Soud ke zdaneni odmeny od tretï strany

Court on taxation of remuneration from a third party

We bring you an interesting recent judgment of the Supreme Administrative Court ("SAC") on the question of how to tax financial incentives for employees for selling a certain brand of goods, where the rewards are provided not by the employer (within the meaning of employment law), but by another person - here the manufacturer of the goods sold by its customers’ employees. The Supreme Administrative Court confirmed here the long-standing interpretation practice and at the same time confirmed that the formal setting of relationships is not decisive for tax proceedings.

Situation

• A company manufactures electrical appliances which it supplies to retail outlet networks.
• It has introduced a benefits programme for its customers' dealers.
• The gist of the program is that a sales representative of the company came to the store to hand out checkbooks. The salespeople in the store collected points in the book for each product sold. Whenever a salesperson decided that he had accumulated enough points, he could cash in his bonus with the company. On the checkbook, the salespeople put some of their information, such as their name, social security number, telephone number, or address. They also gave information about the store where they worked. On the cheque book it was written that the taxation of this income was up to the recipient. There was no written contract between the salesmen and the company.

The view of the tax administrator/regional court (interesting contradiction between the FA/GFD and the ATD)

• The Financial Authority ("FA") assessed (to the company) personal income tax from the remuneration paid as the described benefits were, in its view, employment income under section 6(1)(d) of the Income Tax Act ("ITA").
• However, the Appellate Tax Directorate ("ATD") subsequently concluded that the salesmen's earnings in question were not proven to be related to their employment income and thus reversed the tax assessment under Section 6(1)(d) of the ITA.
• However, the FA filed a petition for review and the General Financial Directorate ("GFD") granted the petition. It ordered the ATD to re-examine the matter.
• The company unsuccessfully appealed the order of review to the Ministry of Finance (“MoF”).
• The ATD subsequently confirmed the original tax assessment orders. The company appealed to the ATD, which dismissed the appeal.
• The Regional Court ("RC") dismissed the Company's action. According to the RC, it is not necessary that the employees perform dependent activities directly for the company. It is sufficient if the income is directly related to the employees' main income. The term employee and employer in section 6(2) of the ITA is merely a legislative abbreviation.

The view of the Supreme Administrative Court

The SAC sided with the FA and confirmed that the remuneration in question was employment income within the meaning of Section 6(1)(d) of the ITA - its selected arguments:

• The wording of the law is clear, the income may also be received from a third party who is not an "employment" employer, but it must be related to the performance of the main dependent activity. That this was the case in the present case is evidenced by the thorough and evidence-based findings of the tax authorities. All of the employees of the customers interviewed testified that they received financial remuneration for selling the company's products. They sold these products during working hours in the shops of their employers in fulfilment of their work obligation. The wording on the checkbook indicated that it was an incentive for the sale of the company's products, the reward was addressed to the person who put his or her identifying information on the checkbook, and the checkbook included a space to fill in the specific store.
• According to the SAC, the RC correctly explained that the accompanying text in the checkbook also clearly indicated that the program was aimed exclusively at the salespeople of the company's business partners, not the general public or consumers.

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

Authors:

Michaela Felcmanová

Adam Linek