The Supreme Administrative Court (hereinafter the "SAC") judgment confirms the ongoing emphasis on assessing the economic rationality of holding structures and demonstrating their commercial justification. Simultaneously, however, it raises extreme uncertainty regarding how broadly some of its conclusions will be interpreted in the future. We consider it essential that the judgment is not perceived as calling into question instruments that are currently standard for the functioning of holding structures.
On June 12, 2026, the SAC issued judgment file no. 10 Afs 57/2026-48, in which it upheld the tax administrator's conclusion regarding an abuse of law in applying the dividend exemption pursuant to Section 19(1)(ze) of the Income Taxes Act (i.e., simplified, withholding-tax-exempt dividend payouts between a parent company and a subsidiary).
The judgment concerns a structure in which a Czech company paid a dividend to its Cypriot parent company. The dividend payout met the formal conditions for exemption from withholding tax under the parent-subsidiary regime. However, the received funds were promptly utilized within the group by providing a contribution outside the registered capital to another Czech company within the group. The payments were executed through mutual set-offs of receivables, whereby the company paying the dividends provided a loan to a sister company within the group (the recipient of the contribution outside the registered capital) prior to the dividend payout.
Tax Administrator's Argumentation
The tax administrator concluded that the holding structure was established primarily for the purpose of obtaining a tax advantage and that the Cypriot company did not perform an adequate economic function.
It considered the following facts to be particularly significant:
- All relevant companies were personally connected through the same individual;
- The Cypriot holding company did not carry out significant business activities of its own;
- The dividend was quickly utilized within the group upon receipt;
- The economic rationale of the holding structure was not sufficiently demonstrated;
- Funds were further transferred via contributions outside the registered capital and other intra-group transactions (set-offs).
According to the tax administrator, the entire structure led to a result contrary to the purpose of the legal regulation of the dividend exemption.
SAC Decision
The SAC concurred with the conclusions of both the tax administrator and the regional court. The court emphasized that the mere fulfillment of formal conditions for a dividend exemption does not preclude the application of the principle prohibiting the abuse of law. Assessment requires evaluating economic reality and the actual purpose of transactions.
In doing so, the court agreed with the tax administrator particularly in that:
- All relevant companies were personally connected;
- The foreign holding company did not perform significant business activities of its own;
- The paid dividends were subsequently redirected back into the group quickly;
- The economic rationale of the chosen arrangement was not sufficiently demonstrated;
- The use of contributions outside the registered capital was one of the elements enabling the transfer of financial funds without corresponding tax burdens.
The SAC therefore concluded that the main purpose of the assessed structure was to achieve a tax advantage.
Our Perspective: What Does (and Does Not) Truly Follow from the Judgment
Many business groups will certainly find elements in the above description that are commonly used in arrangements. The judgment clearly confirms the ongoing trend of strict scrutiny applied to holding structures. At the same time, however, it is appropriate to point out that certain comments made by the SAC regarding the decision may lead to excessively broad and general conclusions.
We consider it highly debatable, in particular, that the SAC and the tax administrator cite the holding company's receipt of a dividend and the subsequent provision of a contribution to another group company, or the potential settlement of receivables and liabilities by set-off, as one of their arguments. We consider it highly unfortunate for this procedure to be taken, in a general sense, as an indicator of an abuse of law.
A contribution outside registered capital is a common corporate instrument explicitly anticipated by statutory regulation, and its use in itself cannot be an indicator of an abuse of law. Likewise, situations where a holding company receives a dividend and subsequently uses the acquired funds to finance other companies within the group are standard. One of the natural functions of holding companies is precisely the concentration of capital and its subsequent allocation within the group. These instruments represent a standard component of the operations of many business groups and do not, in themselves, indicate any abuse of law.
We therefore believe that the true core of the judgment is not the individual transactions as such, but primarily the factual conclusion of the tax administrator and the courts that, in the specific case, the economic substance of the holding and the commercial reasons for the entire structure were not sufficiently demonstrated.
In our view, the primary message of the judgment should not be a challenge to standard holding transactions, but rather the growing emphasis placed by the tax administrator and the courts on demonstrating the economic substance and commercial rationality of a chosen arrangement, where the burden of proof will de facto rest upon the taxpayer. A holding company lacking further activity and a proven reason for establishment is evidently a signal to the tax administrator of an artificial arrangement and a subsequent denial of tax advantages.
This text was translated by AI.
