continued 1
Afs 239/2017 - 49
[FIGURE]
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 Kaniová, and the Judges, JUDr. Marie Žišková and JUDr. Filip
Dienstbier, decided in the legal case of the applicant: FK Teplice, a. s., with
registered office at Na Stínadlech 2796, Teplice, represented by JUDr. Ladislav
Sádlík, lawyer, with registered office at Holečkova 31, Prague 5, against
the defendant: Odvolací finanční ředitelství, with registered office
at Masarykova 31, Brno, on an action against the defendant's decision of 3
April 2015, No 10077/15/5200-10421-706486, in proceedings against the
applicant's cassation complaint against the judgment of the Regional Court in
Ústí nad Labem of 7 June 2017, No 15 Af 51/2015 39,
t a k t o :
I. Sets
aside the judgment of the Regional Court in Ústí nad Labem of 7 June 2017, Case
No 15 Af 51/2015 39.
II. Annuls
the decision of the Appellate Financial Directorate of 3 April 2015, No
10077/15/5200 10421-706486, and refers the case back to the defendant for further
proceedings.
III. The
defendant is ordered to pay to the applicant, at the hands of JUDr. Ladislav
Sádlík, lawyer, a total of CZK 28 570 in costs within 30 days of the entry into
force of this judgment.
C o n c l u
s i o n :
I.
Definition of the case and judgment of the Regional Court
[1] The Tax
Office for the Ústí Region, Territorial Office in Teplice (the tax
administrator), by supplementary payment assessment of 16 July 2014, No
1703949/14/2514-24803-507700, additionally assessed the applicant for direct
payment of personal income tax withheld at a special tax rate for the 2011 tax
year in the amount of CZK 14 292 and ordered him to pay a penalty of CZK 2 858.
[2] The
defendant dismissed the applicant's appeal by the decision described above and
upheld the tax administrator's decision.
[3] The
plaintiff brought an action against the defendant's decision before the
Regional Court in Ústí nad Labem, which dismissed it by the judgment set out in
the header.
[4] The
Regional Court stated that the subject matter of the dispute was the
interpretation of the concept of tax resident within the meaning of the Treaty
between the Czech Republic and Bosnia and Herzegovina on the avoidance of
double taxation and the prevention of tax evasion in the field of income and
property taxes, published as Communication No. 58/2010 Coll. of the Ministry of
Foreign Affairs ("the Treaty on the Avoidance of Double Taxation" or
"the Treaty") and Act No. 586/1992 Coll, on income taxes (hereinafter
referred to as the "Income Tax Act"). The answer to the question
whether the footballer M.G., who had a long-term contract with the applicant
for the performance of his activities as a professional athlete, was a tax
resident in the Czech Republic during the relevant period depends on whether he
was subject to the special tax rate laid down in Section 36(1)(a) of the Income
Tax Act and whether the applicant was obliged, pursuant to Section 38d(1) of
that Act, as a taxpayer, to withhold from the income paid to the footballer and
to pay it to the tax authorities pursuant to paragraph 3 of that provision. The
Court further relied on Section 37 of the Income Tax Act, according to which
the individual provisions of a double taxation treaty take precedence in
application. It follows from Article 4 thereof that, in order to determine
whether a person is a tax resident of the Czech Republic, it is necessary to
examine whether the person concerned is subject to taxation in the Czech
Republic under national legislation by reason of his residence, permanent home
and similar criteria.
[5]
According to the Regional Court, it follows from Section 2 of the Income Tax
Act that a footballer should
subject to
tax in the Czech Republic by reason of his residence, permanent home or other
similar criteria if he had resided in the Czech Republic (continuously or in
several periods) for at least 183 days in 2011 or if he had a permanent home in
the Czech Republic in circumstances from which it can be inferred that he
intended to reside there permanently. If at least one of these conditions is
met, the footballer would be a Czech tax resident within the meaning of Article
2(2) of the Income Tax Act and would be liable to tax on the basis of that
(i.e. residence, permanent home or similar criteria). He would therefore also
be a resident of the Czech Republic within the meaning of Article 4(1) of the
Double Taxation Treaty.
[6] In the
present case, in the Court's view, the tax administrator clearly formulated its
doubts arising from the applicant's different treatment of the income paid to
the footballer
during the
tax year 2011, when in the months of January to March the applicant taxed the
income paid to the footballer as a non-resident taxpayer of the Czech Republic
by withholding under
§ Section
36(1)(a) of the Income Tax Act and remitted the withheld tax to the tax
authorities pursuant to Section 38d(3) of the same Act, whereas in the months
of April to July he did not do so without any justification for the change of
position. In the light of the distribution of the burden of proof described
above, the Court considered that the applicant had the burden of proving the
facts relevant for determining whether or not the footballer was a Czech tax
resident during the relevant period.
[7]
According to the Regional Court, the tax authorities were correct in not
considering the footballer to be a tax resident of the Czech Republic and in
assuming that he was a tax resident of Bosnia and Herzegovina, as that fact
logically followed from his origin and family ties. Moreover, the applicant
himself did not dispute that fact, but merely sought to convince the tax
authorities and the court, without any relevant evidence, of the footballer's
tax residence in the Czech Republic, which he inferred from the treaty
provisions governing situations where a natural person is a resident of both
Contracting States. In doing so, the applicant de facto confirmed that the
footballer was a tax resident of Bosnia and Herzegovina during the relevant
period. In that situation, the tax authorities in the present case quite
correctly applied Article 16 of the Treaty, which allows for the taxation in
the Czech Republic of income received by a tax resident of Bosnia and
Herzegovina as an athlete from such activities carried out in the Czech
Republic. In the absence of a more detailed regulation of such taxation in the
international treaty, it was appropriate to apply the relevant provisions of the
Income Tax Act. The tax authorities therefore acted correctly in treating the
income paid by the applicant to the footballer as income of a Czech
non-resident taxpayer subject to withholding tax pursuant to Article 36(1)(a)
of the Income Tax Act. That tax should have been withheld by the applicant, who
was a taxpayer within the meaning of section 38c(1) of the Income Tax Act, and
paid to the tax authorities pursuant to section 38d(3) of that Act. Since he
failed to do so in the months April to July 2011, the tax authorities were
quite right to assess the tax directly against him.
