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Roman Burnus | December 6, 2022

From the case law: further interpretation of a non-monetary transaction for an employee

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The Supreme Administrative Court (“SAC”) has dealt with a dispute in a cassation complaint between a legal entity (“the plaintiff”) and the Czech Social Security Administration (“the defendant”) concerning a payment assessment ordering the applicant, as the employer, to pay the insurance premiums due in the amount of CZK 1. 890 and related penalty due to incorrect assessment of income tax exemption for contribution to recreation granted to an employee under article 6(9)(d) of the Income Tax Act (‘ITA’). At the core of the dispute was the question of if a holiday allowance paid to an employee in an alternative way – in monetary non-cash form to cover his expenses demonstrably incurred for that purpose – was exempt from income tax and therefore not part of the basis of assessment for social security contributions.

The plaintiff brought an action against the payment assessment before the Regional Court in Brno, which upheld the action, cancelled the payment assessment and returned the case for further proceedings. The defendant disagreed with the decision of the Regional Court and filed a cassation complaint with the Supreme Administrative Court.

Both the plaintiff and the Regional Court are of the opinion that if an employee receives an amount of money from his employer, it cannot in any event be regarded as a monetary transaction. Although the ITA uses the phrases “monetary transaction” and “non-monetary transaction”, these terms are not defined in any way, so a purely linguistic interpretation of these terms cannot be used in the context of the Act. It further states that according to article 6(9)(d) of the ITA, it is clear that a non-monetary transaction is not always only the acquisition of a particular item or service directly by the employer, but also the provision of a contribution for certain goods or services to the employee. The plaintiff bases this argument on the purchase of prescription medical devices, where, according to the applicant, there is no alternative but to make a financial contribution directly to the employee. Another argument refers to article 6(7)(c) of the ITA, which implies that not all income received by an employee from an employer would be subject to tax (e.g., amounts to cover an employee’s provable expenses, etc.), and also refers to an amendment to the Act that allowed employers to provide an employee with a “flat-rate contribution to meals” in the form of a monetary transaction, where is not monitored, for what purpose the employee used it.

The plaintiff concludes that a non-monetary transaction for the benefit of an employee may take the form of either the provision of a personally acquired service or goods or the provision of the same benefit in the form of earmarked funds. According to him, the decisive interpretation of the law is that the employee spends the provided funds in the manner specified by the employer, therefore, according to article 6(9)(d) of the ITA, these contributions should be exempt. In the light of the above, the plaintiff suggested that the defendant’s appeal should be dismissed as unfounded.

Conclusions of the SAC

The SAC disagrees with the decision of the Regional Courts decision and the arguments of the plaintiff. According to the SAC, it follows from the provisions of article 6(9)(d) of the Income Tax Act that the following conditions must be met in order to qualify for the income tax exemption for the provision of a contribution to recreation:

  • it is a non-monetary transaction,
  • provided by the employer (on behalf of the employer),
  • from the cultural and social needs fund, from the social fund, from the profit after tax,
  • it is the provision of a contribution to recreation to an employee.

In the present case, the first prerequisite for exemption, namely the form of the provided transaction, was not met. According to the SAC, the Regional Court does not take into account the difference between the purpose of the transaction and the form, in which the transaction was provided. In addition to the limited purpose, for which the contribution is provided, the form, in which it is provided, is also the essence of a non-monetary transaction. The ITA does not define the concept of “non-monetary performance” any further, however, this concept seems to be absolutely unambiguous, since by the nature of the matter it is considered to be such a performance that is not provided in money, or virtually not exchangeable for money or other similar means.

Non-monetary transactions have already been considered in the past by the Regional Court in Plzeň in its judgment of 29 March 2018, No. 57 A 29/2017-54, in which it dealt with the nature of vouchers provided by an unnamed company. In this judgment, the Supreme Administrative Court (SAC) approbates that the provision of a transaction in the form of earmarked vouchers can be considered a non-monetary transaction, as it is a financial means serving a specific purpose, which is irreplaceable and unexchangeable for another intended benefit, while the fulfilment of the purpose is ensured by the provision of this benefit in the form of a voucher. However, if the same lens were applied to the provision of a sum of money directly to an employee’s bank account, the same conclusion could not be reached as in the case of vouchers. Provided that the employer makes a cash contribution under these conditions, the fulfilment of this purpose cannot be assured at the time of granting. It would depend only on the employee’s will whether he or she actually uses the “extra” money for recreation. In light of these arguments, the SAC summarises that only a scenario, in which the employer pays a sum of money to a person other than the employee and his or her family member, and that person provides a service to those persons, is considered a non-monetary transaction in this sense.

Another argument considered by the SAC was the plaintiff’s objection based on the application of article 6(7)(c) of the ITA. Here, the SAC agrees with the defendant that the provision does not refer to sums of money, which the employee would benefit from, as in the case of employee benefits, as it only refers to sums provided by the employer to the employee to pay on his behalf for goods or services directly or indirectly related to his activities. For this reason, it is not possible to exempt a financial contribution made to an employee for recreation.

Finally, the SAC comes to the argumentation of the contribution to meals, where article 6(9)(b) of the ITA has been amended with effect from 1 January 2021, which allows the employer’s contribution to catering both in a non-monetary form and in the form of a monetary contribution. Here, however, it is expressly distinguished that these are two different forms of transactions, which is consistent with the above conclusions.

The SAC concludes that the disputed transaction is a monetary transaction, which means that the conditions for exemption from income tax in the sense of article 6(9)(d) of the ITA could not be met, therefore it reverses the judgment of the Regional Court and returns the case for further proceedings.

Author: Roman Burnus, Marek Toráč