Wages as a non-monetary supply

The claimants, as employers, provided their employees with part of their wages as a non-monetary benefit in the form of cafeteria points, with one point credited corresponding to a value of CZK 1. Employees could use these points at their discretion only for the supplies defined in Section 6(9)(d) of the Income Taxes Act (“ITA”), i.e. for culture, sport, health, recreation, books or school. That is, for non-monetary supplies that meet the statutory conditions for exemption from employment income tax.

The statutory conditions for exemption are as follows: 1) it is a non-monetary supply, 2) provided by the employer (on behalf of the employer), 3) from the fund for cultural and social needs, from the social fund, from the profit (income) after its taxation or on account of expenses (costs) which are not expenses (costs) for the achievement, provision and maintenance of income, 4) for the purpose of implementation of selected supplies (e.g. culture, sport, recreation).

The tax administration bodies did not question compliance with the statutory conditions for exemption. However, they refused to recognise the claim for exemption on the grounds that these were supplies provided for work performed, i.e. wages in kind, which are always subject to taxation and social and health insurance contributions. According to the tax administration, only employee benefits not linked to the work performed, which are provided in excess of wages, are exempt from employment income tax.

Assessment by the SAC

First of all, the SAC stated that the ITA does not recognise the term “employee benefit”, although it is used by the public to refer to non-monetary supplies under Section 6(9)(d) of the ITA. Instead, the ITA uses the term “employment income”, which is defined very broadly in order to cover the widest possible range of supplies provided by the employer to employees.

According to the SAC, it is therefore irrelevant whether or not the supply in question is a wage when assessing whether the conditions for exemption under Section 6(9)(d) of the ITA are met. It is only relevant whether all the statutory conditions listed in this provision are met (see above) and whether it is also income under the ITA. At the same time, it is irrelevant what type of employment income is involved, i.e. whether it is income from an employment relationship (wages or remuneration for work performed) or income arising in relation to the performance of the activity from which the employment income is derived (benefit in excess of wages). The SAC therefore concluded that the tax administration bodies erred when they excluded the possibility of tax exemption for income simply because they assessed it as part of wages.

Can this be an abuse of law?

The SAC also commented on the question of whether the exemption of wages in kind from employment income tax could be an abuse of law. The SAC concluded that it was not. The SAC did not share the tax administration’s concern that the above interpretation would lead to abuse of the law by employers, since, according to the tax administration, it would give them the opportunity to avoid paying the compulsory insurance contributions. The SAC held that the claimants had intended to obtain tax exemption for non-monetary supplies to their employees on the basis of the clear wording of the law and had not thereby negated its meaning. They cannot be blamed for using the legislation to provide non-monetary supplies for the advantage of their employees, i.e. for the purpose it was intended to serve and under the conditions set by the legislature.

In case you also deal with the area of benefits from a tax perspective, this judgement may be important for you.