In addition, Highgate Law & Tax is also celebrating its win in the “Capital Markets” category, proving itself to be a comprehensive law firm with an extensive portfolio of expertise and the ability to successfully navigate diverse legal challenges.

The awards gala evening, which was organized by the media and educational group EPRAVO Group and the weekly TREND, was held at the Double Tree by Hilton hotel in Bratislava. For Highgate Law & Tax it was not only an opportunity to celebrate its success, but also to thank its clients and partners for their trust and support, without which this milestone would not have been possible.

This double triumph confirms Highgate Law & Tax’s excellent reputation for legal and tax services and reinforces its position as a leading player in the legal services market in Slovakia.

Článok Highgate Law & Tax and its double triumph in the prestigious Law Firm of the Year competition je zobrazený ako prvý na Highgate.

Článok Hello world! je zobrazený ako prvý na Highgate.

Good and bad news at the beginning

In practice, during a tax audit, we often encounter a scenario where the views of the tax administrator (tax authority, tax inspector) develop differently from the position of the tax subject (VAT payer, trading company, etc.) declared in the tax return and fail to reconcile them. Subsequently, such a dispute is decided by the court: the regional administrative court, the Supreme Administrative Court of the Slovak Republic, the Constitutional Court of the Slovak Republic or the Court of Justice of the European Union.

A new trend in the decision-making practice of the Slovak courts, which has been noticeable in the EU for a long time, is a departure from the tendency to primarily examine the (non-)fulfilment of the substantive conditions for the creation of a right to deduction. Instead, the focus is shifting to VAT fraud, where the State loses funds through the deliberate and targeted actions of the entities involved in the fraud. The following messages follow:

• Good news: During a tax audit, the tax administration should be less concerned with “endlessly” calling on the taxpayer to provide evidence that the supply under examination was actually made.
• The bad news: State financial penalties related to VAT fraud can potentially apply even to a taxpayer who has not acted explicitly unlawfully, has not directly benefited financially from the fraud, or even had no certain knowledge of its existence.

More on the good news

In its decision C-610/19 Vikingo, the CJEU addressed the scope of the circumstances in which a taxpayer’s right to deduct cannot be limited. Vikingo is a wholesaler of confectionery which claimed a VAT deduction on the packaging machines it purchased. However, after checking with the suppliers, the tax authorities concluded that the machines had been acquired from an unknown person, so that the supply had not been made between the persons named on the invoice.

In order to qualify for the deduction, the substantive conditions (the goods or services have actually been supplied, the recipient has used them in the course of his economic activity) and the formal conditions (primarily the existence of an invoice) must be met. In the case cited above, the Court concluded that it was not possible to deny the right to deduct VAT on the ground that the invoices were not reliable on the ground that:

1. the supplier named on the invoice did not manufacture and deliver the machines because these persons did not have the necessary human and material resources,
2. accounting legislation has not been complied with,
3. the supply chain was not economically justified and
4. there were irregularities in previous transactions involving the delivery under examination.

However, this is assuming that the company is not involved in the tax fraud and could not and should not have known about it (see below for more on bad governance).

It follows from the above judgment that the taxable person claiming the right of deduction is not liable for the subcontractors and should not bear the consequences of any irregularities at the upstream stages of the supply chain. Nor does the tax administration have the right to refuse a VAT deduction on the basis of its (often subjective and more or less emotional) conclusion that the supply chain does not have an economic justification. A VAT deduction is also to be granted where there are doubts about the supplier’s ability to carry out the supply because of insufficient staff and material resources.

However, all of the above applies provided there is no VAT fraud in the chain.

How VAT fraud works

The aim of the fraud is to collect VAT from the state budget without complying with the obligation to pay it, usually at another stage of the supply chain. So-called Carousel frauds have different schemes of operation, but their aim is to reclaim more VAT from the State budget than to remit VAT to the State. They use white horses, foreign companies and cross-border transactions, a combination of input VAT deduction and exempt supply at the output, fictitious transactions and invoices, significantly inflated prices and the inclusion of a genuine and honest company in the carousel.

Risks of VAT fraud

The ambition of this blog is to raise awareness of the risks of engaging in VAT fraud transactions and to provide tips to help avoid engaging in such illegal transactions. It is important to be aware of what the consequences of engaging in a set of fraudulent transactions may be, even if these transactions are not illegal in themselves:

• the right to deduct input VAT may be lost; or
• VAT may be due on supplies within the EU that were originally exempt, i.e. VAT-free, if the related transactions are fraudulent.

More on the bad news

The CJEU has ruled in several decisions that a claim for deduction may be refused if the taxable person was part of a chain in which VAT fraud was committed, if the taxable person actively participated in the fraud (even though he or she may not have directly benefited financially from it) or knew or should have known that the transactions carried out were part of the fraud.

In Case C-439/04 Axel Kittel, the Court of Justice developed the following algorithm applicable to tax fraud:

1. Proving the existence of tax evasion, i.e. that there has been tax evasion at some stage of the supply chain (the so-called objective test).
2. Proof of the objective fact that the taxpayer knew or should have known and could have known about the tax fraud (the so-called subjective test).
3. An assessment of whether the tax entity has taken reasonable steps to prevent its involvement in a possible tax fraud (the so-called Due Diligence test).

Under the objective test, fraud is proven. This may be the case where the supplier has failed to declare the supply on his tax return or has declared it but has deliberately failed to pay his tax liability. It also combines fictitious invoices, either directly with the taxable person under examination or as input invoices with his supplier.

The subjective test examines the active or passive involvement of the taxpayer in the fraud. An indication of knowledge is e.g. an unusually low price, a personal connection, a non-standard approach to the tax entity by the supplier, a non-existent legal or natural person, payment to an account in another country, etc.

The Due Diligence test then examines how the tax entity has verified the supplier and how it has responded to any indications of risk. Of course, the written documents proving the manner and extent of the verification before or during the transaction under review are particularly relevant in a tax audit.

The concept from the Axel Kittel case law has been adopted in other decisions of the CJEU as well as in the decision-making work of administrative courts in the Slovak Republic.

How does the tax office deal with fraud?

