The court evaluated the chaining of one activity to several companies as an abuse of law

On 20 May 2024, the Regional Court in Ostrava issued judgment No 22 Af 24/2022-97 in a dispute concerning the assessment of value added tax.

The case concerned a case where the performance of one activity was chained successively to several legal entities with always the same owner, where, after the turnover for compulsory registration was exceeded, all activities, including equipment, were transferred to another company. The applicant thus created 27 such companies in a period of 36 months. The Appellate Tax Directorate considered this to be an abuse of the law with a view to avoiding payment of VAT.

The applicant challenged the decision of the Appellate Tax Directorate to charge him VAT for the years 2017 to 2020. The tax authority charged the unpaid VAT to an individual, since, according to the state of the case-law, the tax must be charged on the entity before the abuse of rights begins. The applicant argued that the system of division of economic activity between importers and retailers that it had set up was not for the purpose of circumventing the law but to minimise the risks in the e-cigarette business. The administrative authorities wrongly assessed that structure as a deliberate attempt to evade tax obligations.

The court sided with the Appellate Financial Directorate and found that the applicant's structure met both the objective and subjective criteria for abuse of rights. The applicant's actions created artificial conditions for obtaining a tax advantage. The Court found that the main purpose of the corporate structure was to avoid VAT. The applicant created a system of companies which regularly alternated their business activities, thereby avoiding the obligation to pay tax. Furthermore, the applicant's arguments relating to the protection of business risk were not accepted and the administrative procedures of the tax authorities were found to be correct.

It remains to be seen whether the applicant will decide to appeal, but it is already clear that an increasing number of businesses are coming under the tax authorities' 'crosshairs' and that the number of decisions on abuse of rights is increasing.

We continue to closely monitor the issue of abuse of rights and if you have any questions, please do not hesitate to contact the tax team at PKF APOGEO Tax.