part of the property was used as a school. The remaining part was sublet to 30 end-tenants through a tenant as offices with common areas. The manner and purpose of the lease in this case was therefore identical to the terms of the SUDOP and Cotton properties. In the view of the Supreme Administrative Court, the administrative reasoning regarding the determination of the amount of CZK 960 per 1 m2/year as the normal price was satisfactorily justified and the mere contrary opinion of the complainant cannot change that conclusion. Moreover, it should be noted, in agreement with the Regional Court, that the tax administrator's approach, which chose the lowest amount found and did not take into account the fact that rental prices had risen rather slightly in the periods under examination (2005 and 2006), is to be regarded as a very considerate approach.

The Court of Justice does not find any defects in the tax administrator's procedure for determining the normal price, even in terms of the conditions as defined, for example, in its judgment of 18 July 2005, No 5 Afs 48/2004-89; in that judgment it stated that it must be clearly apparent from the administrative file that the tax administrator communicated to the taxpayer during the tax proceedings the amount of the price which it had itself ascertained, i.e. The taxpayer was informed of the price which it considered to be the price that would have been agreed between independent persons in normal commercial relations under the same or similar conditions, it was demonstrably informed of the difference and thus gave the taxpayer a real opportunity to comment on and substantiate the difference.

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.

The Court of Appeal did not find the judgment under appeal unreviewable in the light of the pleas in law relating to the procedure followed by the tax authorities in assessing the evidence. The Regional Court properly dealt with all the pleas in law, and it is clear from the grounds of the judgment (and from the decision of the Tax Directorate) what facts were established, which evidence was adduced in order to establish the facts, as well as their assessment and the legal conclusions adopted on that basis. It is also clear from the decisions of the administrative authorities on file and from the judgment that the applicant was given the opportunity to defend her rights effectively in the administrative procedure and to submit the evidence proposed to prove her claims. It is also clear which evidence was assessed.

For all the reasons set out above, the Supreme Administrative Court concludes that the appeal as a whole is unfounded and therefore dismisses it in accordance with Article 110(1) in fine of the Code of Civil Procedure.

The Supreme Administrative Court ruled on the costs of the proceedings in accordance with Article 60(1) of the Code of Civil Procedure in conjunction with Article 120 of the Code of Civil Procedure. The defendant was successful in the case and should therefore be entitled to reimbursement of the costs reasonably incurred in the appeal proceedings, but it is clear from the contents of the court file that it did not incur any costs outside the scope of its normal official activities.

C o n c l u s i o n : No appeal is admissible against this judgment (Articles 53(3) and 120 of the Civil Procedure Code).

Done at Brno, 22 March 2013.

JUDr. Lenka Matyášová, Ph.D.

President of the Chamber