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Roman Burnus | April 18, 2023

Non-exemption of income from a service apartment

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On 31 October 2022, the Supreme Administrative Court (“SAC”) dealt with a cassation complaint between two parties, with a religious community (“the plaintiff”) on one side and the Appellate Financial Directorate (“the defendant”) on the other. The dispute between these parties arose on the basis of a performed tax audit, where it was found that the parish priest has a permanent residence in the same municipality, where the service apartment is also situated, therefore one of the conditions for exemption of a non-monetary benefit in the form of temporary accommodation under article 6(9)(i) of the Income Tax Act (“ITA”) could not be met. For this reason, the tax administrator additionally assessed the plaintiff’s personal income tax for the tax years 2013 and 2014.

In the cassation complaint, the plaintiff objects that the tax authorities incorrectly and unfairly determined the amount of the non-monetary benefit (the valuation of the property) by failing to take into account, when calculating the normal rental price, the corresponding period of use of the service apartment for spiritual activities, which was used by the community under a framework agreement concluded with the Council of Elders in a ratio of 50 % for personal use and 50 % for service purposes. According to the complainant, the market value of the service studio should have been taken into account first, then reduced by the deduction of the rent according to the level of use for official purposes and, lastly, by half of the payments for the expenses related to the use of the service apartment, since the parish priest paid the utilities at her own expense. According to the complainant, the amount of the non-monetary benefit thus determined would probably be significantly lower than the amount of CZK 3,500 per month, which constitutes the limit for tax exemption of the non-monetary benefit provided.

In the complainant’s view, the tax administrator was not entitled to speculate independently on the content and timing of the clerical activity, since it did not have documents defining both the content of the employment relationship and the scope of the use of the official flat. Finally, in the appeal, the plaintiff summarised that the tax administration did not proceed in compliance with the Property Valuation Act and had not ascertained the actual normal market price of a comparable service, but had tailored the entire process to the complainant’s disadvantage by refusing to accept the Council of Elders’ resolution on the level of private use of the flat and subsequently disregarding real market laws.

Conclusion of the SAC

First, the SAC points out that, in the field of property valuation, a service apartment is not a separate category of apartments that should be distinguished from “other” apartments in terms of their value. For this reason, it is not relevant to make any distinction when comparing rent levels for service apartments. When comparing an apartment and a studio, it is clear that the studio is a non-residential space and its market value will also differ. However, the tax administrator took this fact into account in the calculation methodology by deducting 10% of the rent. As regards the complainant’s allegation of community use of the apartment, the SAC is of the opinion that this is not a defect of the apartment, but a limitation of the landlord’s use of the apartment. The tax administrator took this limitation into account in the valuation of the non-monetary benefit only according to the proven facts. According to the tax audit and the defendant’s decision, it follows that the tax administrator considered it proven that the service apartment was used for 15 hours per week, i.e. approximately 1/3 of the working time. According to the complainant, the service apartment was also used for other activities and official duties, but the tax administrator did not take these allegations into account, as they were neither specified nor proven.

Furthermore, the SAC agreed with the decision of the municipal court in its evaluation of the resolution of the Council of Elders, where the definition of the allocation of the apartment appears to be indicative, i.e. that the apartment will be used not only for personal purposes. The document certainly does not show that the apartment was actually used for half of each day during the relevant period. Nor does the lease between the parish priest and the Council of Elders provide any further details. The complainant’s argument concerning the reduction of the amount of the non-monetary benefit by the energy costs paid by the parish priest also for the period of use of the flat for official purposes was raised for the first time in the cassation complaint and is therefore inadmissible.

Finally, the SAC concludes that the complainant cannot be convinced that the tax administrator did not obtain sufficient supporting documents to establish the facts, since it should have claimed and proved the extent, to which the flat was used for business purposes in the first place. The tax administrator described the facts it considered proven and included them in its considerations when determining the amount of the non-monetary benefit. Based on the above, the SAC dismissed the cassation complaint.

Author: Roman Burnus, Marek Toráč