[8] The
Regional Court did not find any reason to apply Article 5 or Article 3(2) of
the Double Taxation Treaty, since the contested decision is based, quite
correctly, on the interpretation of Article 4 of the Treaty and, in particular,
on the fact that the applicant did not bear the burden of proof to establish
that the footballer was a tax resident of the Czech Republic.
[9] With
regard to the objections challenging the procedure under section 38s of the
Income Tax Act, the Court states that that provision does not give the tax
authorities any margin of appreciation when it comes to determining the basis
for calculating the tax levied or withheld. It clearly states that the basis
for calculating the amount of tax levied or withheld, including advances, is
the amount which, after collection or withholding, would have remained after
the amount actually paid by the taxpayer to the taxpayer. It is therefore
irrelevant what amount the footballer invoiced to the claimant, but only what
amount was actually paid to him. At the same time, the applicant's argument
that, if the tax had not been paid by a domestic person, only the actual income
would have been the taxable amount is not valid. Such a situation cannot arise
at all in the case of a procedure under section 38s of the Income Tax Act.
Therefore, in the Court's view, the tax authorities did not err in failing to
address the question of actual income as the applicant had envisaged it and in
relying only on the amounts paid by the applicant to the footballer.
II. The
appeal and the defendant's observations
[10]
Against the judgment of the Regional Court, the applicant (the complainant)
lodged a cassation appeal.
[11]
According to the complainant, Article 4 of the Double Taxation Convention sets
out the procedure for cases where a person may be resident in both Contracting
States. That is the case here, and it is therefore not domestic law but the
related treaty provisions that must be applied to determine the status of
residence. According to Article 4(2) of the Treaty, the first criterion for
determining resident status is a permanent home. The complainant proved his
contractual relationship to a specific apartment in the Czech Republic by means
of a rental contract; no other apartment or contract was presented to the tax
authorities.
[12] The
complainant takes the view that it was necessary to assess the possible
existence of a permanent establishment in the case; if it existed, the
complainant could not be required to pay withholding tax. The status of a
resident of the Czech Republic in the present case and the existence of a
permanent establishment are evidenced by the business activities of Mr G.
within the meaning of Article 5(3) of the Treaty. In order to determine the
activity of the undertaking, it is necessary to base the interpretation of the
basic concepts defined in Article 3(1)(g) and (j) of the Treaty.
[13] The
complainant also disagrees with the settlement of the objection concerning the
prohibition of discrimination. According to the complainant, the principle of
withholding tax in the application of section 38s of the Income Tax Act in
relation to an entrepreneur and a registered person of Czech nationality is inappropriate
and unworkable in practice. A registered entrepreneur always has a registered
place of permanent residence in the Czech Republic and is therefore a resident
under the terms of Article 2(2) of the Income Tax Act. Article 23 of the Treaty
excludes more onerous or higher taxation in relation to a person who has the
same status with regard to residence. The definition of 'status of a person'
must be interpreted in a broader sense, so as to equate the same status of
persons with regard to the nature of their activities. However, the procedure
applied by the tax administration authorities to a 'non-resident' person is
considerably harsher than the procedure applicable to a person in the same
'business' status in the case of a resident of the Czech Republic. This fact
was rejected by the Regional Court in its conclusions, even though Section 38s
of the Income Tax Act cannot be applied to a resident of the Czech Republic
with his own business activity, which in practice constitutes the exercise of
the profession of a professional footballer.
[14] In its
view, the complainant has carried the burden of proof to the extent necessary
for the legal assessment of the case. He was the only person in the proceedings
to prove the contractual relationship of the person concerned to a specific
apartment on the basis of a lease agreement in the Czech Republic. He also
referred to the fact of the footballer's registration as an entrepreneur with
the tax authorities, a fact which is both apparent from the contents of the administrative
file and, at the same time, exempt from the burden of proof pursuant to Article
92(4) of the Tax Code.
[15] The
complainant submits that the Supreme Administrative Court should annul the
judgment under appeal and refer the case back to the Regional Court for further
proceedings.
[16] The
defendant, in its comments on the appeal, submitted that in the present case
there is no dispute that Mr G., during his stay in the Czech Republic, used the
flat rented from the complainant and subsequently from Mr Mgr. P.; however, he
also continued to reside with his parents in Sarajevo, from where he had come
in 2009 as a minor. He gave his address in Sarajevo when registering with the
tax authorities in 2009 and did not report any change of residence during his
stay in the Czech Republic. At the relevant time, therefore, he had a permanent
residence in both Contracting States. In those circumstances, the other
criterion for establishing tax residence under Article 4 of the Treaty is the
centre of life interests, and the defendant insists that Mr G.'s centre of life
interests at the relevant time was in Bosnia and Herzegovina, since that was
where he had always lived, studied and played football for a local club, and
where he had his family and property. It is the place from which he came to the
Czech Republic and to which he returned after his activities ended.
[17] The
defendant is not aware of any parallel between a permanent establishment and
the exercise of the activity of a professional sportsman. The complainant's
objections in that direction are unfounded, unsubstantiated and completely
inappropriate to the situation. Both the Income Tax Act and the Double Taxation
Convention contain more appropriate provisions for Mr G.'s position.
[18] The
defendant stressed that, in the matter of determining tax residence for the
months January to March 2011, the complainant had placed itself in the position
of a taxpayer and had not considered Mr G. to be a tax resident (it had acted
in accordance with section 22(1)(f)(2) in conjunction with section 36(1)(a)(i)
of the ITA). The complainant has not been able to explain or substantiate
throughout the tax proceedings on what basis it failed to deduct and remit the
withholding in the months April to July 2011.
[19] As to
the objection to the disregard of Mr. G.'s expenses, the respondent submits
that any consideration of the taxpayer's expenses in imposing a direct payment
obligation on the taxpayer is not an option. The payer of a withholding tax
under section 38d of the Income Tax Act has exactly the same obligations
whether the taxpayer is a domestic or a foreign person. Accordingly, the
defendant does not consider this objection to be well-founded either and
therefore proposes that the appeal be dismissed as unfounded.
III.
Assessment of the appeal
[20] The
Supreme Administrative Court first examined the formal requirements of the
complaint and concluded that it was admissible.
[21] After
a substantive examination of the appeal, the Court concludes that it is
well-founded.
