Abuse of law - who should be taxed and how?

On 2 December 2025, the Supreme Administrative Court (hereinafter the “SAC”) issued a judgment under Case No. 1 Afs 171/2025, in which it repeatedly ruled that in the case of abuse of law, the specific method of recovering the unlawfully obtained tax advantage is in the hands of the tax administrator.

This was a situation where the sole shareholder (an individual) of a limited liability company (hereinafter “the Company”) established Holding a.s. (hereinafter referred to as "Holding"), of which he was the sole shareholder and to which he subsequently sold his 100% share in the Company. The purchase price for the share transfer was to be paid by the Holding to the individual as the original shareholder of the Company in annual instalments. At the same time, the Company paid the Holding, as its parent company, annual profit shares, for which it claimed exemption from withholding tax. The holding company then forwarded these funds to the individual as instalments of the purchase price for the transfer of the business share. The tax administrator saw this as an abuse of the law, the conditions for exemption were created artificially and assessed the Company with corporate income tax collected by withholding.

The judgment of the SAC itself is not interesting from the point of whether or not this constitutes an abuse of law. The situation was more or less clear and the abuse of law was not even questioned in court.

Instead, the complainant based his argument on an alleged procedural error – the unjustified tax advantage should not have been deducted (or assessed) as corporate income tax collected by withholding (i.e., from the profit shares received by the Holding), but as personal income tax collected by withholding (i.e., from profit shares de facto and ultimately received by the individual).

What did the SAC say about this?

The role of the individual entities involved in the abusive transaction is not decisive for the tax liability of the taxpayer. However, what is relevant is the fact that both the legal entity (Holding) and the individual jointly participated in the abuse of rights.

The specific method of recovering an unjustified advantage is at the discretion of the tax administrator when applying the doctrine of abuse of rights and depends on the specific circumstances of the case. In the case at hand, according to the SAC, it was therefore up to the tax administrator to decide whether to impose corporate or personal income tax on the complainant collected at source at a special tax rate.

Conversely, in the case of additional tax assessment on the grounds of dissimulation (i.e., as a formal legal act concealing the actual state of affairs), only personal income tax collected by withholding at a special tax rate would be applicable.