At the end of January, the Supreme Administrative Court issued a judgment 6 Afs 193/2024-54, according to which a natural person abused the law by setting up companies with the aim of avoiding paying value added tax. The whole concept was simple. At the moment when the individual in business exceeded the turnover for compulsory registration as a taxable person, he set up a company under which he carried on the same business activity, i.e. trading in electronic cigarettes. After the first trading company exceeded the turnover for registration as a taxable person, the individual set up another trading company which took over the activity. Thus, within a period of 3 years, a total of 26 trading companies were created, which gradually took over the trade from each other. As the business was transferred, so were the employees and the landlords changed tenants. One thing remained common, however, and that was that sales were always made by the company that was not yet a taxpayer at the time. And all the companies were materially, organisationally and financially subject to the natural person running the business.
On the issue of abuse of rights, it is the tax administrator who bears the burden of proof. The tax administration must prove that the abuse of rights has occurred. The case law of both the Court of Justice of the European Union and the Czech Supreme Administrative Court agrees that there is an abuse of law if the main purpose of the conduct in question is to obtain a tax advantage. In other words, in order for there to be no abuse of law, the main (or at least sufficiently significant) purpose of the transactions must be other than tax.
Perhaps an interesting final question is the implications of the court's decision. The court attributed all tax liabilities to the individual who first transferred his business to the company, since all subsequent transfers were already both the result of this first misuse and still directed by this individual as their owner.
In the case described in the judgment, it was perhaps too "transparent". The same activity, the same people, 26 companies... Just a few months before this judgment of the Supreme Administrative Court, the Court of Justice considered possible abuse of law in relation to registration in case C-171/23 UP Caffe. This Croatian company carried out the same restaurant business as the company SS-UGO of the same owner before it. The Croatian tax authorities were of the opinion that there was in fact no interruption of the activities of SS-UGO and that the establishment of the new company UP Caffe, which took over the activities of SS-UGO, was in fact fictitious or aimed at continuing to benefit from the non-taxpayer status. In the Court's view, the small business exemption scheme, that is to say, the limit beyond which an entity is not liable to pay VAT, cannot be used if it is shown that the purpose of setting up a new company carrying on the same activity is to avoid VAT.
Last spring, my colleague and I cited the spreading of sales among several entities as an example of possible abuse of the law in an article in the Bulletin of the Chamber of Tax Advisors. A year later, this concept can no longer be seen as a risky act in relation to abuse of law, but as an act considered by both the Court of Justice and the Supreme Administrative Court to be abusive.
Autor: Petr Vondraš
On the issue of abuse of rights, it is the tax administrator who bears the burden of proof. The tax administration must prove that the abuse of rights has occurred. The case law of both the Court of Justice of the European Union and the Czech Supreme Administrative Court agrees that there is an abuse of law if the main purpose of the conduct in question is to obtain a tax advantage. In other words, in order for there to be no abuse of law, the main (or at least sufficiently significant) purpose of the transactions must be other than tax.
Perhaps an interesting final question is the implications of the court's decision. The court attributed all tax liabilities to the individual who first transferred his business to the company, since all subsequent transfers were already both the result of this first misuse and still directed by this individual as their owner.
In the case described in the judgment, it was perhaps too "transparent". The same activity, the same people, 26 companies... Just a few months before this judgment of the Supreme Administrative Court, the Court of Justice considered possible abuse of law in relation to registration in case C-171/23 UP Caffe. This Croatian company carried out the same restaurant business as the company SS-UGO of the same owner before it. The Croatian tax authorities were of the opinion that there was in fact no interruption of the activities of SS-UGO and that the establishment of the new company UP Caffe, which took over the activities of SS-UGO, was in fact fictitious or aimed at continuing to benefit from the non-taxpayer status. In the Court's view, the small business exemption scheme, that is to say, the limit beyond which an entity is not liable to pay VAT, cannot be used if it is shown that the purpose of setting up a new company carrying on the same activity is to avoid VAT.
Last spring, my colleague and I cited the spreading of sales among several entities as an example of possible abuse of the law in an article in the Bulletin of the Chamber of Tax Advisors. A year later, this concept can no longer be seen as a risky act in relation to abuse of law, but as an act considered by both the Court of Justice and the Supreme Administrative Court to be abusive.
Autor: Petr Vondraš