The CJEU has ruled in several cases concerning VAT fraud that:

• a taxable person who knew or should have known that he was involved in a fraudulent transaction by purchasing the goods may be refused the right to deduct the related input VAT;
• a taxable person who knew or should have known that the supply was part of a tax fraud committed by the buyer may be denied the right to exempt the intra-EU supply to that buyer.

The tax authorities shall apply the principles set out in those cases where they are satisfied, having regard to objective factors, that the taxable person knew or ought to have known that he was involved in a transaction involving VAT fraud and failed to take all reasonable steps within his power to prevent his own involvement in that fraud.

Risks for VAT-exempt supplies

A frequent finding in tax audits is that the taxpayer fails to prove the entitlement to VAT exemption. Especially critical is the situation when goods are supplied to another Member State and the supplier does not have sufficient evidence of the supply of goods with transport outside the Slovak Republic, or the customer does not acknowledge the supply in his own State.

A seemingly simple situation hides many aspects that need to be taken into account when claiming and documenting the exemption, such as. whether the transport is provided by the supplier, the customer or the postal company, whether the transport is carried out by the customer’s own means of transport, what documents are certified by the customer, how the contractual terms are agreed, how and when the customer’s VAT registration is checked.

A useful aid in setting up processes to eliminate the risks of non-recognition of exemption is the EU Regulation on the documentation of exemption, which sets out for each type of transport a set of documents that create a rebuttable presumption of proof of exemption, thus significantly narrowing the possibilities of the tax administrator to require more and more documents proving exemption.

Guarantee for tax to be paid by the supplier

The tax authority may require the taxable person to reimburse the tax that should have been paid by the supplier who supplied the goods or services to the taxable person, even if the invoice has been paid to the supplier. The institute of liability for tax arises in the following situations:

1. The delivery price is unreasonably high or low without economic justification.
2. The supplier and the tax entity/customer are related persons.
3. The delivery price was paid into an account other than the supplier’s bank account published on the website of the Financial Administration.

When defending against a possible recourse on the grounds of liability, it is important to have documents proving that the legal conditions for liability were not met at the time of delivery or payment, e.g. the price did not show signs of unreasonableness or the supplier’s bank account was published in the relevant lists of the Financial Administration of the Slovak Republic. Thus, it is not sufficient to carry out the verification alone, but it must also be documented and be able to be proven in the event of tax proceedings.

Final recommendations

For a successful long-term operation, it is advisable for the tax entity to know where its potential tax risks are. This includes, for example, an analysis of how the business operates in terms of tax and specifically VAT aspects. Subsequently, the identified weaknesses need to be eliminated by appropriate procedural or commercial-legal adjustments.

For example, in order to prevent VAT fraud and tax evasion, it is beneficial for the tax entity to set up and actually carry out and archive checks on its business partners. Business partner checks are also recommended for reasons other than tax, e.g. In order to eliminate the risk of non-payers and reputational risk.

If you are interested in this topic, please do not hesitate to contact us.

Článok VAT risks or how bad things can happen to good people je zobrazený ako prvý na Highgate.

The awards gala was organised by the EPRAVO Group and the weekly TREND, and its eleventh edition took place on Wednesday 26. April. The event took place at the Double Tree by Hilton Hotel in Bratislava, where the winners of the individual categories received their awards for their year-long work.

We would like to thank our clients and partners for their cooperation, thanks to which we have achieved this success.

If you are interested in a consultation, please do not hesitate to contact us.

Článok Highgate Law & Tax named Tax Law Firm of the Year 2023 je zobrazený ako prvý na Highgate.

SMART watch for business

With SMART watches, it seems easy to argue for their use for the purposes of texting, time keeping, navigation and other functions that are practical for business. However, unlike a mobile phone, a watch feels more “private” and therefore, in the worst case scenario, the tax office may want you to prove that you only used it for business purposes. And at worst, it might want to show that you did not use it for private purposes (although it is relatively settled that no one can fairly be asked to prove the non-existence of a particular legal fact).

Luxury watches for business

With luxury watches, oddly enough, it can be easier. Here, though, it looks at first glance like a “representation”, which is not recognised as a tax expense by default. However, there are other types of “representation” that are recognised as a tax expense. Why can a superior office space (i.e., location, classification, or reception desk appearance) be recognized as a tax expense and a luxury watch not? After all, we don’t necessarily need both “representations” for business? However, the problem arises in how we can construct the argument that we are only using them for business purposes. Thus, while unique office spaces in themselves indicate their use only for business purposes, luxury watches do not automatically enjoy such an attribute.

Watches for business

Something extra must therefore be done to make them tax deductible. To give them the hallmark of corporate use. For example, get a safe for your office.

Photos from weddings of family and friends must exude a different watch. Don’t buy “ROLEXes.” With ROLEXs as standard, you can harden up in winter, go to the beach in summer, and the more expressive ones with their sleeves rolled up can imagine a Friday outing to a more student-oriented area in them. However, brands such as A. LANGE & SÖHNE or NOMOS Glashutte look much more authentic when worn exclusively for work purposes. And perhaps even as much as those office spaces.

Tax check watch on the company

However, a dispute with the tax office can take less pleasant forms. That is to say, the financial administration’s penalties are based on the amount of the ECB’s base interest rate, and these have already reached a threshold beyond which the penalties are higher than we have been used to for many years. In addition, there is the risk of taxation of the employee’s/statutor’s non-cash income, or the legal risks (including liability for private assets) associated with the deposit return institution. Either way, in the context of lower political (and therefore legal) predictability, this is another reason confirming how important it is to pay at least basic attention to prevention in the context of asset and business protection. For example, through the legal structuring of business and asset ownership.

I also dealt with a similar topic in my lecture “Paying for holidays with a company card” – what about the law and taxes?which is available on our website.

If you have any questions, feel free to contact me. For more of this information, subscribe to our newsletter.

If you are interested in this topic, please do not hesitate to contact us.

Článok Can I put a luxury watch “in expenses”? je zobrazený ako prvý na Highgate.

