“ABUSE OF RIGHTS” or what August brought

In August 2025, we noted a trio of interesting Supreme Administrative Court (SAC) judgments relating to the area of abuse of rights.

1. Issuance of koruna bonds

The first of these is another in a series of court cases with a common denominator in the form of koruna bonds. This is judgment ref. no. 1 Afs 68/2025-62 issued on 5 August 2025, in which the Supreme Administrative Court dismissed the appellant’s cassation complaint in the matter of the tax deductibility of interest on koruna bonds. 

This was a situation where a joint-stock company issued CZK bonds at the end of 2012 for the purpose of acquiring a 90% stake in another company (a limited liability company). The bonds had a fixed interest rate of 12% per annum, maturity until 2032 and a total nominal value of CZK 100 million. They were subscribed to a single individual who immediately transferred his 90% share in the second company to a joint stock company. The share of CZK 100 million was settled by mutual set-off. Subsequently, this individual transferred the acquired bonds to the only two shareholders of the first company. At the beginning of 2013, the legal form of the limited liability company was changed to a limited partnership. All these transactions took place in a timeframe of less than one year. Interest payments were made in cash and were not documented.  

The tax administrator identified a number of unusual circumstances in connection with the issue of the bonds and the purchase of the 90% shareholding, on the basis of which it concluded that the predominant purpose of the transactions was to obtain an unjustified tax advantage and that the joint-stock company had abused the law. By an additional payment assessment, the court assessed corporate income tax and set the obligation to pay a penalty.

The Municipal Court agreed with the conclusions of the tax administrator. It stressed that the transaction merely changed the ownership structure of the joint stock company and the company in which the 90% stake was transferred, without the joint stock company obtaining any additional sources of financing through the bond issue. It is also significant that within one year of the transaction, the original shareholders of the joint stock company became the ultimate owners of the bonds and did not pay any money for them. The court also drew attention to the method of payment of the price of the bonds by offsetting the claims. As regards the change of legal form to a limited partnership, this step circumvented the condition set out in Section 25(1)(zk) of Act No. 586/1992 Coll., on Income Taxes. Without the change in legal form, the interest expense would not be tax-effective, as it would be a “parent company expense (cost) related to the holding of a share in a subsidiary”.

And what does the SAC say?

The Supreme Administrative Court recalled that the primary purpose of a bond issue is to secure an external source of financing or to obtain additional capital for further development or maintenance of the business. If this purpose is fulfilled, the application of interest costs of external financing in determining the income tax base does not in principle contradict the purpose of Section 24(1) of the Income Tax Act. In this case, the main purpose of the bond issue was to artificially create tax relief.

The Supreme Administrative Court stated that the municipal court did not criticize the joint-stock company for the issuance of koruna bonds itself, but pointed to a comprehensive chain of suspicious circumstances that accompanied this issuance and were directly related to it in terms of time.

According to the Supreme Administrative Court, in the case under review, the tax authorities had gathered sufficient evidence to show that the individual steps taken by the joint stock company and other interested parties had led to the artificial creation of a situation exactly such that the conditions for claiming interest on bonds as tax deductible expenses were met from a formal point of view. However, from a substantive point of view, the joint stock company has used (abused) the legal provisions in question in order to obtain an illegitimate tax advantage.

Conclusion

This is yet another in a series of judgments where the tax administrator has sustained the burden of proof, or the taxpayer has not been able to sufficiently prove that the transaction was not carried out primarily for tax reasons.

2. Restructuring of companies in a group of related parties

The Supreme Administrative Court confirmed the abuse of rights in its judgment ref. no. 8 Afs 270/2023-105 issued on 15 August 2025, on the issue of excluding the tax deductibility of interest due to abuse of rights in business combinations from the perspective of taxation abroad.

The transaction that was the subject of the dispute consisted of the restructuring of companies in a group of related parties, the creation of an intra-group debt burden and the subsequent conversion into a limited partnership.

