In February, an expanded panel of the Supreme Administrative Court issued a decision (No. 1 Afs 231/2022-44 of 05.02.2025) which interferes with the established administrative practice of the tax authorities previously set according to the case law of the Constitutional Court. As a result of this change, it can be expected that more taxpayers will be referred from the tax proceedings to the proceedings for compensation for damages, which for them will represent a prolongation of the entire proceedings and higher costs of exercising their rights. Potentially, this may also result in a higher workload for the civil courts that adjudicate on compensation disputes. However, there is also an aspect of the Supreme Administrative Court's findings that will help some taxpayers.
The first conclusion of the extended Chamber: "Under the Tax Code, a tax cannot be imposed by default after the limitation period."
In fact, the first conclusion is not entirely new as such - the extended Chamber merely chose between two opposing paths of opinion that have recently been taken by different judicial chambers. The need to unify judicial practice was, after all, the statutory reason why the enlarged Chamber met in the first place.
In this first question, the court interpreted the consequences of the now older ruling of the Constitutional Court (Case No. I. ÚS 3244/09 of 10 March 2009).2011), which at that time simplistically said that if the subject of a tax assessment procedure is a claim of a tax subject (typically a claim for an excessive deduction for value added tax ) and this procedure does not end within the limitation period for tax assessment by a final tax decision, the tax subject is automatically entitled to receive what he claimed (i.e. what he claimed) in his tax return.
The aforementioned ruling of the Constitutional Court related to a case under the now invalid Tax Administration Act (valid and effective until 31 December 2010). However, the Constitutional Court explicitly stated that its conclusions should also apply to tax proceedings under the Tax Code (No. 280/2009 Coll.), which is still valid and effective today. This is how the ruling has been understood and interpreted. In response, the General Financial Directorate issued a methodology for tax authorities, adopting the above conclusion in practice and setting up the necessary internal processes for its application.
However, the Enlarged Chamber of the Supreme Administrative Court has now interpreted that this conclusion does not apply and that under the current tax code, tax cannot be assessed at all after the expiry of the time limit for assessment and therefore not even purely in favour of the taxpayer.
The Enlarged Chamber justified this on the basis of the different procedural technique of the so-called "implied" determination of tax, in which it is of course correct. Nevertheless, the result is still a 180-degree reversal of current established administrative practice. Already in 2011, when the Constitutional Court's ruling was issued, it was clear that the procedural technique of the so-called "implicit" tax assessment under the Tax Code was different from the method of tax assessment under the Tax Administration Act, and it was undoubtedly with this in mind that the Constitutional Court made its above conclusions. This opinion was followed by the case law of the Supreme Administrative Court, which confirmed it.
The second conclusion of the extended Chamber: 'The tax may be assessed in favour of the taxpayer in the 11th year of the limitation period'.
At the same time, the Enlarged Chamber corrected its first conclusion with a second conclusion, which states that if a taxpayer files a supplementary tax return for a lower tax in the last year of the 10-year limitation period for tax assessment, then this period (otherwise in principle not exceedable) is extended by 1 year in order to give the tax administrator time to assess the allegations made in this return and to grant or refute the taxpayer's entitlement to a tax reduction.
This is a very revolutionary conclusion, as the court in this case used the analogy of the law to extend the 10-year statute of limitations, which otherwise cannot be extended or broken without very clear and explicit legislation. At the same time, however, it emphasized that the consequences of this extension cannot be to the disadvantage of the taxpayer, i.e., his tax liability cannot be increased during this extended period.
According to some expert opinion, this second conclusion potentially opens a Pandora's box of endless extensions of the tax assessment deadline, because if a reason can be found for an "exceptional" extension in year 10 (why are we exceeding the otherwise non-exceedable), then can't an equally compelling reason be found in year 11 and beyond? This conclusion is also interesting in that the question was not asked of the enlarged Bench at all. Thus, the conclusion was drawn beyond what the Enlarged Bench was tasked to address. Some experts then infer from this that the second conclusion is less binding.