The practice of businessmen in buying cars for company and (only) private use resembles the practice of the population in (not) observing anti-pandemic measures. A company buys a car also (only) for private use, claims a full VAT deduction on the purchase as well as on the fuel, and includes the cost of the car (through depreciation) and the fuel in full in its tax expenditure. And even if the car is also used (only) for private purposes, the company does not tax or deduct anything on behalf of the employee/managing director/associate (“Managing Director“).

But the rules of the game are completely different. Unlike anti-pandemic measures, the worst case scenario for non-compliance can be dramatic, even with criminal consequences (as I write below). Let us therefore look at how the law and the tax authorities treat the use of a car in a company and for private purposes, i.e. the standard Slovak use case.

What are the basic rules of the game?

If the car is to be used partly for private purposes, the rules for keeping records are (simplified) as follows:

* Even if the car is used for business purposes only, e.g. 20%, the company can claim 100% of its cost (through depreciation) as a tax expense;;

** There is a flat rate of up to 80% of the cost of petrol, but in the context of using the car also for private purposes, it does not have a significant simplifying effect on administration (as I explain below)

It would only make sense to have one rule. In reality, however, the right hand (income tax) does not know what the left hand (VAT) is doing. Moreover, even in the case of income tax it is not consistent. Exemption from the obligation to keep detailed records of car use misses the practical effect, because this ratio still needs to be proven for both fuel and VAT purposes. Moreover, the phenomenon of non-cash income of the Managing Director (as I explain below) enters into it.

Figure 1: Simple structure (explained below):

What are the more complicated rules of the game? (you can skip)

While the above basic rules seem to be unfavourable for entrepreneurs (from a financial and administrative point of view), at least they seem to be easier to understand. Unfortunately, they are not – nor are they easier to understand.

That is, apart from the basic complication in the form of the obligation to keep accurate records of the use of the car for business (or private) purposes for fuel and VAT purposes in general, other administrative and tax inconveniences arise, for example:

The first The interpretation complication is the change of opinion of the Financial Administration in 2022. According to the new opinion, the Financial Administration already considers the use of property by the Managing Director as non-cash income even if the company uses the 80% flat rate. The previously presented opinion of the Financial Administration did not see non-cash income in such a context. Although the 80% flat rate should not be applied to the purchase of a company car used by the Managing Director for private purposes, the practice of some tax and accounting offices was/is different – incorrect. However, following a change of mind by the tax authorities, the use of the 80% flat rate does not even make sense anymore.

The other The puzzle is the actual fuel for income tax purposes. Even if a company decides to apply a flat rate of 80% because the car is also used for private purposes and wants to simplify the administration, it still has to be able to prove the proportion of use of the car for business (or private) purposes because of the statutory wording “up to 80% of the amount”. There is no more space in this blog about the various ways of examining car use and consumption and accepting it for tax purposes in the various ways of including the cost of petrol in tax expenses.

Third A complication is where a company claims 100% of the cost of a car as a tax expense, even though the car is also used by the Managing Director for private purposes. The company is entitled to do so if it taxes and “discharges” the Managing Director in the manner prescribed by law (1% of the cost of the car, which is progressively reduced). However, such administrative simplification cannot be applied to fuel, where the company must again keep records of individual journeys and tax and ‘account’ for the actual consumption of fuel by the Managing Director (alternatively, reimburse the Managing Director for the consumption of fuel).

By the fourth problem is the obligation to monitor the ratio of car use for business and private purposes and the obligation to adjust the amount of VAT deducted (upwards as well as downwards) regularly for 5 years, always to the last tax period of the respective calendar year. The alternative is to charge output VAT at the rate corresponding to the private use. Again, it is necessary to be able to demonstrate such a ratio.

Fifth complication arises when applying the exemption of EUR 500 under Art. 7 lit. (o) of the Income Tax Act. For example, a company that provides a car to the Managing Director for private purposes only cannot apply section 5(1)(a)(i) to such a non-cash benefit. 7 lit. (o) of the Income-tax Act as the expenditure (cost) relating to the operation of the car provided for private purposes is not a tax expenditure. It could be a tax expenditure if the private use was agreed with the Managing Director as an employee benefit. In such a case, the company could decide whether to claim the employee benefit as a tax expense under section 19(1)(b) of the Act. 1 of the Income Tax Act and tax and “withhold” the value of the benefit to the Managing Director or exclude the private use from tax expenditure and exempt the value of the non-cash benefit provided to the Managing Director from tax in accordance with section 5(1) of the Income Tax Act. 7 lit. (o) of the Income Tax Act. Simple.

Figure 2: Complex structure (explained below):

What do the tax authorities say?

As well as the logbook, the tax authorities may want to see other evidence of the journey, such as minutes of the meeting you travelled to, including the signature of the business partner. Problem.

However, this problem is not necessarily in the executive branch (i.e. the tax authorities). The problem is in the legislature. The legislator must, when making laws, act within the limits of the requirement for the so-called material rule of law (Article 1(1) of the Slovak Constitution). The principle of the substantive rule of law sets the bar for the rule of law even higher than the obligation to comply with valid and effective legal norms. It requires that the legal norms (i.e. the Income Tax Act and the VAT Act) be of a relevant quality in terms of content and value. The legislator must be able to write laws so that they are clear, transparent, and (in the context of this blog) can be complied with. But I’m afraid that even the corporation with the greatest sensitivity and commitment to compliance probably can’t objectively follow the rules of the game for company cars used for private purposes.

And so we get into an environment where the tax authorities are just doing their job. The burden of proof is primarily on the side of the taxpayer and the logbook may not be credible. But neither can the taxpayer reasonably be expected to bring signed minutes of meetings. Thus, the legislature has not only created complicated and nonsensical rules, it has created a breeding ground for procedurally intractable situations to arise within the bounds of fairness.

Do such rules have to be followed?

Yes, but sometimes maybe not. Indeed, it is questionable how these rules would stand up to constitutional law scrutiny. The Constitutional Court of the Slovak Republic (e.g.: PL Constitutional Court 9/2014) has repeatedly indicated the extent of the legislator’s freedom (and possible incompetence) in creating tax legislation. Ak pravidlá predstavujú pre a manifestly disproportionate burden on businesses that is extremely disproportionate to the public interest served, such rules are unconstitutional.