III.a.
Relevant facts and legislation
[22] On 14
January 2009, the applicant concluded a long-term contract with the footballer
M.G. (born on 3 January 1992), a national of Bosnia and Herzegovina, for the
period from 14 January 2009 to 31 December 2011, which was terminated by
agreement of 31 July 2011 on that date.
[23] On 21
November 2013, the tax administrator initiated a tax audit of the complainant's
withholding tax under the special personal income tax rate for the tax years
2010 and 2011. By a call for evidence dated 27.1.2011, the taxpayer submitted a
request for the taxpayer's tax return. 2014, the tax administrator asked the
complainant to explain, prove and document, within fifteen days of receipt of
the request, the reason why tax at the rate of 15 % was not withheld and paid
on the footballer's income paid in the Czech Republic for the period from April
to July 2011, and to prove and document, that, as a taxpayer, it complied with
the Double Taxation Treaty and the Income Tax Act and applied the correct
procedure for taxing the footballer's income, and to provide evidence of the
tax office's confirmation of the footballer's tax domicile (residence) in the
Czech Republic, or, in the alternative, to provide evidence of the taxpayer's
tax domicile in the Czech Republic. other documents relevant for the
determination of the domicile.
[24] The
complainant withheld tax from the footballer for the period from January to
March 2011 in accordance with Section 36(1)(a) of the Income Tax Act in the
amount of 15%, which it subsequently paid, but did not withhold the tax from
the income paid to the footballer for the period from April to July 2011. The
tax authorities therefore had doubts as to whether the complainant had followed
the correct procedure in taxing the footballer.
[25] In
response to this request, the complainant submitted a statement dated 6 March
2014, in which he referred to Article 4 of the agreement governing tax
residence and attached a flat rental agreement concluded between the footballer
and Mgr. J. P. (a person with the same name and surname, according to an
article from the internet in the administrative file X FK Teplice) for the
period from 1 July 2011 to 30 June 2012, in which A. M. from Serbia, as well as
the apartment lease agreement concluded between PATRIA COMPANY, s.r.o. and the
complainant for the period from 19.2.2010 to 19.2.2011, which was extended by
an amendment of 23.6.2010 until 30.6.2011. That contract entitled not only Mr
G. but also the footballer A. M. from Serbia and A. M. from Bosnia and
Herzegovina (these footballers were listed as members of the tenant's household
- the complainant).
[26] The
tax administrator considered that the complainant did not prove its claim
during the tax audit that the football player was a resident of the Czech
Republic in 2011 and did not explain why it did not withhold and remit tax in
that period. It therefore issued the above-described additional payment order,
by which it assessed the complainant for direct payment of the personal income
tax withheld at the special tax rate for the 2011 tax period.
[27] It
should also be emphasised that the contested decisions of the tax administrator
and the defendant did not concern the football player M.G. directly, but the
complainant as the payer of his income. However, the obligations imposed on the
complainant by the tax administrator are directly related to the assessment of
the question of the correct taxation of the income paid to the foreign athlete
by the complainant from his activities in the Czech Republic.
[28] In
order to assess this issue, it is necessary to determine whether the athlete is
a tax resident or non-resident of the Czech Republic.
[29] The
Income Tax Act defines tax residents and non-residents in section 2(2) and (3).
A tax resident (a tax resident or taxpayer with tax domicile in the Czech
Republic) is a taxpayer who resides or habitually resides in the Czech
Republic. Such a taxpayer has a tax liability that applies both to income
derived from sources within the Czech Republic and to income derived from
sources abroad (unlimited tax liability). Section 2(4) defines that a domicile
in the Czech Republic for the purposes of this Act means the place where the
taxpayer has a permanent home in circumstances from which it can be inferred
that he intends to reside permanently in that home. Taxpayers habitually
residing in the Czech Republic are those who reside there for at least 183 days
in the relevant calendar year, either continuously or in several periods; each
day of residence is counted towards the 183-day period.
[30]
According to Section 2(3) of the Income Tax Act, tax non-residents (tax
foreigners) are taxpayers not listed in Section 2 or those for whom
international treaties so provide. These taxpayers have a limited tax liability
which applies only to income derived from sources within the Czech Republic (§
22).
[31]
Pursuant to Section 37 of the Income Tax Act, the provisions of this Act apply
only if an international treaty by which the Czech Republic is bound does not
provide otherwise. Notwithstanding the wording of the cited provision, Article
10 of the Constitution also favours the application of the international
treaties to the ratification of which Parliament has given its consent and by
which the Czech Republic is bound. It can therefore be concluded that
international treaties on the avoidance of double taxation are superior in
application to the Income Tax Act. The fulfilment of the conditions laid down
by the international double taxation treaty in question thus triggers the
obligation, not the possibility, to apply the treaty in question.
[32] In the
present case, such a treaty is the Treaty between the Czech Republic and Bosnia
and Herzegovina on the avoidance of double taxation and prevention of tax
evasion in the field of income and property taxes, published as Communication
of the Ministry of Foreign Affairs No. 58/2010 Coll.
[33]
According to Article 4(1) thereof, the expression "resident of a
Contracting State" means, for the purposes of this Treaty, any person who,
under the laws of that State, is subject to taxation in that State by reason of
his domicile, permanent residence, place of incorporation, place of management
or any other similar criterion, and also includes that State and any
subordinate administrative department or local authority of that State.
However, this term shall not include any person who is subject to taxation in
that State solely by reason of income from sources within that State or
property situated therein.
[34] Under
Article 4(2) of the Treaty, if an individual is a resident of both Contracting
States under the provisions of paragraph 1, his status shall be determined as
follows:
(a) he
shall be presumed to be a resident only of the State in which he has a
permanent home; if he has a permanent home in both States, he shall be presumed
to be a resident only of the State with which he has closer personal and
economic relations (centre of vital interests);
(b) if it
cannot be determined in which State he has his centre of vital interests, or if
he does not have a permanent home in either State, he shall be presumed to be
resident only in the State in which he habitually resides;
(c) if the
person is habitually resident in both or neither State, he shall be presumed to
be resident only in the State of which he is a national;
(d) if the
person is a national of both or neither State, the competent authorities of the
Contracting States shall settle the question by mutual agreement.
