Judgment of the Supreme Administrative Court: Application of the 5% Tax Rate to SICAV Sub-funds
Dear Readers,
We want to inform you about Judgment of the Supreme Administrative Court (the “SAC”) No. 6 Afs 272/2023 – 60 dated 11 December 2024. In that judgment, the SAC dealt with a question of when and under what conditions a SICAV sub-fund can apply the 5% tax rate to its tax base.
What Was the Judgment About?
The plaintiff as an investment fund established in the form of a SICAV created a sub-fund with an independent investment strategy. The plaintiff considered this sub-fund a primary investment fund pursuant to Section 17b (1) (a) of the Income Tax Act and applied the 5% tax rate.
The Specialised Tax Office (the “STO”) arrived at a conclusion that the sub-fund fails to meet the condition for the 5% tax rate’s application, and applied the standard 19% tax rate on the tax base and, as a consequence, increased the sub-fund’s tax liability for the taxation periods 2016 through 2020.
Consideration by the Municipal Court
The Municipal Court (the “MC”) agreed with the tax authorities’ conclusions. It disagreed with the sub-fund being a primary investment fund authorised to apply the 5% tax rate pursuant to Section 17b (1) (a) of the Income Tax Act (the “ITA”) due to the fact that investment stock related to the sub-fund was accepted for trading on the Prague Stock Exchange. Moreover, the MC rejected the alternative where Section 17b (1) (b) of the ITA can also be applied to SICAV sub-funds in the context of applying the text of Section 37c of the ITA.
According to the MC, laws clearly distinguish the possibility to consider SICAV sub-funds primary investment funds only pursuant to Section 17b (1) (c) of the ITA provided that such sub-funds mostly invest in investment instruments enumerated on an exhaustive basis in the concerned provision in the taxation period. As the plaintiff invested into real properties and investments in real property companies in more than 90% within the concerned sub-fund, it failed to comply with the condition of the above-mentioned provision. Hence, the plaintiff was not authorised to apply the 5% tax rate to the sub-fund.
SAC’s Statement
The SAC dealt with a question of the extent, to which a lower corporate income tax rate can be applied by taxpayers specified in Section 17b (1) of the ITA in the context of the regulation in the Act on Investment Companies and Investment Funds (the “AICIF”) and in Section 37c of the ITA.
The SAC agrees with the MC that lawmakers distinguish individual legal statuses of investment funds as well as components in the form of sub-funds in Section 17b (1) of the ITA. As the ITA also expressly mentions SICAV sub-funds in Section 17b (1) (c), and only mentions investment funds in (a) and (b), those paragraphs shall not be applied to sub-funds.
In addition to this, the SAC states that reasoning cannot be based on the general regulation in the AICIF or in Section 37c of the ITA. The regulation in Section 17b of the ITA is more recent in terms of time and contains a specific regulation; as a consequence, it has application priority to the general regulation in Section 37c of the ITA.
The SAC also takes sides with the tax authorities in the case of applicability of the investment fund’s definition pursuant to Section 169a of the AICIF for the ITA’s purposes (provided in Section 17b (1) (a) of the ITA). Under the AICIF, this term also includes investment funds’ sub-funds. In the SAC’s view, this definition cannot be unreservedly used for the ITA purposes.
In addition to this, the SAC takes sides with the tax authorities also in the case of applicability of Section 37c of the ITA. As Section 17b (1) (b) of the ITA includes a special regulation, it has application priority and the general regulation in Section 37c of the ITA cannot be used.
The SAC arrived at a conclusion that the sub-fund was not authorised to apply the 5% tax rate in the taxation periods 2016 through 2020.
Following upon an AICIF’s amendment, the ITA was also amended. Effective since 1 July 2024, Section 17b (1) has been amended, among others: paragraph (a) was supplemented to newly include investment funds’ sub-funds, and paragraph (c) has been generalised to an investment fund’s sub-fund. The above-mentioned amendment has no impact on the judgment with regard to the taxation periods 2016 through 2020.
If you would like to receive more information about this judgment, please feel free to contact us. We are ready to help you.
Marek Kopejtko
kopejtko@clarksonhyde.cz
