“Professional companions” do not have to deal with taxes? Regional court rejects tax liability for prostitution

On 4 February 2025, the Regional Court in Ostrava issued a judgment under Case No. 65 Af 4/2024-64, in which it deals in detail with the question of the taxability of income from prostitution of an individual (“the applicant”) and the issue of her tax residence. This is a new decision in a follow-up proceeding after the Supreme Administrative Court (“SAC”) returned the case for further consideration by judgment No. 8 Afs 281/2023-53 of 14 November 2024 (as we informed you in our previous article).

Origin of income: “professional companion” as a euphemism

During the search, the tax administrator found that the applicant regularly exchanged higher amounts of foreign currency (EUR) into Czech crowns between 2012 and 2014 and then deposited them into her Czech bank account. However, she reported zero income on her tax return. When asked to prove the origin of the foreign currency, she argued that these were loans or jewellery sales. The court, however, refuted these claims – the evidence, including her ex-partner’s testimony, questionings, civil judgments, and photographs and videos, led to a surprising conclusion: it was income from prostitution.

The tax administrator subsequently assessed the applicant’s tax by means of aids in a total amount exceeding CZK 2 million. It is also worth noting the ruling of the Regional Court that the designation of the activity as “professional companion” is rather an effort to soften the specification of an otherwise difficult to recognize profession, but it does not change the substantive nature of the activity.

Tax residence: a general statement is not enough

In the proceedings, the applicant also claimed that she was not a tax resident of the Czech Republic, but she failed to state the country, in which she was resident. She has worked as a casual wage earner in various countries around the world, including the Republic of Panama, where she rented an apartment. In other countries, she operated services in customers’ homes or hotels. She only occasionally stayed in the Czech Republic, in various places. Although the applicant owned property in the Czech Republic, it was not a permanent apartment, in which she would intend to reside for a long period of time, nor did her length of stay exceed 183 days per year.

However, the court found that she had not sustained her burden of proof. To prove tax residency in another country, the taxpayer would have to prove specific facts – length of residence, income in that country, tax returns, etc. On the contrary, it turned out that the applicant had permanent residence in the Czech Republic, real estate, cars, Czech accounts and paid her current expenses from them. Since it was not proven that she was a resident of another state, the court proceeded on the assumption that she was a tax resident of the Czech Republic.

Income that cannot be taxed?

The most interesting part of the judgment concerns the assessment of the possibility to tax income from prostitution. The Regional Court followed the previous reasoning of the Supreme Administrative Court and the Constitutional Court and concluded that such income – although economically real – does not meet the definition of taxable income within the meaning of the Income Tax Act.

A key argument is the commitment of the Czech Republic under the New York Convention for the Suppression of the Traffic in Persons and of the Exploitation of the Prostitution of Others, signed in 1950, which considers prostitution (even voluntary prostitution) to be an evil that threatens human dignity. Although this Convention has not been promulgated in the Collection of Laws, according to Article 1(2) of the Constitution of the Czech Republic, the State is bound by its international obligations and the public authorities (including the tax administrator) are obliged to take them into account when interpreting national law. In other words, even though prostitution is not formally prohibited, the state cannot impose a tax on it because this would cause it to be legalized and accepted as a legitimate source of income.

In order for income from prostitution to be taxable under the Income Tax Act in the future, two basic conditions would have to be met:

1. Denunciation of the New York Convention – that is, the international withdrawal from the commitment to combat prostitution as a social evil. This is a politically and diplomatically very sensitive step, which would require active negotiations of the Czech Republic at the international level. In addition, denunciation of the Convention has been on the table of the Chamber of Deputies several times in the past, but the motions ended up being rejected, which supports the fact that the Czech Republic is committed to the Convention.
2. Legalisation and regulation of prostitution in national law – regulation through national legislation explicitly regulating prostitution. In the past, the main options discussed were its inclusion among the so-called independent professions (i.e. similar to actors or dancers) or the possibility of entering it in the trade register (extension of the free trades). This would create a legal framework, in which this activity would be a “proper economic activity” as required by Section 7 of the Income Tax Act and the VAT Act. On grounds of this income, prostitutes would also be obliged to pay social and health insurance. Historically, there have also been less supported suggestions in the professional community that this would be other income under Section 10 of the Income Tax Act (i.e. not subject to insurance), or the performance of activities within the framework of a classic employment relationship. Only after the legalization of prostitution would it be possible to tax this activity without conflicting with international obligations, and not just for one particular person, but systemically.

The court’s conclusion: no tax, but not without rules

The decision contains a fundamental message for tax practice: although the Income Tax Act does not contain an explicit general definition of the term “income”, income derived from criminal activities or activities contrary to good morals and ethical values is generally not subject to income tax. In cases of controversial or “informal” forms of earnings, formal income considerations are not enough. The wider legal and ethical context, including international obligations, must also be taken into account.

So, this case is not just about taxes – it is also about how the law reflects social values and where the line between real earnings and what is income in the eyes of the law refracts. The Regional Court annulled the decision of the Appellate Financial Directorate and returned the case to it for further proceedings.