The European Court of Human Rights (SWENSKA MANAGEMENTGRUPPEN AB v/SWEDEN) refers to taxes as an unbearable burden which, if it exists, is contrary to the European Convention on Human Rights. The Czech Constitutional Court makes a similar point. It refers to the unconstitutional rule in the field of taxation as a rule that does not stand the test of legitimacy and rationality. Legitimacy of a tax is not exhausted by the manner of its adoption and by the reason consisting in the fulfilment of the state budget (Pl. ÚS 29/08).

From a procedural point of view, the road to success would resemble Ulysses’ road, which, moreover, thanks to the derogatory effects of the Constitutional Court’s rulings in administrative (tax) proceedings, may be only partially successful at the end of the day. Be that as it may, it can be a concomitant argument supporting the legitimacy of the taxpayer’s actions acting within the bounds of what can fairly be expected of him.

I confess that with company cars I have no procedural experience with this reasoning yet. And of course, this is just my humble digression into this complex area of law, which, given the scope of this blog, cannot even aspire to be exhaustive. At the very least, however, it provides a glimpse of the issue from a different argumentative perspective. In any event, I look forward to testing it in our practice of representing clients in tax audits.

What are the penalties and why am I writing about this?

Making laws is thus clearly an art. And if not mastered, it creates the discomfort of unpredictability in a more warped rule of law.

In the grammatical interpretation of the law and without the application of the so-called. material correctives , one car in the company used also for private purposes, and for which full VAT deduction and 100% of tax expenses were applied, and if the Managing Director is not taxed and does not “justify” non-cash income, can cause the following:

With tax reform unlikely anytime soon and the outcome of the September elections unpredictable, the legal set-up of business and asset ownership needs to be diversified in addition to investments.

On a thick bag, a thick patch. For simpler as well as more complex examples of setting up legal-tax structures, see the figures above in the text. The goal is to minimize the impact of the biggest risks of an unpredictable state (not only in the area of company car use rules).

So if you have any questions on this topic or on legal structuring, feel free to get back to me. For more interesting information like this, please subscribe to our newsletter.

If you are interested in this topic, please do not hesitate to contact us.

Článok Peter Varga’s view on the topic: car (for private purposes) in company expenses, VAT deduction, tax audits and worst case scenario je zobrazený ako prvý na Highgate.

Acquisition credit and abuse of law (aggressive tax optimisation)

At the end of last year, 2022, a decision was issued by the Regional Court in Prague[1], which dealt with two main areas of law, namely the misuse of tax law and also the challenge by the tax authorities of the interest on acquisition credit in mergers of companies. As these are areas that we are actively involved in our practice as well, below we will bring you to the interesting conclusions of this decision.

Misuse of tax and tax law

Abuse of tax law can be understood as conduct that formally appears to comply with the law, but such conduct results in a tax advantage being obtained in a manner inconsistent with the purpose of the law. Thus, it can be said to be conduct, seemingly sanctioned by law, which is intended to achieve an illicit result. The main or substantially predominant purpose of such conduct must be to avoid tax. Once such conduct occurs, it is disregarded for tax purposes.

There is often a very thin and blurred line between illegal abuse of the law and legal tax optimisation, which is not always easy to identify well in practice. This is also evidenced by the aforementioned decision of the Regional Court in Prague, where we see a different view of this boundary from the perspective of the tax administrator and from the perspective of the court.

Facts of the case

In this case, a loan was granted to a company for the acquisition of a business shareholding followed by a merger. However, the tax administrator did not recognise the interest on this loan as tax deductible, pointing out that, in his opinion, it was an artificial transaction created for the purpose of reducing the tax base.

The Dutch investment group Gilde wanted to take over the multinational Teleplan group of companies. In November 2010, the acquisition company AMS Acquisition B.V. was established, which was owned by AMS Holding B.V. belonging to the Dutch investment group Gilde.

Subsequently, in December 2010, AMS Acquisition B.V. and AMS Holding B.V. entered into a loan agreement with a consortium of banks, with a credit facility of up to EUR 115 million. EUR.

The acquisition itself took place in March 2011, when AMS Acquisition B.V. acquired the shares of Teleplan International N.V. for a price of EUR 142 million. EUR. Teleplan International N.V. was also part of the Czech company Teleplan Prague s.r.o.

A month later, Teleplan International N.V. bought a ready-made company, which it named Teleplan Holding Prague s.r.o. It was an empty company, which did not carry out any business activity and therefore had no assets or financial resources, and its share capital was 200 thousand CZK. CZK.

In the next step, Teleplan Holding Prague s.r.o. purchased from Teleplan Holding Asia B.V. a business stake of 89.99% and from Teleplan International N.V. a business stake of 10%. Part of the purchase price for these shares in the amount of EUR 23.4 million was paid in the amount of EUR 1.5 million. The company paid the EUR 1 million by entering into an acquisition loan. As a result, the purchase price was deemed to have been paid in the amount of EUR 23,4 million. EUR and the liability of Teleplan Holding Prague s.r.o. from the purchase of the business share was transformed into a loan.

The remaining part of the receivable was assigned by Teleplan Holding Asia B.V. to Teleplan International N.V., which subsequently capitalised it. The receivable for the sale of the business interest from Teleplan International N.V. was also capitalized.After this transaction, the merger was completed by merging Teleplan Holding Prague s.r.o. with Teleplan Prague s.r.o. K 1. In August 2011, as a result of the merger, Teleplan Prague s.r.o. was dissolved and Teleplan Holding Prague s.r.o. was renamed Teleplan Prague s.r.o. as the successor company.

As a result, the original acquisition loan was squeezed to an entity lower down in the group hierarchy that was actually generating some profit. The case shows that such a request came directly from the banks that granted the loan and was directly part of the contractual loan documentation. And this has proved to be a very important fact in relation to the court’s assessment of the transaction in question.

The successor company Teleplan Prague s.r.o. subsequently claimed the interest and other financial costs related to the loan in the tax periods 2013 and 2014 as a tax deductible expense within the meaning of Section 24 of Act No. 586/1992 Coll. on income tax, while in the conditions of the Slovak Republic it would be § 2 (i) of Act No. 595/2003 Coll. on income tax.

