Konec plánování 90. let

The end of 90s planning

This time we bring you a fresh judgment of the Supreme Administrative Court (SAC) in the case of withholding tax on a dividend to a Cypriot company.

The situation is somewhat convoluted. A Czech individual sold (exempt) a 25% share in a Czech LLC to a Cypriot company. The Cypriot company was subsequently entitled to 100% of the profits. The individual justified this by the overall arrangement where the remaining part of the shareholding was to be sold for much less and this procedure was to guarantee payment of the purchase price.

Subsequently, the Czech Ltd. paid a (exempt) dividend to the Cypriot company. These sums flowed right back to the Czech individual (as instalments of the purchase price). The latter also had a right of disposal over the accounts of the Cypriot company.

The tax authorities did not like this and assessed the Czech Ltd. withholding tax of 15% on the dividend. The tax authority stated that the Czech individual was the beneficial owner of the dividend paid out and the amounts paid out through the foreign accounts merely "flowed through".

The Regional Court and the Supreme Administrative Court sided with the tax administrator. The SAC stated, inter alia, that "the entire transaction (not just its partial steps) concealed the real situation, which was the payment of a dividend to an individual in an amount corresponding to his position in the company, but at a tax advantage that could not have occurred, if that payment of the dividend had been made directly, and that act was disguised by the formal situation in which the shareholding was purchased by a Cypriot company, and the Cypriot company was paid (despite its participation in the company) all the profits, which it had to pay as an instalment of the purchase price of the shareholding. "

In the judgment, we were interested, inter alia, in the following passage: "If it was the intention of the parties to pay the purchase price out of the share of the profits, the majority shareholder could have retained the share and set off the purchase price against it and the result would have been identical in terms of income for the next few years. The Supreme Administrative Court notes the defendant's conclusion that, if the taxpayer's assertion that 'the payments to the private account of Mr. Ing. Liska were in fact payments of the purchase price, it would mean that the liability of the Cypriot corporation arising from the acquisition of the share was paid from the taxpayer's funds. In such a case, serious doubts would then arise as to the purpose of the capital transaction of the corporations concerned, since the need for external financing is usually the reason for the decision to bring an external partner into a corporation. However, the above circumstances suggest that the financial flows from the foreign accounts were merely pretending to be repayments of a purchase price."

We read the above as a warning from the SAC, for example, for those types of transactions where instead of a taxable dividend payment a share is transferred (tax exempt) to another entity and an exempt dividend is subsequently paid. This is then used to pay the purchase price for the transferred share.

Thus, the abundant use of holding company structures in the 1990s and early 2000s to pay out tax-free profits seems to have finally caught up with the SAC.

If you have any questions, please contact the EY tax team with whom you regularly work.

Authors:

Libor Frýzek

Vladimír Sopkuliak