The payment of a profit share concealed by the sale of shares

In this case, a Czech natural person sold its share in a Czech limited liability company to a newly-created Cypriot company, which fulfilled the conditions for exemption from taxation on the part of the natural person. The provisions relating to the purchase price were relatively specific in the contract in question. It was supposed to be paid over the course of ten years without any further specification of the amount or dates of the individual instalments. Another peculiarity was that at first a 25 share in the company was transferred at a significantly higher price than the remaining 75% share in the company. Based on the agreement of the shareholders (the Czech natural person and the new Cypriot owner), the limited liability company then paid the profit share solely to the Cypriot shareholder (in spite of its share in the company).

The subsequent payment of the profit share to the Cypriot company was exempt from tax in accordance with the Income Tax Act and the relevant Double Taxation Treaty between the Czech Republic and the Republic of Cyprus, while the Cypriot company transferred all the funds thus obtained to the accounts of the natural person (the original shareholder of the limited liability company), as payment of the purchase price for the sale of share.

On the basis of a tax inspection, the tax administrator assessed an additional tax on the Czech limited liability company, the subject of which was the payment of aprofit share to the Cypriot company. The tax administrator stated that the beneficial owner of the profit shares paid out was the original Czech shareholder of the limited liability company and the paid amounts only “flowed” through the foreign accounts. Thus, they were transactions that concealed the true legal situation, namely the payment of a profit share to a natural person, which would be subject to taxation in the Czech Republic.

Court case 2 Afs 94/2021- 48

Author: Vendula Velenská, Tax Senior