When invoicing partners runs up against tax rules: The SAC once again confirms the broad concept of “work for company”

In its recent judgment ref. no. 4 Afs 166/2024, the Supreme Administrative Court (SAC) returned to an issue that is becoming increasingly common in practice – the invoicing of services of partners of one’s own company. A typical case involves project, engineering, or other professional activities that partners perform as self-employed persons, while their company carries out similar contracts as a general contractor. The dispute between ARCHAPLAN s.r.o. and the tax administrator has now provided another very important clue as to where the boundary between a partner’s business and income from employment under Section 6 of the Income Tax Act (ITA) lies.

Substance of the dispute: according to the tax administrator, the project activities of the partners did not constitute “business activities”.

The partners of ARCHAPLAN – both chartered engineers – invoiced the company for various parts of the design and engineering services. These were activities without employees, carried out personally, and the company was their main customer (more than 99 % of the income of one partner and 78 % of the income of the other). Both the tax administrator and the Appellate Financial Directorate assessed such invoicing as income from dependent activities pursuant to Section 6(1)(b)(2) of the ITA, not as self-employment of the entrepreneur.

The SAC upheld this conclusion. The taxable nature of the income does not depend on the invoice designation or the form of the contracts, but on whether the partners’ activities actually fulfil the company’s business – i.e. whether they are in fact “working for their company”.

SAC criteria: related activity, personal performance and economic connection

In assessing the fulfilment of the elements of dependent activity, the court clearly reiterated its established case law:

• Personal performance of the activity and as directed by the payer of the income
  It must be work that the partner performs personally, similar to an employee of the company. If the activity would normally be carried out by an employee (e.g. project work, technical supervision, administrative management of a project), it is typically a dependent activity. The condition of subordination is not necessary for the assessment of the dependent activity of the partners, since the partners manage the company and would have to give instructions to themselves, which is completely illogical.
• Close economic links
  The key point is that the partner works “precisely because he is a partner” – not as an independent entrepreneur with his own economic base. One of the most important indicators is the structure of income: if the bulk of income comes from the company, the relationship is typically dependent. The SAC also added that the amount of ownership interest in the company is not relevant. Even a 10% shareholder can perform an activity that constitutes “work for the company”.
• Related activities
  The more the activity of the partner coincides with the activity of the company, the more the activity of the partner is a dependent activity. In this case, the partners and the company had the same trade license and provided virtually identical design and engineering services.

The company argued that the partners provided the investors with above-standard services (construction controlling, tendering, technical supervision) that went beyond the scope of the project activities and that if they had not, the company would have had to hire external subcontractors with similar qualifications. The defence also included opinions from ČKAIT, which confirmed that these activities were not project activities in nature.

However, the Supreme Administrative Court strongly objected that even these “above-standard” activities were part of complex contracts for which the company was responsible, and that the partners were in fact performing parts of the contracts instead of the company. The decisive factor was therefore not how the service was classified by the professional chamber, but whether it objectively fulfilled the essence of the company’s activities.

Practical implications for businesses: where do the boundaries of a secure setup lie?

The judgment confirms the very consistent approach of the Supreme Administrative Court, which clearly states that a partner may run his own business and invoice his own company, but only if this activity is not actually part of the company’s core business. If the activity is identical or very similar, in most cases it falls under Section 6, regardless of contracts for work, separate authorization, independence of performance, or method of invoicing. Facts and economic realities are decisive, not formal labels. It always depends on the specific situation and what prevails when all the decisive criteria are taken into account – whether it is a corporate-legal relationship or a supplier-customer relationship.

In practice, this means that LLCs should evaluate the involvement of their partners very carefully – especially where those partners perform professional, project or management activities that are the core business of the company.

The ruling of the Supreme Administrative Court thus confirms once again that invoicing of partners of one’s own company is an area with a high tax risk. The key is not the form of the cooperation, but its actual content, related fields of activity and economic interdependence. A partner who carries out the core business of the company will generally not be considered an independent contractor for tax purposes, but rather a person performing dependent “work for the company”.