[35] At
this stage, it is therefore necessary to slightly correct the view of the
Regional Court, which stated on page 8 of the judgment that the complainant
should have proved that the footballer fulfilled the conditions set out in
section 2(4) of the Income Tax Act (residence in the territory for at least 183
days or a permanent home). The double taxation treaty does not contain the
condition of habitual residence in the sense of a stay of more than 183 days in
the territory of the other Contracting State. However, that partial deficiency
cannot affect the lawfulness of the Regional Court's decision, since, as the
Regional Court correctly observed, the question of residence for at least 183
days was not at issue; the evidentiary proceedings concentrated on proving the
existence of a permanent dwelling, a criterion which corresponds to the provisions
of Article 4(2)(a) of the treaty, which was the key provision in the present
case.
[36] In the
present case, there is no dispute between the parties that the footballer was a
tax resident of both Contracting States during the relevant period. Thus, Article
4(2) of the Double Taxation Treaty, which contains criteria for resolving a
conflict in the event of dual residence, was decisive in determining his
status; those criteria are applied in turn as set out in Article 4(2) of the
Treaty.
[37] From
the point of view of Article 4(2)(a), the following is then to be followed in
determining tax residence: Where a person has only one permanent home, he is
resident in the Contracting State in which that home is situated. However, if
he has a permanent home in both Contracting States, he shall be resident in the
State in which he has his centre of vital interests.
[38] A
permanent home means a home which is at the taxpayer's disposal at any time
according to his needs, whether owned or rented. The taxpayer's intention to
reside permanently in a permanent dwelling is assessed in the light of the
circumstances of his personal and family situation, i.e. whether he also lives
there, for example, with his wife, children or parents, or whether the dwelling
is used in connection with his economic activities (cf. The
"permanence" of the apartment means, among other things, that the
taxpayer may use the place continuously (continuously) and not only
occasionally for the purposes of a short-term stay, such as recreation, educational
courses or short-term stays related to business activities, etc. Thus, what is
relevant for the assessment of the 'permanence' of the flat is the
complainant's ability to use the flat without any restriction. It should be
emphasised that the possibility of using the flat does not imply an obligation
to be physically present in the flat at all times. It is only the possibility
of using the apartment at one's own discretion (judgment of 13 November 2014,
no. 7 Afs 120/2014 68).
[39] The
complainant argues that the proceedings established the existence of one
permanent apartment, namely in the Czech Republic, and that the footballer
should therefore have been regarded as a tax resident of the Czech Republic. He
then considers the defendant's conclusions, which were based on the fact that
the footballer has two permanent apartments and that the centre of his
interests in life is in Bosnia and Herzegovina, to be incorrect and unproven.
[40] In
order to assess this objection, it is also necessary to recall how the burden
of proof in tax proceedings is distributed between the taxpayer and the tax
authorities.
[41]
According to Article 92(3) of the Tax Code, it is the duty of the tax subject
to prove 'all the facts which he is required to state in the regular tax
return, the supplementary tax return and other submissions'. According to
paragraph 4 of the same provision, "if the course of proceedings so
requires, the tax administrator may call upon the tax subject to prove the
facts necessary for the correct assessment of the tax, provided that the
necessary information cannot be obtained from its own official records".
On the other hand, pursuant to Article 92(5)(c) of the Tax Code, the tax
administrator shall prove 'facts refuting the credibility, conclusiveness,
correctness or completeness of the mandatory records, accounting records, as
well as other records, documents and other means of evidence submitted by the
tax subject'.
[42]
According to the above-quoted provisions, the tax entity is obliged to prove
all facts which it is obliged to state in the tax return or facts necessary for
the correct assessment of the tax, which it has been requested to prove by the
tax administrator. The taxable person proves his claims primarily through his
accounts and other compulsory records. However, the tax administration may
express doubts as to the veracity, conclusiveness, accuracy or completeness of
the accounts and other compulsory records. The tax administration is not
obliged to prove that the tax entity's accounting records are inconsistent with
the facts, but it is obliged to prove that there are serious and reasonable
doubts as to the consistency of the accounts that render the accounts
unreliable, incomplete, inconclusive or incorrect. If the tax authority bears
its burden of proof in relation to the facts described above, it is for the
taxable person to prove the truth of its allegations and the veracity,
reliability and accuracy of the accounts and other obligatory records in
relation to the accounting case in question, or to correct its allegations. As
a rule, the tax entity will prove these facts by means of evidence other than
its own accounts and records (cf. e.g. judgments of 30 January 2008, no. 2 Afs
24/2007 119, 22 October 2008, no. 9 Afs 30/2008 86, 18 January 2012, no. 1 Afs
75/2011 62, or 12 February 2015, no. 9 Afs 152/2013 49).
[43] As
already stated above, the complainant withheld and subsequently paid tax to the
footballer for the period from January to March 2011 at the rate of 15 %
pursuant to Article 36(1)(a) of the Income Tax Act; for the period from April
to July 2011 it did not withhold such tax from the income paid to him.
[44] The
tax administration therefore found a fact which cast doubt on the information
provided by the complainant; it therefore asked the complainant to explain its
procedure, i.e. to provide evidence as to the reason for not withholding and
remitting tax on behalf of the footballer in the period April to July 2011 and
whether it had complied with the double taxation treaty and to provide evidence
of the documents relevant to the determination of the footballer's tax domicile.
This shifted the burden of proof to the complainant under section 92(4).
[45] The
latter submitted the lease agreements described in paragraph [25] of this
judgment in response to the tax authorities' request to prove the correctness
of its practice in taxing the footballer.
[46]
According to the Supreme Administrative Court, by submitting those rental
agreements, the complainant proved the existence of the footballer's permanent
home in the Czech Republic. These were rented flats which were at the athlete's
disposal at any time during the tax period in question, which he could use
continuously and without restriction, and which were linked to his economic
activity in the Czech Republic.
[47] In
that respect, the tax authorities' view that the existence of a permanent
apartment was only apparent from the second lease agreement in the row, where
the footballer was a direct tenant and not a member of the complainant's
household, is therefore partly incorrect. However, that view was corrected in
the appeal decision, in which the defendant clearly took the view that the
footballer had a permanent home in both Contracting States (cf. p. 6(3) of the
decision), including the Czech Republic, throughout the entire tax period in
question.
