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Roman Burnus | September 26, 2023

From case law: the essence of a non-monetary benefit is not only its purpose but also its form

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The Supreme Administrative Court (hereinafter “the SAC”) has issued a judgment in the cassation complaint proceedings of 16 August 2023, No. 7 Afs 33/2022-41, against the judgment of the Regional Court in Brno (hereinafter “the Regional Court”) of 21 December 2021, No. 29 Af 89/2018-68, which resolved a dispute between a legal entity (hereinafter “the plaintiff”) and the Appeals Directorate (hereinafter “the defendant”).

The subject of the dispute is the assessment of the provided employee benefit from the point of view of its form for the purpose of exemption from income tax as a non-cash benefit under Section 6(9)(d) of Act No. 586/1992 Coll., on Income Taxes (“ITA”).

The plaintiff provided cash amounts as benefits to her employees. On the basis of the tax audit, the tax administrator concluded that the benefits provided by the plaintiff in the form of a health care allowance, use of sports facilities or cultural events were provided by the plaintiff to its employees as cash benefits, which should have been included in the employment income of individual employees, and subsequently assessed the plaintiff for payment of personal income tax on employment income including a penalty on the additionally assessed tax.

The defendant upheld the first-instance decisions of the tax administrator and insisted that a non-monetary benefit exempt from income tax under Section 6(9)(d) of the Income Tax Act cannot, under any circumstances, be in the nature of a monetary amount paid directly to an employee.

The claimant defended herself stating that what was relevant was the actual use of the designated services or goods by the employee, not the form of payment. The Regional Court agrees with the plaintiff’s opinion and states that the provisions of the law do not prevent the employee from paying for the benefits himself and being reimbursed by the employer either in advance in the form of an advance payment or afterwards on the basis of a documented receipt, as the Regional Court also stated in its judgment of 12 January 2021, No. 31 Ad 8/2019-45 in a similar dispute. The Regional Court also found that the defendant had incorrectly increased the employee’s remuneration by income in the form of contributions to employee benefits, which cannot be related to the employment relationship, if the managing director did not derive any income from that relationship due to her parental leave. The defendant (complainant) stressed that the plaintiff’s internal directive did not provide for the provision of benefits to employees on parental leave and defended itself against the Regional Court’s judgment on the assessment of employee benefits by means of an cassation complaint.

Conclusion of the SAC

The above-mentioned judgment of the Regional Court has been subject to review by the Supreme Administrative Court in the past. The article, in which we discussed the judgment, can be found here. In its judgment of 15 November 2022, 7 Ads 31/2021-28, the SAC disagreed with the interpretation of the Regional Court, annulled the judgment and has now no reason to deviate from its opinion in the case under review. The SAC confirmed its case law and stated that the essence of a non-monetary benefit is not only the limited purpose, for which it is provided, but also the form, in which it is provided. By the nature of the case, a benefit, which is not provided to the employee in money or is not exchangeable for money or other similar means, should be considered a non-monetary benefit. Benefits, where the employer pays a sum of money to a person other than the employee and his/her family member, can also be considered to be non-monetary benefits. In the case of the provision of an amount of money to an employee, it is not tax-exempt income, even though it has been proven that the employee used the sum of money to pay for a benefit referred to in Section 6(9)(d) of the ITA.

Furthermore, it is not clear to the SAC, why it is relevant for the complainant if the plaintiff’s internal directive provided for the provision of employee benefits to employees on parental leave, when the essence of the complainant’s decision was that there were in fact no employee benefits. Regarding income under Section 6(1)(d) of the ITA, the SAC states that this type of benefit must be provided in connection with the performance of a dependent activity, but need not be paid at the same time as any of the income under (a) to (c) of this provision.

In view of the above, the SAC found the cassation complaint to be well-founded, annulled the judgment of the Regional Court and returned the case to it for further proceedings.

Author: Roman Burnus, Anna Beránková