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