How did the tax authorities view the transaction?

The tax administrator challenged this procedure on the grounds that, from its point of view, it was an artificially created transaction aimed at reducing the tax base, arguing as follows:

• the way in which the obligation to pay the loan and related costs is passed on to the successor company makes no economic sense and has no link to taxable income;
• the debt rollover transactions appear to be purposeful and without economic justification and were carried out in such a way as to result in an illegitimate tax advantage for the company;
• overall, the transactions did not make any clear and obvious economic sense, and the tax administrator finds the successor company’s claim regarding the meaning and purpose of the transactions unconvincing.

On the basis of the above, the tax administrator concluded that the interest and financial costs related to the loan could not be tax deductible as it was an abuse of law.

How did the court view the transaction?

The court disagreed with the tax administrator’s reasoning and ruled in favor of the company, pointing out the need to prove that the objective and subjective tests for abuse of rights were met.

Objective test

The court stated that the first step in applying the abuse of rights test is to deal with the question of whether the taxpayer’s conduct, and in particular the result of his conduct, is contrary to the object and purpose of the tax law.

The provision whose purpose was examined by the court can be found in section 24 of Act no. 586/1992 Coll. on income tax, for the purposes of Slovak tax law we would examine § 2(i) of Act No. 595/2003 Coll. on Income Tax (hereinafter referred to as “ITA”), according to which a tax expense is an expense (cost) for the achievement, provision and maintenance of taxable income demonstrably incurred by the taxpayer. It can be said that the purpose of both modifications, i.e. j. Slovak and Czech, is identical, as the definition of tax expenses for income tax purposes is almost the same. It is contrary to the purpose of these provisions to apply interest on the loan in a way that has no meaningful connection to the economic activity of the company. Further in the article we will refer to the Slovak legislation.

The court also pointed out that, without evaluating other circumstances, the company’s conduct was objectively contrary to the purpose of section 2(i) of the ITA.

Subjective test

In assessing whether the subjective condition was met, the court addressed the question of whether the main or significantly predominant purpose of the company’s conduct was to evade tax. This means that it is necessary to answer whether the company had rational reasons and whether it was not a formal cover to obtain a tax advantage.

The court considered it essential that the terms and conditions under which the entire transaction took place originated in the Master Loan Agreement. The court noted that the terms of the loan were set by the external bank, which certainly did not set them in such a way as to create an artificial structure for obtaining an undue tax advantage. The Court considered the company’s actions to be economically rational and accepted the company’s argument that the bank’s intention in setting the conditions was to ensure maximum efficiency in the repayment of the loan.

Accordingly, the court found that both tests for the application of the abuse of rights test were not met in the present case and annulled the decision. The tax administrator subsequently lodged a cassation appeal with the Supreme Administrative Court, so we will have to wait for the final conclusion of the case.

[1] 55 Af 4/2020-137

If you are interested in this topic, please do not hesitate to contact us.

Článok Acquisition credit and aggressive tax optimisation je zobrazený ako prvý na Highgate.

Why can the failure to recognise a VAT deduction have devastating consequences?

Imagine a trading company that buys goods worth €1,000,000 + VAT per year and then sells them for €1,100,000 + VAT. The gross margin is thus EUR 100 000 . If the tax authorities were not to allow the company to deduct the VAT (i.e. EUR 200 000), this would be an amount significantly in excess of the gross margin. Add to this the company’s other costs, and the non-recognition of the VAT deduction could be liquidating for the company.

Although the company can seek justice in court, until the court decides, this decision of the tax administrator is in most cases enforceable. And this entails in larger companies, for example, the loss of ratings against partner companies or the repayment of bank loans. And if the business as an individual is liable for the bank loan, the private assets of the company owner may also fall victim.

What are the common mistakes of the tax administrator?

In practice, we encounter several mistakes. These include simple procedural errors, such as the signature on the tax inspection report. Simple at first sight, but in the end, even such things can win a tax dispute. More complex and, above all, more dangerous are these oversights:

The supplier has not made delivery on the invoice

While the tax administrator does not dispute that the delivery did not take place, it does dispute whether the delivery was made by the supplier on the invoice. Did the supplier have employees? Which persons at the supplier made the delivery? If the delivery is of goods, did the supplier have a sufficiently large warehouse? For how long a period was that warehouse available?

Often these are requirements that are objectively outside the sphere of disposal of the audited tax entity. How is the taxable person to prove whether his supplier had employees and a sufficiently large warehouse at the time?

Such an approach of the tax administrator is contrary to the case law of the Court of Justice of the EU as well as the Constitutional Court of the Slovak Republic. The burden of proof of the tax subject is not absolute and such requirements are manifestly disproportionate. In so far as the tax authorities do not dispute the existence of the supply, the right to deduct VAT cannot be denied on the sole ground that it appears to the tax authorities that the supplier did not have sufficient material and personnel or that the transaction does not make economic sense to the tax authorities. This defence is supported by relatively recent court decisions and is therefore often disregarded by tax authorities in practice.

Devasion or tax fraud

It is common for a tax administrator to attempt to burden a healthy audited taxpayer with fraudulent conduct by one of the supply or purchasing partners in the chain. In other words, if someone in the chain has failed to pay VAT, it is the controlled tax entity that is supposedly liable to compensate the State.

However, the case law of the CJEU is clear on this point too. It is not enough for the tax authorities to raise doubts that the taxpayer being audited may have participated in fraudulent conduct. The tax administration must prove that the taxable person concerned knew or was obliged to know that fact. This jurisprudential view is sufficiently settled and should be automatically applied by tax administrations in tax proceedings. And if it is not, a court should be able to identify it and overturn the tax administrator’s decision.

Confusion of terms

A very common phenomenon is also the confusion of terms in the tax administrator’s reasoning. The use of the terms ‘undue tax advantage’ and ‘tax evasion’ or ‘tax fraud’ in the same reasoning is confusing. Each of those terms involves a different procedural position of the taxpayer under scrutiny. Therefore, if the tax administration is unable to formulate its line of argument clearly, the fairness of the proceedings is affected and the taxpayer concerned is prevented from making an effective legal defence in such a case. And this argumentation may be successful before the court.

