When does the burden of proof pass to the tax administrator?

The recent judgement of the Supreme Administrative Court (ref. no. 1 Afs 73/2019-71) confirmed the way in which the burden of proof is distributed between the taxable entity and the tax administrator during the withholding tax proceedings. In this present case, the interpretation of the concept of “beneficial owner of royalties” will also be interesting in relation to the possibility of applying the modified rate according to a Double Taxation Treaty (“DTT”). However, the courts (the Regional Court and the Supreme Administrative Court) have only dealt with the procedural aspect of the case so far, i.e. the distribution of the burden of proof in particular. The case will thus be heard again by the Regional Court (“RC”), which made an incorrect conclusion about the transfer of the burden of proof, hence the Supreme Administrative Court (“SAC”) returned the case for further proceedings.

The entire text of the judgement ref. no. 1 Afs 73/2019-71 is available on the website of the Supreme Administrative Court.

From the settled administrative practice (e.g. judgments ref. no. 8 Afs 67/2013-49, ref. no. 7 Afs 138/2018-52, ref. no. 7 Afs 379/2018-40 or Constitutional Court’s judgment no. IV ÚS 591/08) and Section 92 of the Tax Code, it follows that it is the taxable entity who bears the burden of assertion in relation to its tax liability as well as the burden of proof in relation to these assertions. In other words, the taxable entity bears the primary burden of proof, fulfilling this obligation by submitting documents that can sufficiently prove its assertions. Nevertheless, in the present dispute, it was the taxable entity who did not bear its burden of proof, since it did not provide any supporting documents confirming the facts that it claimed — i.e. that payments abroad for programme licences were not subject to withholding tax.

Consequently, the RC’s conclusion that the tax authority did not bear its burden of proof, since it did not sufficiently justify the existence of facts calling into question the credibility, completeness, conclusiveness and accuracy of the taxable entity’s accounts in its call for evidence, did not stand up to the SAC. From the SAC viewpoint, the RC’s conclusion is incorrect because it was based on the assumption that the taxable entity did not bear the primary burden of proof, since it stated that it had not incurred a tax liability. However, as confirmed by the judgements (see above), the taxable entity bears both the primary burden of assertion and the burden of proof. The taxable entity would only fulfil its burden of proof if it stated why it considers that it has not incurred a tax liability. Nonetheless, in the dispute in question, the taxable entity limited itself to a vague assertion that it had not incurred a tax liability. The SAC thus closed the case by stating that the tax administrator could not bear its burden of proof since it had not been transferred to it at all. This conclusion confirms the taxpayer’s obligation to duly substantiate the scheme applied in relation to income paid to non-residents (and to prove claims for any exemptions or benefits granted by double taxation treaties).

Interpretation of the concept of “beneficial owner”

Unfortunately, the judgment has not provided an interpretation of the concept of “beneficial owner” (so far), which is contained in the relevant international double taxation treaties and Directive 2003/49/EC in relation to income from royalties. According to them, a company is considered to be the beneficial owner of royalties only if it accepts them for itself and not for another person as an intermediary, e.g. as a representative, asset manager or agent. Let us add that the Income Taxes Act (refer to Section 19(6)) also contains the same definition when it says that the beneficial owner of income is the person who receives these payments for his/her own benefit.

Assessing who the beneficial owner is is a matter of law, not of facts. In the judgment under discussion, the SAC also noted that in cross-border disputes over the beneficial owner, it is good to request how the other party of the DTT sees the given income and whether it considers itself justified to tax it. However, the SAC also stated that the opinion of the foreign tax administrator is not binding for the Czech tax administrator, since the Czech tax administrator has to make its own judgment as to who the beneficial owner is, on the basis of sufficient evidence collected in the tax proceedings.

The judgment of the Court of Justice of the European Union in joined cases C-116/16 and C-117/16 has also brought conclusions concerning the burden of proof of the taxable entity on withholding tax exemption in accordance with Council Directives 90/435/EEC and 2003/49/EEC, or the application of a zero rate in accordance with the DTT. According to the judgment, companies applying for the exemption from withholding tax on dividends are obliged to prove that they meet the objective conditions set out in the Directive. The tax authorities of the respective state may, therefore, request such evidence from the taxable entity as they deem necessary for the proper assessment of taxes and charges and, where appropriate, refuse the requested exemption if such evidence is not provided.

It is, therefore, appropriate to recall Instruction no. D-286 of the Ministry of Finance (“Instruction”) summarising the taxpayer’s obligation to prove that the conditions for claiming benefits arising from the relevant DTT were fulfilled. According to the Instruction, evidence may be used in particular in the form of a confirmation of the payee’s tax residency, its declaration that it is the beneficial owner of the payment received and confirmation that the given income is considered to be its income under the tax law of the other state.

In addition to correcting procedural errors, the renewed proceedings at the Regional Court should also address the issue of the correctness and lawfulness of the factual assessment. Therefore, we will have to wait for a further interpretation of the concept of “beneficial owner”. However, it is clear that in the upcoming years, the tax administration will increasingly focus on this aspect (here we refer to last year’s SAC judgment, which we wrote about in the article The SAC’s View of Beneficial Ownership in Sublicense).

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