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Dear Readers,

This article is to inform you about Judgment of the Supreme Administrative Court (the “SAC”) No. 3 Afs 177/2022–49 dated 19 July 2024 where the SAC dealt with application of a time text to income from a transfer of securities for consideration pursuant to Section 4 (1) (w) of Act No. 586/1992 Coll., on Income Taxes, in the wording effective until 31 December 2016 (the “ITA”). The SAC drew attention to the fact that the exemption time test was suspended in increasing the share capital by increasing the stock’s nominal value, which is clearly implied by the above-mentioned provision.

What was the Judgment about?

Several major things happened during the time of the securities’ holding: The complainant (a natural person) exchanged certain shares for shares with another number based on an exchange agreement in 2012. In 2014, the company increased its share capital from its own resources by increasing the nominal value of the existing stock, while exchanging the original stock for new shares. The stock was sold in 2015.

The complainant applied tax exemption on income from a securities’ transfer for consideration as they figured that the exemption time test (3 years) pursuant to Section 4 (1) (w) of the ITA had been met.

An extract from Section 4 (1) (w) of the ITA in the wording effective until 31 December 2016:

The following shall be tax exempt:

• (w) Income from a security’s transfer for consideration, if the period of time between such security’s acquisition and paid transfer in the security’s paid transfer exceeds three years; …. in exchanging a share by the issuer for another share with the same total nominal value, the period of three years between the security’s acquisition and paid transfer shall not be interrupted in the same taxpayer.

Decision of the Tax Administrator and the Regional Court (the “RC”)

According to the tax administrator and the RC, the exemption time test pursuant to Section 4 (1) (w) of the ITA was interrupted in the concerned case because the condition of maintaining the same nominal value was not complied with in the exchanged shares. The ITA does not define the term ‘share’s acquisition’ in detail but the RC states that an exchange is one of the acquisition’s forms.

In the RC’s view, the technical way of increasing the nominal value is irrelevant, i.e. the interpretation also applies to so-called stamping. What is important is the fact that the value’s increase has an impact on property’s increase even in a case where the percentage share in the company remains unchanged.

Finally, the RC also commented on the tax administrator’ steps in determining the tax base, which the RC agreed with. The tax administrator correctly took the price, for which the complainant acquired the original shares, as the basis. Under the ITA, the acquisition cost is the price, for which the share was purchased by the shareholder. The RC also stressed that expenses on increasing the share capital constituted costs of the joint stock company rather than the shareholder. As a consequence, the difference between the old and new nominal value cannot be considered an effectively incurred expense.

The SAC’s Statement

The SAC agreed with conclusions of both the tax administrator and the RC and highlights unambiguity of the provision of Section 4 (1) (w) of the ITA, which says that the time test is not interrupted only in a case where shares with the same nominal value are exchanged. No other conditions are set forth by the concerned provision.

In the SAC’s opinion, the provision cannot be applied in a case where shares’ nominal value is increased as a result of stamping, which is a process of marking a new nominal value in the original share, thus in fact implementing one of the exchange methods. This is also provided in Section 500 of Act No. 90/2012 Coll., on Corporations. It is only a technical process where no new security is issued (“a piece for a piece”), and this process has no implications for rights and duties attached to the share.

The SAC also confirmed the unfounded nature of the complainant’s reasoning by referring to the procedure pursuant to Section 4 (1) (r) of the ITA. The concerned provision deals with transfers of shares in other corporations and says that the time test is not interrupted in cases where the total level of the share remains unchanged. The SAC highlighted unambiguity of the text of Section 4 (1) (w) of the ITA, which does not refer to Section 4 (1) (r) in any way and, as a result, the above-mentioned information cannot be taken into account in the concerned case.

If you are concerned with these matters, please feel free to contact us. We are ready to assist you.

Stela Bartošová
bartosova@clarksonhyde.cz