The "Mountfield Case," or Where Tax Optimization Ends and Abuse of Law Begins

In judgment 8 Afs 173/2024-121 of August 7, 2026, the Supreme Administrative Court (hereinafter the "SAC") dismissed the cassation appeal filed by Mountfield and upheld the conclusions of the tax administration and the regional court, according to which the company abused the law by establishing a structure related to the early settlement of its liabilities arising from the purchase of trademarks. Consequently, the company was denied the tax deductibility of interest expenses on crown bonds issued to finance a portion of the purchase price.

Subject Matter of the Dispute
In 2012, Mountfield purchased trademarks (from a related party) that had been long utilized in its business activities. The trademark transfer agreements were concluded on November 1, 2012, with the maturity of the purchase price agreed for December 31, 2018. A portion of the purchase price was financed through the issuance of crown bonds (the bond issuance took place on November 16, 2012) in the volume of CZK 300 million with an 11% interest rate. The bonds were subscribed by persons closely connected to the company. Simultaneously, a significant part of the settlement for this transaction was realized through mutual set-offs of receivables between related entities, without any real inflow of new funds.

Put very simply, the tax administrator, the regional court, and subsequently the Supreme Administrative Court reached the following conclusions:

"...as a general rule, there can be no significant doubt that the mere fact of paying off a substantial part of a certain liability (purchase price) with a significant (multi-year) advance, while requiring external financing and without any compensation for such an (early) procedure, makes no clear economic sense (without further explanation)."
The early repayment of a non-interest-bearing liability arising from the trademark sale agreement and its replacement with an interest-bearing liability toward a related person necessarily leads to the conclusion that the reason for such a procedure was the taxpayer's tax advantage, and
Such a situation constitutes an abuse of law and leads to the denial of the tax advantage to the company—i.e., the tax deductibility of interest expenses on crown bonds issued to finance a portion of the purchase price.
It must be added that the company brought forward many arguments and proposed numerous evidence items intended to explain and prove the rationality of this early repayment; however, no administrative or judicial instance accepted this argumentation, and some proposed evidence was not admitted at all. Here again, the key role of the "subjective" evaluation of the significance of a rational economic motivation by the authorities can be traced—for instance, the SAC stated that the fear of a loan being called cannot justify any procedure of a tax subject, regardless of the apparent non-standard nature or potential artificiality of its procedure. Ultimately, it will always be "subjectively" up to the court whether it prioritizes an economic motivation (e.g., fear of loans being called) over a tax motivation.

However, this judgment contains many very interesting consequences—newly or repeatedly confirmed—that are crucial for the practice of abuse of law.

Ex Post Evidence and Its Quality
Although the burden of proof to demonstrate an abuse of law lies with the tax administrator, in practice the burden of proof is not infrequently reversed (which was also confirmed in this judgment); i.e., it is the taxpayer who is forced to prove that the transactions they executed (which are typically associated with a tax advantage and contain non-standard steps) have rational economic motivations.

In the given case, the taxpayer obtained evidence (e.g., bank statements) only ex post (which reduced their persuasiveness), or it was impossible to obtain them in adequate quality.

According to the SAC, "one can have great doubts about the meaningfulness of witness testimony regarding the specific economic situation of the complainant and the specific procedure of the bank in their case after a considerably long time (more than 10 years at the time of the proceedings before the regional court)."

Crown Bonds
The mere existence of crown bonds does not constitute an abuse of law. However, crown bonds that are:

"Hastily" acquired at the end of 2012 (bonds issued by the end of 2012 enjoyed a preferential tax regime);
Acquired by a related person (ideally a controlling natural person); and
Without a real financial flow (typically payment for bonds via complicated set-offs)
...have represented an irresistible invitation in recent years for tax assessments based on abuse of law. Such was the case in the dispute described above, although the crown bonds played only the role of an "immaterial" non-standard circumstance.

