The Supreme Administrative Court (SAC) again examined the matter of a beneficial owner of income when paying royalties abroad. Specifically, this case concerned payment for broadcasting rights. The case was already dealt with last year by the Regional Court in Brno, which decided in accordance with the tax administrator. Subsequently, the claimant addressed the Supreme Administrative Court. What was the verdict?
A Czech entity (the claimant) paid royalties to its fellow subsidiaries in Hungary and Slovakia (the “Distributors”) in connection with the distribution of television programmes (broadcasting rights). Although the Distributors accounted for the royalties as their own income in their accounts, i.e. the payments were not formally separated from other funds on accounts, they were contractually obliged to continue to pay the royalties to the producers of the individual television programmes (the “Producers”) without any profit margin.
Therefore, the tax administrator had doubts as to who was the beneficial owner of the royalties paid, whether it was the foreign Distributors or the Producers. The assessment of this matter is crucial for the determination which double tax treaty and which withholding tax rate to apply to the relevant case.
The Regional Court upheld the tax administrator’s findings and ruled that the Distributors were not the beneficial owners of the royalty income but functioned as “flow-through entities” that merely intermediated payments between the payer and the Producers (the beneficial owners of the income). We reported the case in an earlier article.
According to the Supreme Administrative Court, the Regional Court presented its own comprehensive reasoning as to why the Distributors were not the beneficial owners of the income and correctly assessed the Distributors as the “immediate recipients” for the following reasons:
(i) The Distributors were not free to decide what to do with the royalties they received and did not benefit economically from them.
(ii) Volume of the royalties agreed between the Czech entity (the claimant) and the Distributors were at the same amount as the subsequent royalties paid to the Producers. Therefore, the Distributors did not make any profit margin in this case.
In view of the above-stated facts, the Supreme Administrative Court in its decision 6 Afs 56/2023-48 fully agreed to the above-stated conclusions of the Regional Court that the Distributors were not the beneficial owners of the income from royalties but merely acted as “flow-through entities”.
This judgment relates to 2010, when the exemption from withholding tax was not yet available, the lower courts have nevertheless dealt with subsequent tax years as well.
This matter was dealt with by SAC before; it was from the perspective of the taxpayer’s burden of proof (for more information on the SAC’s decision, see our article When Does the Burden of Proof Pass to the Tax Administrator?).
The SAC has referred to its previous decisions in similar cases in which it stated that the beneficial owner is the entity that not only receives the income in the form of royalties in its sphere of disposal, but it can also freely dispose with it, control it, use it, and benefit from it without being contractually or legally obliged to transfer this income to someone else.
We have informed you about these decisions in our articles SAC Confirmed Conclusions in the Interpretation of the “Beneficial Owner” Term in Connection with Royalty and The Supreme Administrative Court’s View of Beneficial Ownership in Sublicense.
Last but not least, in this case, the aspect of abuse of law, or the economic rationale of the situation, is stated (unfortunately only without detailed argumentation or elaboration). The claimant argued that the purpose of the beneficial owner concept is to prevent abuse of the benefits arising from double tax treaties, and it did not occur in the present situation. However, in the view of the Supreme Administration Court, neither the tax authorities nor the courts identified the elements of abuse of law in the setting of the transactions, but precisely the fact that it was not possible to establish the entity which was the beneficial owner of the royalties.
Since the Czech entity did not submit any supporting documents in the proceedings to assess the beneficiary owner of other entities (the Producers), it is not possible to determine with certainty the beneficial owner of the income. In this situation, the tax administrator does not need to further determine, prove, and confirm who the beneficial owner is and apply the relevant double taxtreaties. Therefore, it is up to the taxable entity to prove and demonstrate the other beneficial owner of the income.
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