[48] It can
therefore be summarised that, in response to the tax authorities' request, the
complainant sought to prove that the footballer had only one permanent home,
namely in the Czech Republic. The complainant responded to the tax
administrator's summons by explaining that it did not withhold in the period
April to July 2011 because the footballer had a permanent apartment there and
was therefore, in the complainant's view, a tax resident of the Czech Republic.
In doing so, he also responded to points 2 and 3 of that request (i.e. he
demonstrated that he had complied with the international double taxation treaty
and the Income Tax Act and submitted the documents relevant to the
determination of domicile). According to the Supreme Administrative Court, the
burden of proof, which was shifted to the complainant on the basis of the tax
administrator's request, was therefore borne by the complainant.
[49]
However, if the tax authorities continued to have doubts about the tax domicile
of the footballer, the burden of proof in respect of those doubts shifted to
the tax authorities; it was for them to challenge the evidence and the
complainant's allegations. The tax authorities and the defendant sought to
undermine the rental contracts submitted and the complainant's claim of a
permanent home by their own assertion that the footballer had a permanent home
and also a centre of life interests in Bosnia and Herzegovina.
[50] The
complainant correctly points out, however, that the tax authorities did not
produce any evidence that would call into question the evidence of one
permanent apartment, namely in the Czech Republic. The assertion that the
footballer came to the Czech Republic as a minor in 2009 and could therefore be
presumed to have family and a permanent apartment in Bosnia and Herzegovina
remained mere speculation on the part of the tax administrator (cf. p. 13 of
the tax audit report "it is very likely that he had a permanent residence
with his parents in 2009"). Moreover, that allegation does not relate in
any way to the footballer's situation in the tax period in question, 2011, but
to 2009 (the tax administrator's claim that the footballer had played for
Radnik Hadžići before coming to the Czech Republic). Similarly irrelevant
is the argumentation concerning the footballer's activities in January 2012,
which cannot refute the complainant's allegations concerning 2011. Similarly,
the tax authorities' conclusions that the footballer has a permanent family and
assets in Bosnia and Herzegovina (a situation which may have changed since
2009) are unsubstantiated (a claim which remains completely unsubstantiated).
Those facts could therefore not have led the tax authorities to conclude that
there were two permanent dwellings and, as a result, to consider the question
of centre of vital interests.
[51] In
this respect, the complainant can be accepted as having failed to discharge its
burden of proof in relation to the existence of a permanent apartment in Bosnia
and Herzegovina (it is clear that the complainant could not be compelled to prove
that there was no permanent apartment in Bosnia and Herzegovina). In the
absence of proof of the existence of two permanent dwellings, it was not
appropriate to examine the centre of vital interests but, in accordance with
Article 4(2)(a) of the Double Taxation Treaty, to determine tax residence
according to the State in which the only permanent dwelling was situated.
[52]
However, in addition, it may be noted that the tax authorities did not
correctly assess the question of the State in which the footballer had his
centre of vital interests, or had insufficient grounds for reaching a clear
conclusion on that question. The tax authorities assumed that the footballer
had always lived, studied and played football for a local club in Bosnia and
Herzegovina and had family and property there. That was the place from which he
had come to the Czech Republic and to which he had returned. It is apparent
from the course of the tax proceedings that the evidence only supports the
conclusions that the footballer came from Bosnia and Herzegovina, that he
played football there and that he returned there again in 2012 (cf. two
internet articles on file). However, the conclusions of the tax authorities
that he (still) had his family and any assets there have no support in those
documents; they are allegations which have no support in the administrative
file, but at the same time they are allegations on which the defendant based
its conclusions about the footballer's tax residence.
[53] The
Supreme Administrative Court understands that the tax administrator's doubts
were (and rightly so) caused by a change in the tax treatment of the athlete in
question during one tax year. However, in the Court's view, the fact that the
complainant withheld and paid tax at the special rate of 15% on the
footballer's remuneration between January and March 2011, and subsequently
ceased to do so, does not lead to the conclusion without more that the method
of taxation in the first three months of the year was the 'correct' one. It
cannot be ruled out that the complainant 'realised' in April that he had been
taxing incorrectly up to that point, since the footballer had, in his view,
been tax resident since the beginning of the year. That fact could then have
been taken into account at the end of the tax year, when, if the footballer's
Czech tax residence had been established, the complainant, as taxpayer, could
have refunded the footballer's overpaid tax for the first three months of the
year (Article 38d(8) of the Income Tax Act).
[54] As
regards this objection, it can be summarised that the complainant proved,
following the tax administrator's request, that the footballer M.G. had a
permanent flat in the Czech Republic in 2011 (from January to July), i.e. that
he fulfilled the condition of tax residence in the Czech Republic. The tax
administrator sought to undermine the complainant's conclusions on tax
residence by claiming the existence of a permanent flat and, subsequently, of a
centre of the complainant's life interests in Bosnia and Herzegovina. However,
neither the tax administration nor the defendant later discharged its burden of
proof in respect of those allegations. The Court cannot rule out at this stage
that the footballer did not in fact have a permanent apartment and a centre of
vital interests in Bosnia and Herzegovina in the tax period in question (and
that he was therefore a tax non-resident of the Czech Republic); however, the
evidence adduced so far does not correspond to those conclusions.
[55] The
ground of appeal under Article 103(1)(b) of the Code of Civil Procedure is
therefore fulfilled (the administrative authority based the contested decision
on facts which are not supported by the case-file, and the Regional Court
should have annulled the defendant's decision for that defect). At the same
time, it is clear that the above-mentioned error can be remedied only in the
proceedings before the defendant, and therefore it is appropriate to annul the
decision of the defendant together with the judgment of the Regional Court and
to refer the case back to the defendant for further proceedings (Article
110(2)(a) of the Code of Civil Procedure). If the defendant wishes to maintain
its conclusions concerning the footballer's tax residence, it must carry its
burden of proof in the subsequent proceedings (i.e. clearly establish that the
footballer had a permanent home and centre of vital interests in Bosnia and
Herzegovina); if it fails to do so, it must proceed on the basis of the proven
facts, i.e. that the footballer had a permanent home only in the Czech
Republic.
III.B.
