Dear readers,
Please find below information about Judgment of the Supreme Administrative Court (the “SAC”) No. 10 Afs 61/2022-41 dated 7 February 2023. The SAC addressed the issue of taxing financial incentives for employees in the form of remuneration provided by a manufacturer of sold goods (as a third party) rather than directly by the employer.
What Was the Judgment About?
The sold goods’ manufacturer, Isolit Bravo, spol. s.r.o., introduced a scheme for its customers’ employees. In the scheme, points were collected for every sold product. Subsequently, the business partner’s employee could redeem those points with the manufacturer, thus obtaining a monetary bonus. Points could be redeemed based on a chequebook that included data on the business partner’s employee and on the store where employees work or information that taxation of income from the bonus is the responsibility of the income’s recipient.
Decision of the Regional Court
Following an inspection at Isolit Bravo, spol. s.r.o. (the manufacturer), the tax administrator assessed additional individual income tax and penalty on the bonuses paid explaining that the income was generated by a dependent activity under Section 6 (1) (d) of the Act on Income Tax (the “AIT”).
The manufacturer applied to the Regional Court (the “RC”) that dismissed the action. In the RC’s view, it is sufficient if income meets the condition of a direct connection with the employee’s main income without being generated directly by the employee’s employment with the employer (according to the RC, the terms in Section 6 (2) of the AIT only are legislative ‘shortcuts’ that are not identical with the terms in labour law).
Statement of the SAC
In connection with Section 6 (1) (d) of the AIT, the SAC refers to judgments No. 7 Afs 29/2005‑91 and No. 5 Afs 38/2014‑37. Those judgments read that income specified in the relevant Section include various forms of supply (other than salary or work remuneration) in connection with the performance of a dependent activity that (among others) have the incentive or stabilising nature.
The SAC stresses the fact (and confirms previous conclusions of the RC) that where there is a connection between income and the performance of a main dependent activity, the income will constitute income from a dependent activity under Section 6 of the AIT. In the SAC’s opinion, it is immaterial whether that income flew from the employer’s employment or from a third party. Such income’s payer is defined as the “employer” in compliance with Section 6 (2) of the AIT and is obliged to pay income tax (in compliance with Section 38d or 38h of the AIT).
The SAC also referred to similarity with Judgment No. 1 Afs 162/2018‑39 of 2018 that dealt with taxation of non-monetary income provided to employees by a third party that properly taxed the income. In that judgment, the SAC addressed the question of whether income will be subject to the payment of social security and healthcare insurance. The SAC believes that the following condition must be met: income pursuant to Section 6 of the AIT is generated by employment (i.e. by the employee’s activity performed for the employer) in compliance with regulations regulating the insurance premium. The SAC stated that, as a consequence, such bonus’ payment does not automatically generate the obligation to pay the insurance premium on the income, and referred the case back for a review.
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Stela Bartošová
bartosova@edmutilitas.cz