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Petr Němec | September 12, 2023

“Abuse of the law” coming up again – this time cross-border

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  1. Do you carry out cross-border transactions/structures?
  2. Do you have sufficiently documented and supported reasons for performing them?
  3. Does the subsequent operation of the group after the transactions/structures in question correspond to the intended reasons and purposes?

In this regard, you may be interested in a new judgment on the issue of abuse of the law. On 6 September 2023, the Supreme Administrative Court (SAC), in its decision No. 2 Afs 82/2022 – 53, dismissed the complainant’s cassation complaint in a dispute concerning the assessment of the possibility of exempting dividends paid from the Czech Republic to a foreign parent company.

What happened, simply put?

A Czech natural person owned a Czech joint stock company. The individual set up a trust in Cyprus, which was to be used for example not only to provide for the individual’s children, for their health, education, etc. The individual put a newly formed Cypriot company into the trust. Subsequently, the individual sold the shares of the Czech joint stock company to the Cypriot company. The statutory body of the Cypriot company was another Czech individual who was also a protector in the trust (i.e. could to some extent influence the disbursement of funds from the trust).

The Cypriot company accepted a loan from the son of its statutory body. It subsequently received dividends from the Czech company and used the dividends to repay the loan, including interest, as well as the purchase price for the shares acquired from the individual. The Cypriot company only held the Czech company and had received loans from third parties.

The tax administrator saw the above-mentioned conduct as an abuse of the law and levied a 15% Czech withholding tax on the Czech joint-stock company because the conditions for granting exemption from corporate income tax had not been met.

The Regional Court and the Supreme Administrative Court agreed with the conclusions of the tax administrator.


The SAC states that the purpose of Section 19(1)(ze)(1) of Act No. 586/1992 Coll., as amended by the relevant regulations (ITA), is to prevent double taxation of profits and to achieve tax neutrality so that profits are taxed at the final recipient.

According to the Supreme Administrative Court, the payment of dividends from the Czech company to the Cypriot company did not correspond to the given purpose and the transaction had no reasonable economic justification and was obviously aimed at obtaining a tax advantage (avoiding withholding tax on dividend income).

The SAC further states, with reference to previous case law, that it is necessary to examine the main purpose of the conduct, i.e. the rational justification of the transaction in terms of the taxpayer’s conduct before and after the transaction, with the aim of identifying, on the basis of the objective circumstances of the case, “whether the specific conduct of the taxpayer could have had an explanation other than an attempt to unlawfully obtain a tax advantage” and to identify “an artificial construction used to obtain a tax advantage” (judgment 10 Afs 289/2021-42). Furthermore, according to the Supreme Administrative Court, it is necessary to take into account “the legal, economic and personal relationships between the entities involved as well as the overall economic rationality of the transactions” (judgment 7 Afs 175/2022-37). In addition to the economic rationality of the conduct allegedly constituting an abuse of the law, the manner of “involvement of related persons, or members of their statutory bodies, in the chain of transactions” (4 Afs 376/2021-60) is also relevant for the assessment of motive or intent.

What to take away from this?

If you intend to structure your business in any way, or if you intend to provide for your family and your loved ones in the future by using various legal forms (including foreign ones), we recommend a detailed analysis of the options of the transactions and their tax implications.

Also, if you have already structured your business in good faith, we recommend checking whether there are any tax risks associated with this, or under what circumstances.

The line between a legitimately chosen option with a lower tax burden and abuse of the law can be quite thin, with only case law showing us the rough outlines.

Last but not least, it is crucial to mention that in tax proceedings, legitimacy (i.e. sound economic reasons) has to be proven, and we know from experience that some evidence (or arguments) is more and some less accepted by the tax administrator.

If you are interested in this topic, please do not hesitate to contact your Grant Thornton contact person or directly the authors of this article.


Author: Petr Němec, Martin Hahn