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Penalty as a punishment: pursuant to the ruling of the Supreme Administrative Court it will no longer be possible to punish certain persons for tax evasion

It will be likely impossible in the future to prosecute persons for potential tax evasion if they were assessed additional tax and penalty payments as a result of a completed tax inspection. In its recent ruling the Supreme Administrative Court has stated that a penalty imposed in line with the Tax Code is, in substance, a criminal sanction similarly as, for example, a criminal monetary penalty or imprisonment.

While the Supreme Administrative Court has not made a direct comment in this respect, one of the possible implications of the ruling is that, taking into account the ban on sanctioning one action twice, it will be impossible to prosecute persons that were imposed a penalty on an additionally-assessed tax as part of tax proceedings.

In the relevant ruling, the Supreme Administrative Court (SAC) specifically assessed the case of a company which, as part of an additional tax assessment (disallowance of tax losses), was imposed a penalty under the old legal regulation, which was five times higher than the penalty under the new legal regulation but without the possibility of waiving such imposed penalty which the old legal regulation contained. In this regard, the company sought the application of the principle common in criminal law under which the more recent legal regulation is applied if is more beneficial for the relevant person.

In this context, the SAC had to address the issue whether it is admissible to treat the penalty as a criminal sanction, the imposition of which would follow the criminal law principles. The SAC stated that, while a tax penalty is not classified and systematically categorised as part of criminal law but rather tax law, in the Czech law system, imposing the tax penalty has a penal nature since the purpose is not to seek compensation for evaded tax but to inflict a severe punishment on the relevant person with the objective of discouraging him/her from engaging in similar activities in the future.

The same conclusion reached by the European Court for Human Rights

The SAC’s conclusion that a penalty is a punishment is not surprising. The European Court for Human Rights has reached the same conclusion on a number of occasions whereby the imposition of a tax penalty amounts to a “criminal charge” and therefore needs to be seen as a criminal sanction. Any subsequent condemnation for the crime of tax evasion is thus not admissible in view of the ban on sanctioning one action twice.

Abolishing the penalty?

The stated ruling may considerably change the current practice where a penalty is primarily imposed and subsequently a criminal prosecution for tax evasion is initiated with regard to the most serious cases. The new practice would be that once taxable persons receive a penalty from the tax administrator, it will no longer be possible to criminally prosecute them in the relevant matter. The first verdict in this regard has been issued by the District Court for Prague 4. This will apply for both the individuals and the companies with exception to the statutory body of the company; the penalty will be imposed directly to the company while the liability for tax evasion will rest predominantly with the members of its statutory body or employees.

Legislative changes can be expected in response to the SAC’s ruling. The options available include either abolishing or revising the conditions for imposing a penalty or amending criminal and tax regulations to the effect that penalties will be imposed only in respect of less serious cases while criminal prosecution will be initiated with regard to the most serious cases.

Jiřina Neumannová +420 246 042 430 jneumannova@deloittece.com

Táňa Čapková +420 246 042 297 tcapkova@deloittece.com