Objection as to the existence of a permanent establishment
[56]
Although the reasons set out above lead in themselves to the annulment of the
judgment under appeal and the defendant's decision, the Supreme Administrative
Court proceeds to examine the appeal within the limits of the other cassation
objections raised, since it considers that the issues considered below, which
were dealt with by the Regional Court in the proceedings on the application,
are relevant to the further proceedings before the defendant, and are issues
which are separable from the examination of the first cassation objection.
[57]
According to the applicant, the existence of a permanent establishment within
the meaning of Article 5(3) of the Treaty had to be inferred from the
activities of the footballer as a professional sportsman in the Czech Republic;
that fact in turn implies his status as a resident of the Czech Republic.
[58] The
complainant's premise that proof of the existence of a permanent establishment
in the Czech Republic would confer on the footballer the status of tax resident
of the Czech Republic is incorrect.
[59]
According to section 22(2) of the Income Tax Act, a permanent establishment
means a place for the performance of the activities of taxpayers referred to in
sections 2(3) and 17(4) in the Czech Republic, e.g. a workshop, an office, a
place for the extraction of natural resources, a place of sale (outlet), a
construction site. A construction site, a place of carrying out construction
and assembly projects, and the provision of activities and services referred to
in paragraph 1(c) and (f)(1) by the taxpayer or by employees or persons working
for him shall be considered a permanent establishment if their duration exceeds
six months in any period of 12 consecutive calendar months.
[60] The
concept of a permanent establishment is similarly defined in Article 5 of the
Double Taxation Convention invoked by the complainant.
[61] It is
clear from the above provisions that the concept of permanent establishment is
linked to non-resident taxpayers (reference to Article 2(3) and Article 17(4)
of the Income Tax Act) - it is a place in the Czech Republic where non-resident
taxpayers carry out their activities (in the words of the treaty, 'wholly or
partly carry out the activities of an enterprise'). Therefore, the existence of
a permanent establishment does not in any way indicate the tax residence of the
tax subject; on the contrary, it is an expression of the fact that a
non-resident taxpayer has a certain place in the territory of the Czech
Republic with the statutory characteristics for carrying out his/her
activities.
[62] Thus,
when the complainant argues that the footballer had a permanent establishment
in the territory of the Czech Republic, he is implicitly saying, first of all,
that he was not a tax resident, but that he carried out his activities as a tax
non-resident through that establishment.
[63] The
Regional Court was therefore correct in concluding that the relevant provisions
of the treaty relating to the permanent establishment need not be applied to
the assessment of the question of tax residence in the present case, since
those provisions are not relevant to the resolution of the issues raised in the
proceedings.
[64] The
assessment of the question whether or not a non-resident taxpayer (namely an
athlete) carries on his activity through a permanent establishment is relevant
to the assessment of the nature of the income derived from that activity and
the related method of taxation.
[65] On the
income of a non-resident taxpayer from activities carried out through a
permanent establishment referred to in section 22(1)(a) of the Income Tax Act,
the complainant, as payer of the remuneration, would be required to withhold a
10% tax collateral in accordance with section 38e(1)(b) of the Income Tax Act
on the payment, remittance or credit of the remuneration to the
taxpayer-footballer (non-resident taxpayer) and remit that collateral to the
local tax authority. However, if the remuneration paid by the complainant to
the non-resident taxpayer is income pursuant to Section 22(1)(f)(2) of the
Income Tax Act ('income from activities personally carried out in the Czech
Republic or appreciated here by a publicly performing artist, sportsman,
entertainer and co-performers, irrespective of to whom such income accrues and
from what legal relationship'), such income is subject to a special tax rate of
15 % pursuant to Section 36(1)(f)(2) of the Income Tax Act. 1(a)(1) of the
Income Tax Act and the complainant would be obliged to pay the withholding tax
in that amount pursuant to section 38d(3) of the Income Tax Act.
[66] The
treaty regulates the concept of "permanent establishment" in Article
5, the definition of this concept serves to determine when a Contracting State
is entitled to tax the profits of an enterprise of the other Contracting State.
Under Article 7 of the Treaty, a Contracting State may tax the profits of an
enterprise of the other Contracting State only if the enterprise carries on its
activities in the other Contracting State through an establishment situated
there. This is an exception to the general rule that the profits of an
enterprise of a Contracting State are taxed only in that State (Article 7(1) of
the Treaty).
[67] The
question whether it is possible to understand the income of a non-resident
taxpayer - athlete derived from sources in the Czech Republic as income earned
through a permanent establishment was dealt with in detail by the Supreme
Administrative Court in its judgment of 22 November 2007, No. 9 Afs 55/2007 75,
No. 1489/2008 Coll.
[68] There,
it stated that the institution of a permanent establishment allows a State in
which an undertaking of the other State carries on a regular business activity
and participates in local economic life to tax the profits of transactions
taking place in its territory. In other words, an enterprise which earns income
abroad also taxes its 'worldwide income' in the State of which it is resident.
Even if a company were to carry on business only in the other state for a long
period of time and use the resources and infrastructure of the other state to
make profits, it would still only be taxed on its income in its state of
residence. In order to avoid the negative consequences of this situation,
international double taxation treaties (including the OECD Model Treaty) have
introduced the "permanent establishment" concept, which allows the
income of a company earned through a permanent establishment to be excluded
from the taxpayer's "worldwide income" and taxed where it is earned
over the long term.
[69]
However, Article 7(7) of the Double Taxation Treaty further provides that
'where profits include income dealt with separately in other Articles of this
Treaty, the provisions of those Articles shall not be affected by the
provisions of this Article'. This essentially means that, even if the athlete's
activities in the Czech Republic meet the characteristics of a permanent
establishment, Article 7 of the treaty does not apply if the treaty contains a
specific provision governing the income directly assessed. In the present case,
the treaty contains a special provision, namely Article 16, which excludes
income from the athlete's personal activities from the broad and general
category of other profits and regulates it specifically. According to Article 16(1)
of the Treaty, "Income derived by a resident of a Contracting State as a
public performer, as a theatrical, cinematographic, radio or television artist
or as a musician, or as a sportsman from such personal activities in the other
Contracting State may, notwithstanding the provisions of Articles 7 and 14, be
taxed in that other State." This provision of the treaty is then reflected
in Section 22(1)(f) of the Income Tax Act, which considers as one of the types
of income of non-resident taxpayers from sources within the territory of the
Czech Republic income from activities personally carried out in the Czech
Republic or appreciated there by a public performer, sportsman, entertainer and
co-performers, regardless of to whom such income is derived and from what legal
relationship.