This is the second time this case has been before the SAC. The Municipal Court should – on the basis of the previous ruling of the Supreme Administrative Court – have examined the question whether taxation of income abroad would prevent the conclusion of abuse of law.

The tax authorities assessed whether the transaction provided a relevant economic opportunity for the group as a whole or made a relevant contribution to the maintenance of the income generated. However, they concluded that it was not, or that these non-tax advantages were insufficient in comparison with the tax advantage obtained. The fact that the tax was paid abroad cannot change the above assessment.

The Supreme Administrative Court dealt only with the objection that the group had paid the tax related to the foreign transaction and therefore did not receive a tax advantage. As regards this objection, the Supreme Administrative Court observes that the group’s argument does not take into account the conclusion of the municipal court that only the difference in the interest rate of 0.125% was taxed abroad. The Supreme Administrative Court accepts that, formally, there was taxation related to the foreign transaction. However, from a group-wide perspective, this tax is significantly disproportionate to the tax the group would have had to pay if the transaction had not occurred.

Conclusion

Abuse of the right is not prevented by the fact that the income was taxed abroad if the level of taxation was marginal – i.e. there is a tax advantage.

Not only from the two judgments mentioned above, but also from other case law, it can therefore be relatively generalized that in a situation where business shares are transferred between related parties and without external financing, it will be difficult to defend any tax advantage (exempt transfer of shares, untaxed interest on koruna bonds, tax costs in the form of interest expenses) in relation to the alleged abuse of rights.

3. Deduction of donations made to an affiliated sports club

The last of the three judgments is the judgment ref. no. 1 Afs 69/2025-35 issued by the Supreme Administrative Court (SAC) on 14 August 2025 on the issue of deduction of gifts provided to a related sports club from the personal income tax base. In this judgment, the Supreme Administrative Court dismissed the tax administrator’s cassation complaint.

It is not without interest that the case in question is similar in type to the very first Czech case of tax assessment for abuse of law (final judgment III. ÚS 374/06).

In the present case, however, the Supreme Administrative Court dealt with the evidence itself – i.e. whether the tax authorities had sufficiently and without internal contradictions established the facts of the case and thus de facto proved abuse of law.

The tax administrator considered the actions of the individual to be an abuse of law, as the gifts were to be given to the club for the sole purpose of deducting them from the tax base, while at the same time drawing benefits for himself and his relatives, financed from the same gifts. By such conduct the individual did not pursue foreign, or society-wide, benefit, but his own. After an unsuccessful invitation to submit additional tax returns, the tax administrator issued additional payment assessments, which did not recognise the application of the non-taxable part of the tax base on the above-mentioned gifts and imposed an obligation on the individual to pay the tax and the related penalty. It concluded that the club’s actions were of a private nature, catered to the personal interests of a closed group of persons, and were therefore not socially beneficial.

On the basis of the action filed, the Municipal Court annulled the contested decision and returned the case to the tax administrator for further proceedings. It concluded that the facts concerning the social utility of the club’s activities had not been sufficiently established and that the tax administrator had reached its conclusion on abuse of rights prematurely.

The Supreme Administrative Court – in agreement  with the municipal court – found that the tax administrator had insufficiently addressed the contradictions between the club chairman’s testimony and other evidence in the contested decision.

Conclusion

The SAC confirmed that the tax administrator must assess each of the evidence taken individually (and all the evidence in its interconnectedness), while the contradictions in the evidence must be dealt with in a reviewable manner and all the evidence must be evaluated in such a way that the factual and legal conclusions exclude reasonable doubt.

It is not possible to find an abuse of law if the tax administrator did not deal with the evidence sufficiently.

However, we would like to point out that in other misuse of rights judgments the SAC appears to be less strict and does not require an evaluation of every single piece of evidence. In the case under review, it can be assumed that the tax administrator will correct its mistakes in the evaluation of evidence and assess the tax (on the basis of abuse of law) again – similarly to the above-mentioned case from the previous ruling of the Supreme Administrative Court (SAC), where the SAC first ordered to supplement the evidence and subsequently confirmed the abuse of law.