On 29 October 2024, the Supreme Administrative Court issued a judgment [1], in which it rejected abuse of law in the case of a chain lease of a property with VAT and its subsequent sublease to a VAT non-payer.

This is a case in which the applicant purchased a plot of land with a house on it in June 2020 and claimed a VAT deduction of CZK 2.4 million. She subsequently rented the property to another company and applied VAT on the rental (the wording of the VAT Act in force until 31 December 2020 did not restrict the application of VAT on the rental of real estate and it was possible to apply VAT even in the case of the rental of a family house to a VAT payer, which is no longer possible under the current wording of the Act [2]). The company also sublet the property for the purpose of long-term housing to a natural person who is not subject to VAT.

The tax administrator assessed the applicant's procedure as a purposeful abuse of the law. It stated that the business structure was set up for the sole purpose of obtaining the right to deduct VAT and was therefore deprived of that right.

However, the Supreme Administrative Court came to the opposite conclusion and annulled the decision of the Appellate Financial Directorate. According to the Supreme Administrative Court (SAC), the defendant (OFŘ) infringed procedural rules by failing to inform the applicant of the newly discovered facts, which were only obtained during the appeal proceedings, and thus not allowing her to comment on them. Furthermore, the SAC emphasised that the burden of proof on the issue of abuse of rights lay with the tax authorities, but that the tax authorities had failed to prove that the applicant had actually abused the law by her transactions. The Court also confirmed that entrepreneurs have the right to choose the structure of their business activities, including the choice between related and unrelated entities, if justified.

The judgment highlights the importance of compliance with the procedural rules and the tax administrator's burden of proof in proving abuse of law. However, the SAC did not comment on the lease and subsequent sublease model, noting that the model might appear irrational in different cases, even though in a certain context such a choice may be entirely logical.

If you are in any doubt as to the correct application of the VAT Act, please do not hesitate to contact the tax team at PKF APOGEO Tax.

[1] 9 Afs 51/2024-58
[2] Section 56a(3) of Act No. 235/2004 Coll., on value added tax before 31 December 2020

Barbora Plšková

Cookies