How Many Non-Standard Circumstances Are Enough for an Abuse of Law?
The SAC has repeatedly held that if even a single substantial circumstance stands as the ground for an abuse of law (here, the aforementioned irrational early repayment), it is no longer necessary to deal with other circumstances if they would not affect the resulting evaluation.

In practice, however, tax administrators and courts quite commonly rely on a large number of suspicious, substantial, or immaterial non-standard circumstances when applying the abuse of law doctrine, making it harder to discern which of the presented circumstances the taxpayer should focus their argumentative attention on—which, incidentally (in the opinion of the SAC as well), happened in this case.

When Do Non-Standard Circumstances Cause an Abuse of Law?
Generally, no one knows, and even in a specific case, the views of various tax administrators and courts may differ.

In this instance (as stated above), the tax administrator and the regional court demonstrated many non-standard circumstances. One of them involved the circumstances prior to the purchase of the trademarks.

Ing. Ivan Drbohlav (then Chairman of the Board of Directors and majority shareholder of the company) registered most of the trademarks as a natural person. After contributing them to a structure of foreign companies, resales of rights and licensing took place between personally, capital-wise, or otherwise connected companies. The company paid license fees amounting to tens to hundreds of millions of crowns annually for their use, and subsequently purchased the trademarks in November 2012.

The regional court (and the SAC did not distance itself from this in any way) clearly explained in the reasoning of its judgment that the mere use of trademarks based on (sub)licensing agreements cannot be held against the participating persons; although the subsequent resale of trademarks appreciated in this manner is "questionable," the regional court explicitly links the "breaking point" (the overflowing cup) strictly to the method of financing the trademark purchase.

This once again demonstrates that the context of transactions can play a key role in the application of the abuse of law doctrine.

Tax Optimization
The ultimate question, therefore, is where permitted tax optimization (utilization of a more tax-advantageous variant) ends and impermissible abuse of law begins.

Academically, the difference is relatively clear—permitted tax optimization exists if I pursue a rational economic intent using a tax-advantageous method (resp. a tax-advantageous method that makes economic sense), whereas abuse of law occurs in situations where I execute a structure/transaction irrationally or in a manner that is irrational (artificial) for the purpose of achieving a tax advantage.

In practice, however, we are generally unable (and often even in specific cases) to state which method of execution (of an otherwise rational intent) is still rational and when it is already irrational (artificial) for the purposes of abuse of law.

It is precisely in this judgment that we can observe at least the fact that, in the view of the regional court, “...the use of trademarks on the basis of (sub)licensing agreements cannot be held against the participating persons, whereas the subsequent resale of trademarks appreciated in this manner is already 'questionable'...”

Of course, this cannot be entirely torn out of the broader context of the regional court's judgment, but the fact that in this case the contribution of a trademark by a Czech natural person to a foreign company and the subsequent licensing back to a Czech company predominantly owned by this natural person (where income from these licenses was presumably untaxed), nor the final sale of this trademark, represented non-standard circumstances a priori judged as an abuse of law, is quite important for practice.

Conclusion
The boundary between legitimate tax optimization and abuse of law does not lie in the mere existence of a tax advantage. The decisive factor is whether the transaction pursues a genuine economic objective and whether the method of execution is economically rational—simply put, whether the economic substance holds up even without the expected tax benefit.

In our view, therefore, the Mountfield case is not an argument against tax optimization as such; quite the contrary. It serves rather as a reminder that tax-efficient solutions must stem from a genuine business intent and correspond to economic reality.

It remains the case that the boundary between permitted tax optimization and abuse of law can be unclear and subjective. In any case, however, it is up to taxpayers—in the case of non-standard transactions with a potential tax advantage—to prepare ex ante argumentation and sufficient quality evidence demonstrating a rational economic motivation. It is up to us, as tax advisors, to provide our clients with an independent opinion reflecting current (and ever-evolving) case law and administrative practice.