[70] It is
therefore clear that, in the case of an activity carried on by an athlete in
person, the treaty expresses a clear rule that the income derived from that
activity should be taxed at the place where it is carried on, whether or not it
is carried on through a permanent establishment. Article 16 of the Treaty is
special to Article 7 in that it gives priority to the nature of the activity
from which the income (profit) is derived over the other criteria according to
which other income is taxed under the Treaty. The wording of Article 16,
particularly in combination with Article 7(7) of the Treaty, does not allow for
the possibility of taxing income derived from the athlete's personal activity
other than under Article 16.
[71] The
Regional Court's reasoning in finding no grounds for applying Article 5 of the
Treaty (permanent establishment) was therefore correct. In the present case, it
was irrelevant whether or not the footballer had a permanent establishment in
the Czech Republic, since (assuming that he was a non-resident taxpayer) he had
to be taxed on the basis of Article 16 of the Treaty, or Article 22(1)(f)(2) of
the Income Tax Act.
[72] This
objection is not well founded.
III.C
Objection of discriminatory nature of the Income Tax Act
[73] The
complainant considers that the Regional Court's substitution of the defendant's
reasoning on the prohibition of discrimination (which the defendant refused to
address) for that of the Regional Court is defective; at the same time, the
complainant also disagrees with the Regional Court's assessment of the
objection of breach of the prohibition of discrimination.
[74] As
regards that objection, it should be noted, first of all, that the complainant
refers throughout the proceedings to Article 23 of the Treaty, but does not
specify on which paragraph of that article it bases its argument. However, it
is clear from the content of his submissions that the complainant relies on
Article 23(1) of the Double Taxation Treaty. It provides:
Nationals
of a Contracting State shall not be subjected in the other Contracting State to
any taxation or to any obligations connected therewith which are different from
or more onerous than the taxation and connected obligations to which nationals
of that other State who are, in particular with regard to residence, are or may
be subjected and who are in the same situation. Notwithstanding Article 1, this
provision shall also apply to persons who are not residents of one or both
Contracting States.
[75] This
article of the Treaty containing the prohibition of discrimination is to be
interpreted as meaning that nationals of one Contracting State may not be
discriminated against for the purpose of taxation on the ground of their
nationality and that nationals of one Contracting State may not, in the same
circumstances, be treated differently in the other Contracting State from
nationals of that other State. It should be emphasised that the criterion on
the basis of which taxpayers cannot be unjustifiably discriminated against is
nationality.
[76] It is
also necessary to focus on the expression 'in the same situation', since that
article provides for a prohibition of discrimination on grounds of nationality
precisely in the case of taxpayers 'in the same situation'. The expression 'in
the same situation' refers to taxpayers who are, from the point of view of
national law, in essentially the same situation, both in fact and in law. The
expression 'in particular with regard to tax residence' makes it quite clear that
the assessment of whether the subjects are 'in the same situation' is based
precisely on the residence of the tax subjects. In other words, all tax
residents of a State (irrespective of their nationality) must be subject to the
same tax liability; similarly, tax non-residents in a State (irrespective of
their nationality) must not be subject to different (more onerously different)
taxation among themselves. Thus, a tax resident of a Contracting State and a
tax non-resident are not "in the same situation" within the meaning
of Article 23 of the Treaty (for more details, see the commentary to Article 24
of the OECD Model Double Taxation Treaty in the field of income and wealth
taxes: OECD. Model Tax Convention on Income and on Capital. Volume I and II.
Updated 15 July 2014. Available online at:
http://www.keepeek.com/Digital-Asset-Management/oecd/taxation/model-tax-convention-on-income-and-on-capital-2015-full-version_9789264239081-en#page1).
[77] In the
proceedings before the administrative authorities and before the courts, the
complainant argued that the procedure applied to the footballer (the taxpayer)
was contrary to Article 23, since, unlike domestic sportsmen-entrepreneurs, he
could not claim costs related to the generation of income and was thus taxed on
gross income.
[78]
However, it is clear from the above interpretation of Article 23(1) of the
Treaty that the situation of the footballer - a non-resident taxpayer - cannot
be compared with that of tax residents of the Czech Republic. The tax authorities
proceeded against the footballer in accordance with the relevant provisions of
the Income Tax Act on the basis of his tax residence, not on the basis of his
nationality. There was therefore no scope for the application of Article 23(1)
of the Treaty in the present case. If the footballer were a tax resident of the
Czech Republic, he could, of course, enjoy the same advantages as tax residents
of the Czech Republic who are also nationals of the Czech Republic. The
complainant's argument in relation to the prohibition of discrimination is
therefore false and completely at odds with Article 23(1) of the Treaty.
[79] For
the same reason, the objection that section 38s of the Income Tax Act cannot be
applied cannot be substantiated.
[80] Under
that provision, where the obligation to collect or withhold tax, including
advances, under section 38d or 38h has not been complied with in the prescribed
amount by the taxpayer, even afterwards, the basis for calculating the amount
of tax collected or withheld, including advances, is the amount which, after
collection or withholding, would have remained after the amount actually paid
by the taxpayer to the taxpayer; in the case of a taxpayer with income under
section 6, increased by the compulsory insurance premium under section 6(13).
[81] The
procedure described in this provision is called brutation or addition and
occurs precisely in cases where the taxpayer fails to withhold the tax, does
not collect the tax in the amount specified, and does not collect it retrospectively.
This was also the case in the present case, where the complainant did not
withhold the tax for the tax period April-July 2011 and did not remit it to the
tax administrator, whereas the complainant was obliged to remit the tax by the
end of the calendar month following the calendar month in which it was obliged
to withhold the tax (Section 38d(3) of the Income Tax Act). Therefore, the tax
authorities did not err in assessing the tax in accordance with section 38s of
the Income Tax Act and in calculating the tax using the gross-up. The court
draws this conclusion, of course, bearing in mind that the question of the
footballer's tax residency will still be addressed in further proceedings - if
the tax authorities conclude that the footballer was a tax resident of the
Czech Republic, the procedure under section 38s of the Income Tax Act will
obviously not apply.