Proof that delivery has taken place

In some proceedings, the tax authorities argue that the existence of the supply has not been proven. The burden of proof in this case lies on the shoulders of the taxable person. The taxable person should be able to prove that the supply actually took place. On the other hand, the taxable person cannot reasonably be expected to discharge that burden of proof absolutely and such proof must be beyond reasonable doubt. Unrealistic and cumbersome requirements by the tax authorities to prove the existence of, for example, supplies of services by means of detailed minutes of meetings, protocols or official records are frequent.

What should be the operational preventive defence?

If taxpayers want to avoid VAT irregularities during tax audits, one option is to be extremely diligent and check their suppliers and customers in detail. One of the main principles is not to do business with businesses that have a record of amounts owed to any of the public authorities. At the same time, caution should be exercised with newly established business partners, partners with minimal share capital and those with no employees or high turnover. Clients are advised to always verify suppliers as well as customers through public registers for larger deliveries and to record this information in separate records. Such steps can significantly help in arguments in tax proceedings.

What should be the systemic defence?

Setting the right corporate structure for the business. This includes, in particular, elements of protecting assets and values that may be threatened by tax proceedings, as well as protecting the owners of the companies themselves. However, caution must be exercised in such structuring. For example, in situations where the Financial Administration is already circling over the tax entity, the transfer of assets and business to another company needs to be dealt with not only through the lens of transfer pricing, the legal opposability of such transfers, but also criminal law. Therefore, it is important to set up the corporate structure of the business in advance.

You can also see the full article here:

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Článok Highgate Law & Tax: failure to allow VAT deductions can put a business on the back foot.
Peter Varga’s statement for HOSPODÁRSKE NOVINY je zobrazený ako prvý na Highgate.

During tax inspections carried out by the auditors of the Financial Administration of the Slovak Republic (FA), a common problem in practice from the point of view of entrepreneurs is the application of the right to deduct value added tax.

As tax attorney Peter Varga of Highgate Law & Tax points out, there are often situations when the tax authorities deny a businessman’s claim for deduction on the grounds that the person on the invoice did not supply the necessary service or goods, according to the tax authorities. This is contrary to EU law in many situations.

Often healthy companies pay the price, and in such cases they are also responsible for the fact that their supplier does not keep accounts in accordance with the law or has become uncontactable over the course of a few years, for example, does not receive shipments from the financial administration.

“However, such practice is often contrary to the established case law of the Court of Justice of the EU or the Constitutional Court of the Slovak Republic. Doubts about a supplier or customer in a certain chain of supplies are relevant only to assess their participation in fraud – thus, they cannot in themselves lead to the rejection of a VAT deduction claim,” explains a tax lawyer from Highgate Law & Tax.

Errors and inconsistency are also on the side of companies

For example, the taxpayer may not be able to prove the carriage if the supply of goods is connected with it. In such cases, the tax authorities do not want to recognise the exemption of the supply, for example when the goods are delivered to another Member State, and charge the taxpayer output tax.

So, if companies want to avoid VAT irregularities during tax audits, one option is to be extremely thorough. Verify your suppliers and customers in detail, document everything, take photographs or film everything.

The tax administrator should be able to prove unequivocally that fraud has been committed on the basis of sufficiently established facts and objective evidence in the event of suspicion. Not to mention the fact that in some segments it is virtually impossible for businesses to fully scrutinise their partners. In fact, there are companies on the market that have a very wide range of suppliers.

“We have encountered cases where auditors have accused the company of having no employees and therefore it is not possible to credibly prove who actually delivered the service in question. However, it is not in the power of a business to go into such detail. And if he wanted to do so, his business costs would increase extremely,” explains tax lawyer Peter Varga.

Read the full article at https://www.trend.sk/financie/daniari-neferovo-neuznavaju-firmam-odpocty-dph-chcu-nich-nemozne-idu-aj-proti-zasadam-eu.

Source: KULLOVÁ, Z.: Taxpayers unfairly do not recognize VAT deductions for companies and want the impossible from them. In: TREND, 6.3.2023. Available at: https://www.trend.sk/financie/daniari-neferovo-neuznavaju-firmam-odpocty-dph-chcu-nich-nemozne-idu-aj-proti-zasadam-eu

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Článok Taxpayers unfairly do not recognize VAT deductions for companies and want the impossible from them.
They also go against EU principles – Interview by Petr Varga for TREND je zobrazený ako prvý na Highgate.

Non-deduction of VAT in economic consequences

Imagine a trading company that purchases goods worth EUR 1 000 000 + VAT per year. It then sells these goods for EUR 1 100 000 + VAT. The gross margin is therefore EUR 100 000. The tax authority starts a tax audit for 24 calendar months and decides that the supplier could not have delivered the goods (for example because he did not have a warehouse). The tax office does not dispute that the goods never existed or were never delivered.

If the tax authorities were to disallow the company’s VAT deduction (i.e. EUR 400 000), this would be an amount far in excess of the company’s gross margin. Not taking into account the company’s other costs. Imagine that the company has bank loan financing for which the owner is the guarantor. If the tax authorities do not grant the VAT deduction, the company can only seek justice in court. In the meantime, however, this claim by the tax authorities for EUR 400 000 + penalty will most likely become enforceable. The bank may repay the loan and the company, including its owner, may end up in bankruptcy, without the court ruling on the merits of the case.

There is no doubt that the tax authorities in Slovakia must make decisions lawfully. And what is this lawful decision-making in the case of supplier status will be the subject of this article.

The person named on the invoice when deducting VAT

The wording of the Slovak VAT Act is largely dependent on the EU VAT Directive. Both legislations require two basic conditions to be met for VAT to be deductible: (i) formal conditions and (ii) the fulfilment of substantive conditions.

Under the substantive conditions, it must be shown that the supply actually took place. In practice, however, we encounter a kind of derivative of this condition, which is applied relatively often by Slovak tax administrators. They often require that the supplier (i.e. the person named on the invoice) actually made the supply or was able to make it. It is not sufficient that it is obvious that the supply has taken place. There is a big difference.

