The discussion concerning one-crown bonds is continuing. As repeatedly debated in the media, the Financial Administration continues to carry out tax inspections of the companies which issued so-called one-crown bonds through the end of 2012. Proceeds from these bonds issued through the end of 2012 are not subject to effective taxation due to the rounding down to the whole Czech crown. Although at the time it was a routine form of financing, nowadays, the tax authorities in many cases challenge the economic reasons for placing one-crown bonds, treating the issuance of such securities as an abuse of law with all the related tax consequences.
The first ruling of the Supreme Administrative Court on one-crown bonds
In August 2018, the Supreme Administrative Court dealt with the tax inspection of the one-crown bonds for the first time. In this case, the complainant did not contest the amount of the additionally-assessed tax liability but claimed the illegality of the tax inspection as such. The illegality of the tax inspection was inferred by the complainant based on the fact that it had not been initiated on the basis of a “free decision” of the Director-General of the General Financial Directorate, but on the basis of political pressure. According to the complainant, it was not the Financial Administration, but the Chamber of Deputies (especially its Budget Committee) that decided to examine the placements of the one-crown bonds made in 2012.
The Supreme Administrative Court did not concur with this conclusion on the illegality of tax inspections. The Court admitted that the question of one-crown bonds and related inspections was intensively publicly debated and individual political leaders also expressed their opinion. However, according to the court, it was not proved that the Financial Administration had acted directly on the order of the Chamber of Deputies or because of political pressure. On the contrary, the court noted that it is normal for the Financial Administration to initiate a tax inspection not only on the basis of its own activities but also on the basis of public inquiries and facts obtained from other state authorities (e.g. from the Police of the Czech Republic). The conceptual decisions on what issues the Financial Administration will focus in its inspection activity is fully within the remit of the Director-General of the General Financial Directorate.
Up to now, this ruling of the Supreme Administrative Court does not address the correctness of the conclusions of the tax authorities regarding one-crown bonds. Therefore, we will still have to wait for the answer of whether and in which cases the issuance of one-crown bonds can be considered an abuse of law.
Bonds may be subject to taxation in the future
In the context of the tax inspections on one-crown bonds, the Ministry of Finance is also coming back to the proposal to amend the Income Taxes Act, according to which proceeds arising from the one-crown bonds should be subject to taxation regardless of when the bonds were issued. According to the most recent information, this legislative amendment should become part of the governmental package, which will come into effect by 2020 at the earliest.
In early 2017, the government supported the proposal to amend the Income Taxes Act, but even then, it was clear that the then Chamber of Deputies would not be able to pass this amendment before the election. According to the governmental proposal, taxation was supposed to apply on the one-crown bonds purchased by natural persons from their own companies or otherwise linked to the issuers of one-crown bonds.
The proposal for the current legislative amendment is not available yet. However, preliminary information from the Ministry of Finance indicates that, in addition to the one-crown bonds, the taxation should also extend to other types of bonds.
It may be assumed that, in the context of the planned legislative amendments, the following question will arise: to what extent the proposed taxation can be retroactively applied to the already issued bonds. Retroactive application of tax regulations may run counter to basic legal principles and relevant investment protection treaties. Therefore, it is apparent that the debate regarding the one-crown bonds will be continuing. We will inform you about further developments in the practice of the Financial Administration and administrative courts. If you have any questions about tax inspections on bonds, we will be happy to answer them also in person.
The article is part of dReport – September 2018, Tax news; Grants and investment Incentives.
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