Repeated discontinuity of legal interpretation
It will now be crucial to see how the Constitutional Court, if the issue comes before it (which is likely, since the first conclusion goes against the taxpayers), will view both conclusions. In my opinion, it is quite possible that the Constitutional Court will, at least, reverse the above-mentioned first conclusion of the Extended Chamber of the Supreme Administrative Court, as it did originally in its 2011 ruling.
I see the legal uncertainty about the outcome as a bigger problem than how it will all turn out in the end. We have already seen legal opinion turn once in this area. So the question still remains whether the judgment of the extended Chamber is now the final legal opinion or whether it will be reversed again by the Constitutional Court.
Unfortunately, this is not the only case in taxation where the legal opinion of the judiciary evolves and changes to such an extent that it results in inevitable "whirlwinds" in the administrative practice of the authorities that are supposed to follow it. I have long considered legal uncertainty and repeated changes in the legal practice set by the courts to be very problematic.
Why has the above mentioned resolution of the Supreme Administrative Court caused such a stir among tax experts?
Even in the case of the conclusions of the Constitutional Court's 2011 ruling (which allowed the tax to be assessed after the expiration of the "non-exceedable" limitation period for assessing the tax), this was a completely unsystematic step from a legal point of view, which the administrative courts, led by the Supreme Administrative Court, initially strongly resisted. That is why the case came before the Constitutional Court in the first place.
I understand that the conclusions of the Constitutional Court have a certain fair basis in the idea that the tax administrator is responsible for the proper conduct of tax proceedings, and if it initiates control procedures, i.e. in some way disputes the claim of the tax subject, but subsequently fails to make a final decision on this claim within a specified period of time, the tax subject should not be "punished" for this state of affairs by having to subsequently defend its claim in a subsequent proceeding for compensation for damages. This conclusion has been adopted and implemented in the administrative practice of the Tax Administration, a methodology has been issued, etc. The administrative courts have then ruled in accordance with this conclusion in a number of cases (although not exclusively).
At the moment, therefore, the contrary verdict in the first judgment of the Extended Chamber in February this year is somewhat surprising to experts and practitioners, especially as it breaks the continuity already established. This is why it has also provoked a great deal of discussion in the professional community, including at the Chamber of Tax Advisers and the Faculty of Law of Charles University.
The discussion highlighted in particular the problem that if the claims of the tax subject cannot be resolved after the expiry of the given deadline by a simple "automatic" declaration in tax proceedings, it will be necessary to initiate proceedings for compensation for damage caused in the exercise of public authority (pursuant to Act No. 82/1998 Coll.). However, this means a much more complex, lengthy and costly procedure for the taxpayer.
In the case of compensation for damages, the procedural procedure is governed by different legislation (Act No. 82/1998 Coll. and the Code of Civil Procedure), with other entities (in the case of taxes, it is mainly the Ministry of Finance) and disputes are resolved by general courts instead of administrative courts. On the other hand, however, in terms of the substance and content itself, it is largely a continuation of tax proceedings - with which, however, the general courts are not as experienced (as the tax administrator or the administrative courts). The discussions therefore raised concerns about legal uncertainty, for example, as to the extent to which evidence will be transferred from tax proceedings to proceedings before the general courts, or the extent to which the number of cases that the general courts will be obliged to deal with will increase. The latter may find it difficult to deal with them, which in turn may exacerbate the problem of the length of court proceedings in the Czech Republic in general.
The question is whether the fears will be realised and, given the number of cases, whether this will be a major problem. In any event, the trend of transferring cases from tax proceedings to compensation proceedings is not something that will make common law judges happy and taxpayers happy.
In a number of cases, we observe that in practice clients do not want to engage in a new fight with the state at all, even if there are grounds for claiming damages in their case. This is understandable, as they want to be able to move on after the endless martyrdom in the tax proceedings.
We have to remember that tax audits are now routinely going back ca 3-6 years, and in the most complex cases, after appeals, one or two trials, and a total of ten years, opening up the matter again and again often exhausts you. And that's even if you call in a professional who handles most things for you.
Autor: Václav Čepelák