Problematic person in the chain and impact on VAT deduction

The tax administration’s interpretation of the construction “thesupplier supplied” or “was able to supply” has the potential to expose the taxpayer significantly. The tax administration will start to question whether the substantive condition has been met and you may be denied the right to deduct input VAT if it finds that there is an entity in the supply chain that:

• according to the financial administration, the transaction could not be carried out objectively (e.g. it has no employees or no warehouses);
• is non-contact;
• has not filed tax returns or control statements; or
• did not have employees, etc.

The person named on the invoice did not make the delivery

Under the EU VAT Directive, any person who includes VAT on an invoice is liable to pay it. This requirement of the Directive is implemented in the Slovak VAT Act in § 69 (5). This means that an entity that has not incurred the obligation to pay VAT is obliged to pay the VAT stated on the invoice to the state budget.

However, the problem arises with the customer. The customer is not entitled to deduct VAT on the input VAT applied in this way. The customer is only entitled to deduct VAT if the supplier has actually incurred the tax liability. In this case, however, the supplier has not incurred the liability and the customer cannot argue that (i) the VAT has been paid by the supplier; and (ii) the VAT has also been paid by the customer by way of output VAT.

This view is supported by the judgments of the Court of Justice of the EU (“CJEU“), which have been relatively uncompromising in this regard. They separate out such supplies and do not take into account that input VAT has been paid by the supplier. The right to deduct VAT only arises if the supplier has also incurred the tax liability, i.e. the supplier has actually supplied the service or goods (or has been able to supply them, which appears to have been very material in recent years). And these facts are subject to verification during VAT tax control.

Non-deduction of VAT due to tax fraud

It follows from the case law of the CJEU that participation in tax fraud must be supported by objective facts on the basis of which it can be justified that the taxpayer knew or should have known that he or she was participating in the fraudulent conduct. These have been formulated in several judgments of the CJEU and have given rise to the so-called Axel Kittel test. The test consists of four questions. All four questions must be answered in the affirmative in order for the administrator to deny the taxpayer the right to deduct VAT.

(i) Did the taxable transactions under consideration give rise to tax evasion?

(ii) If so, is this tax evasion the result of fraudulent conduct?

(iii) If the tax evasion is the result of fraudulent conduct, have the taxable transactions of the taxpayer associated with that conduct been assessed?

(iv) If the taxable transactions under assessment involved fraudulent conduct, did the taxpayer know or could and should have known about it?

The first three questions are aimed at establishing objective facts. The tax administration must therefore prove, and therefore bear the burden of proof, that there has been fraudulent conduct involving tax evasion. At the same time, it must prove that the transaction under examination is part of a fraudulent practice. The fourth point (the so-called knowledge test) then becomes crucial. This is to show whether the party knew or should have known or should have known of the fraudulent conduct.

Back to the person on the invoice and CJEU case law and the link to tax fraud

The CJEU’s ruling in Case C-610/19 Vikingo Fővállalkozó Kft (the “Vikingo ruling“) also deals with the denial of the right to deduct VAT on the grounds that the supply was not made by the declared supplier.

The case concerned a situation where the Hungarian company Vikingo, a wholesale candy business, purchased food packaging machines for its products from the supplier Freest. The supplier bought these machines from another subcontractor, who in turn bought them from another subcontractor. Vikingo deducted input VAT on the invoices from the supplier Freest, whereas, according to the CJEU, there was no doubt that the machines actually existed and were put into operation.

The tax office did not recognise the VAT deduction in question during the audit, namely mainly because the directors of the companies in the supply chain did not confirm the supply. The tax office concluded that the supply was made by an unknown person and not by the person on the invoice. A very similar conclusion to the one we see in Slovak decision-making practice.

The CJEU gave the following answer to the Hungarian court: the EU VAT Directive, in conjunction with the principles of fiscal neutrality, efficiency and proportionality, must be interpreted as precluding a national practice under which a tax authority refuses a taxable person the right to deduct value added tax paid on the acquisition of goods supplied to him on the ground that

• first, the invoices relating to those purchases cannot be considered reliable because, first, the person who drew up the invoice was unable to produce or deliver the goods in question because of a lack of the necessary material and human resources, i.e. those goods were in fact acquired from another person whose identity has not been established;
• secondly, national accounting legislation has not been complied with;
• third, the supply chain leading to the purchases in question was not economically justified;
• and fourthly, there were irregularities in some of the previous transactions that were part of this supply chain

Such a refusal of the right to deduct VAT shall only be possible where it is established to the requisite legal standard that the taxable person actively participated in the tax fraud or knew or ought to have known that the transactions in question were part of a tax fraud committed by the person who drew up the invoice or by any other entity upstream in the supply chain. However, that fact must be verified by the tax authorities.

This means that if it is proved that the goods have been supplied, the facts cannot be considered that (i) the chain of transactions leading to those supplies does not appear to be rational or reasonably justifiable from an economic point of view; or (ii) any of the participants in that chain has failed to fulfil its tax obligations, shall be sufficient to conclude that there has been tax evasion. The tax authority has the legal burden of establishing in each particular case, on the basis of the objective circumstances, that the taxable person has committed tax fraud or that he knew or should have known that the transaction in question was part of a tax fraud committed by the person who issued the invoice or by another entity involved in the supply chain of goods or services.

So what about the burden of proof?

The CJEU is and should be an important legislative well for Slovak tax administrators. This is especially the case where the VAT Act does not give a clear answer. In the context of the topic of this article, therefore, another CJEU judgment is interesting. In another recent case, the CJEU dealt with the assessment of the denial of the right to deduct VAT in the context of the taxpayer’s obligation to act prudently when choosing his business partner.

The CJEU notes that a prudent person may, depending on the circumstances of the case, consider it his duty to find out information about the other party from whom he intends to acquire goods or services in order to identify its reliability. However, the tax authorities may not, in general, require the taxable person claiming a VAT deduction to verify that the person who issued the invoice relating to the goods and services on the basis of which the VAT deduction is claimed is the person who issued the invoice relating to the goods and services on the basis of which the VAT deduction is claimed:

• meets the conditions of a taxable person;
• it had the goods in question and was able to supply them; and
• it has fulfilled its obligation to file a tax return and pay VAT,

to ascertain whether there have been any illegalities or tax fraud on the part of the taxpayer’s business partners.