[82] It is
then significant in terms of the cassation objection that this provision also
does not distinguish between taxpayers (or withholding tax payers) on the basis
of nationality, but instead applies to all withholding tax payers under
sections 38d and 38h, regardless of nationality.
[83] The
Regional Court came to the same conclusion (cf. p. 10, first paragraph, of the
judgment); it found that none of the provisions applied distinguished between
the nationality of persons, so there could be no breach of the prohibition of
discrimination. In fact, in the same factual circumstances, the same amount of
withholding tax would have been imposed even if the person concerned had been a
national of the Czech Republic who was not a tax resident.
[84] There
is therefore no merit in the objection of error of law on that point.
[85] On
appeal, the complainant argued that foreign athletes were discriminated against
because the tax authorities' procedure precluded the application of flat-rate
costs to them, although case-law has already established that this is possible.
A Czech athlete is therefore entitled to flat-rate costs, whereas a foreign
athlete is not. The appellant then states in its supplement to the appeal that
this objection relates to the prohibition of discrimination contained in
Article 23 of the Treaty.
[86] The
Regional Court would be guilty of a defect of unreviewability affecting the
lawfulness of its decision if it were to review a decision of the defendant
which is unreviewable. It is clear from the reasoning of the judgment that it
did not substitute the defendant's reasoning in relation to the
non-discrimination plea, but merely identified part of the defendant's
reasoning as incorrect and corrected that incorrect legal view. The Supreme Administrative
Court agrees with the Regional Court that the defendant cannot avoid
considering the possible discriminatory effect of its action on the taxpayer.
As already stated above, the Double Taxation Treaty, including Article 23(1)
thereof, takes precedence in application over the Income Tax Act - if,
therefore, any provision of that Act were contrary to the prohibition of
discrimination contained in the cited article of the Treaty, the tax
administrator could not apply it or would have to choose a non-discriminatory
procedure. However, that partial defect in the defendant's decision (an error
of law) could not affect its legality since, as the Regional Court correctly
observed, it is clear from the grounds of the appeal decision that the
defendant considered that the decisive factor in determining the tax regime of
the footballer was his tax residence and not his nationality. There was
therefore no breach of the prohibition of discrimination on grounds of
nationality laid down in Article 23(1) of the Treaty. That ground of appeal is
therefore also unfounded.
IV.
Conclusion and costs
[87] The
Supreme Administrative Court found the first ground of appeal (failure to
discharge the burden of proof) to be well-founded and therefore set aside the
judgment of the Regional Court under appeal. Since the defects complained of
cannot be remedied in the proceedings before the Regional Court, but can only
be remedied in the proceedings before the administrative authority, the Supreme
Administrative Court also annulled the defendant's decision, which is bound in
further proceedings by the legal opinion expressed above (in particular
paragraph [55] of the judgment).
[88] As the
Supreme Administrative Court annulled the judgment of the Regional Court and at
the same time annulled the decision of the administrative authority pursuant to
Article 110(2) of the Code of Civil Procedure, it is obliged to decide on the
costs of the proceedings preceding the annulled decision of the Regional Court
(Article 110(3), second sentence, of the Code of Civil Procedure). In this
case, the costs of the proceedings on the action and the costs of the
proceedings on the appeal form a single unit and the Supreme Administrative
Court decided on their compensation in a single judgment based on Article 60 of
the Code of Civil Procedure (cf. judgment of the Supreme Administrative Court
of 19 November 2008, No 1 As 61/2008 98).
[89] The
defendant was unsuccessful in the case and is therefore not entitled to
reimbursement of its costs. The complainant was fully successful in the case,
therefore the Supreme Administrative Court awarded him compensation for the
costs of the proceedings against the defendant pursuant to Article 60(1) of the
Code of Civil Procedure in conjunction with Article 120 of the Code of Civil
Procedure. Those costs consisted of CZK 8 000 for court fees (court fee for the
application of CZK 3 000 and court fee for the appeal of CZK 5 000).
[90] In the
proceedings on the action, the complainant was first represented by 3 LSA, a.s.
and JUDr. Stanislav Lžičar; they are persons performing specialised legal
advice pursuant to Act No. 523/1992 Coll., on Tax Advice and the Chamber of Tax
Advisers of the Czech Republic, who are therefore entitled to remuneration for
representation pursuant to Article 35(2) of the Code of Civil Procedure. Decree
No 177/1996 Coll., on lawyers' fees and lawyers' remuneration for the provision
of legal services (Advocates' Tariff), applies mutatis mutandis to the
determination of the amount of the fee. In the proceedings on the application,
the applicant's representatives performed a total of three acts of legal
service, namely the acceptance and preparation of representation, the lodging
of the application and participation in the hearing before the court (Article
11(a), (d) and (g) of the Advocates' Tariff). The complainant's representative
in the cassation appeal proceedings, JUDr. Ladislav Sádlík, lawyer, performed
two acts of legal service, namely the acceptance and preparation of the
representation and the filing of the cassation appeal (Article 11(a) and (d) of
the Lawyer's Tariff). For each act of legal service, the representatives are
entitled to an extra-contractual fee of CZK 3 100 (§ 9(4)(d) in conjunction
with § 7(5) of the Advocates' Tariff). The Supreme Administrative Court
therefore awarded the applicant's representatives a fee for five acts of legal
service in the amount of 5 x CZK 3,100 and a lump-sum reimbursement of
out-of-pocket expenses in the amount of 5 x CZK 300, i.e. a total of CZK 17,000.
Since the complainant's representatives are VAT payers, it is necessary to
increase the remuneration awarded by the amount of CZK 3 570, which corresponds
to the 21% rate of that tax. The non-contractual remuneration and the flat-rate
reimbursement of expenses therefore total CZK 20 570.
[91] The
total costs of the proceedings thus amount to CZK 28,570. The defendant is
ordered to pay that sum to the complainant at the hands of his representative,
Mr Ladislav Sádlík, lawyer, within 30 days of the judgment becoming final.
C o n c l u
s i o n : No appeal is admissible against this decision.
Done at
Brno, 1 November 2017.
JUDr. Lenka
Kaniová
President
of the Chamber