Deferred maturity of liabilities – abuse of law

The essence of the dispute between the taxpayer and the tax administrator in the matter under consideration was the question of whether the conclusion of an agreement regulating the maturity of liabilities, based on which the taxpayer did not fulfil the so-called “after maturity liabilities”, constituted an abuse of law or not.

In 2005, the taxpayer acquired an enterprise from an individual and in the purchase agreement, they agreed to pay the purchase price in monthly instalments. In December 2007, the taxpayer and the selling individual entered into an addendum to the enterprise sale agreement, which stipulated that the remaining portion of the purchase price would be paid by mutual agreement in full or in gradual instalments. The tax administrator interpreted this phrasing as not clearly indicating the due date of the liability for payment of the purchase price or that the maturity of the liability was indefinitely postponed. Furthermore, no limitations were stipulated regarding the taxpayer's disposal of the acquired property or securing the obligation. At the time of the addendum's conclusion, the selling individual was also considered a related party of the taxpayer under Section 23 (7) of the Income Tax Act (the seller became an executive and owner of the taxpayer).

The selling individual included the payments of the purchase price in its taxable income only upon receipt. The taxpayer utilized the tangible and intangible assets acquired through the enterprise purchase and included tax-deductible depreciation into tax deductible expenses.

Effective from January 1, 2008, according to Section 23 (3) (a) point 12 of the Income Tax Act, it became the obligation of taxpayers to increase their financial result by the amount of the unpaid liabilities corresponding to a claim, the maturity of which has expired for 36 months or has become time-barred, provided that it concerns liabilities from which tax-deductible expenses arose.

The Supreme Administrative Court concurred with the conclusions of both the tax administrator and the regional court that previously evaluated the case, according to which the addendum to the enterprise sale agreement did not correspond to customary and economically rational conditions and reasons characteristic of relationships between independent entities. It also agreed that by concluding the addendum to the enterprise sale agreement and effectively postponing the maturity of liabilities indefinitely, the creditor, the individual, gained an advantage in the form of excluding a substantial portion of the sales price from its taxable income. The taxpayer, on the other hand, benefited by claiming tax deductions for depreciation of the assets acquired through the enterprise purchase, without paying the purchase price for these assets (ownership reservation was not stipulated) and did not tax the “after maturity liabilities”. Therefore, the Supreme Administrative Court found no fault in the tax administrator's decision, which deemed the actions of the taxpayer as an abuse of law and required to tax the “after maturity liabilities” from the 2010 tax period. The court also affirmed that abuse can be related not only to effective law but also to valid one.

This decision by the Supreme Administrative Court confirms its stance on the abuse of law, already expressed in a previous decision in a similar matter - 4 Afs 137/2016 – 43. The application of the concept of abuse of law by tax administrators has gained further support from the judicial authority, and thus, it is in the interest of taxpayers to pay increased attention to this issue.

Court Case: 1 Afs 220/2021 - 88

Author:

Olga Těhlová, Tax Senior