In principle, it is for the administrative authorities to carry out the necessary checks on taxable persons in order to detect illegalities and VAT fraud and to impose penalties on the taxable person who has committed such illegalities and tax fraud. The burden of proof in these circumstances must therefore be borne by the tax administrator.

The reality of tax controls in proving eligibility for VAT deduction:

The performance of tax administration, and thus also the performance of tax control, is subject to compliance with the basic principles of tax administration formulated in the Tax Code. These principles should always be followed by the tax administrator. For the purposes of the fair exercise of tax control, the following principles are particularly relevant:

• take into account not only their own interests but also those of the taxpayer;
• to act at all times in accordance with generally binding legal regulations, while protecting the interests of the state and municipalities, but at the same time taking care to preserve the rights and legally protected interests of tax subjects and other persons;
• evaluate the evidence according to its discretion, each piece of evidence individually and all the evidence in its context, taking into account everything that has come to light in the administration of the tax. However, the content of the phrase ‘at its discretion’ does not mean that the tax administrator is entitled to take into account arbitrarily, and sometimes arbitrarily, only that evidence which is to the tax administrator’s satisfaction. The tax administrator should reflect on each piece of evidence, realistically assess and evaluate it and rationally state why it does not take any piece of evidence into account.

In practice, however, tax administrators relatively often not only fail to respect these basic principles of tax administration, but also fail to follow the established case law of the CJEU (e.g. the Axel Kittel test or the Vikingo ruling).

In addition, the tax administrators apply the provision of Art. 6 of the Tax Code, arguing for a kind of tax advantage. However, it is objectively not possible to obtain such an advantage if the tax subject pays the output VAT.

So what (and more) should tax administrators observe when performing tax administration (i.e. also tax audits)?

The judgments of the CJEU also show that the EU VAT Directive should be interpreted in conjunction with the principles of tax neutrality and proportionality. Under these principles, a customer cannot be denied the right to deduct VAT on the grounds that invoices cannot be regarded as reliable simply because:

• the person named on the invoice was unable to deliver the goods due to lack of material and personnel resources, and therefore the delivery had to be made by another person;
• national accounting law has not been complied with or the supply chain has not been economically justified; or
• there have been some discrepancies in the previous stages of trade.

What should be done to increase the likelihood of success in defending a VAT deduction claim?

In the reality of tax audits, the tax authorities will relatively often refuse a VAT deduction as soon as an entity in the queue fails to comply with its reporting or levy obligations. However, these are not necessarily known to the taxpayer. Although the tax administration publishes a number of lists on its website which might indicate that a problematic entity is likely to be involved, these lists are updated with time delays. Thus, at the time of the contaminated transaction, the problematic entity may not be on any of the lists at all.

For these reasons we recommend:

• Have documented communication with the business partner to the maximum extent possible;
• Also have the existence of the delivery documented to the maximum extent possible, including photo documentation or email communication where appropriate;
• Do not do business with business entities that have a record of amounts owed to a public authority;
• Be vigilant with newly established business partners;
• Be vigilant with business partners with minimal capital;
• Be vigilant with business partners who do not have employees but possibly show high turnover;

In practice, it may happen that the tax administrator questions the personnel capacity of the supplier and places the burden of proof on the audited tax entity. The taxpayer should thus demonstrate how the supplier was able to carry out the supplies in question. In some cases, the tax authority’s argumentative position may be inferred from its requirement for the tax entity to have even a detailed overview of the employees/suppliers of the business partner, including the content of their contractual agreements.

Based also on the established case law of the CJEU, we are of the opinion that the audited tax entity cannot be required to prove facts which are completely outside its sphere of influence and which it cannot, either because of legal obstacles or because of the factual state of the case, ascertain and verify.

But will this be enough to justify the VAT deduction?

If the taxpayer had everything recorded in writing, including printed websites of the Social Insurance Institution, the relevant health insurance companies, the register of accounts, the commercial register and/or the lists of the tax administration, would this be sufficient to prove the right to deduct VAT and to do so in good faith?

Unfortunately, there is no uniform and unambiguous answer to this. In recent practice, we have seen a case where the taxpayer had several relevant facts necessary to defend its VAT position covered. For example, it required confirmation from the supplier in the contract that it had staff capacity. The taxable person had a lot of relevant supporting documentation for each transaction and was as cooperative as possible in the tax proceedings. In addition, it was a reputable foreign company. The result of the tax audit was a report of approximately 100 pages, on the basis of which the tax administration issued a decision confirming the existence of the supplies, but criticising the tax entity for the fact that the supplier was unable to carry out the supplies due to a failure to demonstrate staff capacity.

But this is against EU law and needs to be legally defensible. Not only subsequently in a tax dispute against the tax directorate or in court, but also preventively by building a more sophisticated corporate structure.

Further consequences of the non-recognition of a VAT deduction

If a taxpayer is denied an input VAT deduction, he automatically becomes an unreliable taxpayer for the tax administration in subsequent tax proceedings. This has further consequences, such as shorter deadlines, reluctance of the tax administration to accept certain claims, a higher probability of tax audits and a negative perception in the eyes of business partners. At the same time, applying the logic of the tax administrator, such business partners should no longer want to do business with the tax entity because they expose themselves to tax risks.

We believe that the approach of tax administrators in Slovakia will fundamentally change. Otherwise, routine tax audits may be liquidating for less prudent entrepreneurs. And more prudent entrepreneurs must make significant efforts at prevention. Prevention not only in terms of obtaining sufficient documentation to demonstrate good faith conduct, but especially in terms of legally structuring the business in a way that protects valuable assets/business streams from these risks. In our experience, business transfers abroad are common. Of course this is only possible in certain cases.

We thus provide our clients not only with representation before tax authorities, but also with a comprehensive set-up of their business with a view to preventive prevention of materialisation of the risks in question. On several occasions we have assisted clients in the legal transfer of assets from the company in the event that the company was already “overwhelmed” by a number of tax audits.

If you are interested in this topic, please do not hesitate to contact us.

Článok VAT deduction disallowed due to supplier status je zobrazený ako prvý na Highgate.