An old dispute between the Appellate Financial Directorate and Czech Radio is nearing its unravelment. The Supreme Administrative Court in Brno has received an answer from the Court of Justice of the European Union (CJEU) to a preliminary question it had posed regarding assessment of the object of taxable transaction in case of providing radio broadcasting for a so-called broadcasting fee.

The essence and meaning of this article is to familiarise readers with a purely Czech dispute, which has reached the highest court of justice in the European Union, to illustrate the viewpoint of the CJEU and, last but not least, to point out the time difficulties of legal disputes, which may await us all, if we ever get into a dispute with the financial authority in a similar situation.

THE CORE OF THE DISPUTE

The object of this dispute is an assessment of the activity of Czech Radio from the perspective of act no. 235/2004 Sb., on the value added tax (the “VAT act”). This activity consists in providing public-service radio broadcasting. For this activity, Czech Radio is entitled to remuneration, which is paid in the form of radio fees (in practice commonly referred to as broadcasting fees).

These fees ensue directly from the act on Czech Radio, or the Act on radio and television broadcasting fees, where the payer of these fees is basically any person or legal entity, which owns a radio-broadcast receiver.

The participants in the dispute have expressed differing views regarding assessment of the above-mentioned activity in terms of the VAT act.

• Czech Radio is of the opinion that the above-mentioned activities cannot be seen as activities, which are subject to the value added tax. The main argument of Czech Radio is the established court practice of CJEU, sees one of the main criteria for a taxable transaction in an existence of a legal relationship between the provider of performance (that is Czech Radio) and the recipient of the performance (that is the listener) and also the fact that there is a direct connection between the provided service and the consideration received in return. As the optionality of the establishment and existence of this legal relationship and direct connection between the service and consideration can be doubted (that is in a situation, when the fees between the listener and Czech Radio are based directly on the law), Czech Radio is of the opinion that this activity is not subject to VAT.

• The Appellate Financial Directorate, on the other hand, is of the opinion that the mentioned activities are subject to VAT. The main argument of the Appellate Financial Directorate was the stipulation of article 53 of the VAT act, based on which radio and television broadcasting has been exempted from tax without entitlement to VAT deduction.

Although the above-mentioned differing views may have the same effect at first sight, when both sides are of the opinion that the performance in question does not include output VAT:

• from the perspective of Czech Radio, this is a performance, which is not subject to VAT
• from the perspective of the Appellate Financial Directorate, this is a performance, which is exempted from the tax without entitlement to VAT deduction,

the core of the dispute remains within the subsequent question, which will deal with the calculation of entitlement to VAT deduction itself applied on the part of Czech Radio.

Czech Radio worked on the premise that while its activity is an economic activity, it is not subject to VAT at all (that is the remuneration in the form of broadcasting fees); and this remuneration thus cannot be considered so-called exempted fulfilment without entitlement to input VAT deduction for related taxable transactions received. And thus the duty to reduce entitlement to deduction of VAT from the received taxable transactions, which relates to the provision of exempted transactions without entitlement to deduction, will not arise for the company.

With regard to persisting doubts regarding assessment of the activity of Czech Radio in terms of VAT, the Supreme Administrative Court has asked the CJEU to answer a preliminary question, which basically consists in assessing, if the activity of Czech Radio needs to be considered a non-economic activity, which is not subject to VAT, or an activity, which is exempted from taxes without entitlement to VAT deduction.

THE VIEWPOINT OF CJEU

In the judgment in question, the CJEU identified with the opinion of Czech Radio, which was based on earlier established judicature of the CJEU.

When assessing the given dispute, it saw its nature in the fact that there is no legal relationship given between Czech Radio and the payers of the radio fee, within which transactions would be provided mutually, nor is there any direct connection between the provided performance and the consideration received. Within the providing of the mentioned service, Czech Radio and these payers are not bound by any contractual relation or agreement on the price, nor by any legal obligation voluntarily accepted by one party towards the other.

The Supreme Administrative Court - based on the decision of CJEU - decided in favour of Czech Radio, stating that the provision of radio broadcasting cannot be considered to constitute activities, which are subject to the value added tax. In its verdict, though, it stated that the provision of the service of public-service radio broadcasting in the extent financed by radio fees cannot be considered an economic activity.

The question remains, to what height an in what proportion Czech Radio will be able to apply entitlement to VAT deduction in these cases, that is in situations, when it carries out activities, which are not subject to VAT (radio broadcasting) and activities, which are subject to VAT (provision of advertising).

THE TIME DIFFICULTY

With the above-mentioned summary, we intentionally did not consider the timeline of the development at the individual appeal instances of the executive and judicial power, which we would like to point out separately in the part of this article that follows.

It all began with the submission of supplementary tax declarations for the taxable period beginning in May 2004. These lodgements were made by Czech Radio due to the issuing of a viewpoint of the finance ministry from July 21, 2005, among other things, in which the ministry inclined to the opinion that radio fees are not payment for taxable performance.

These supplementary tax declarations were, nonetheless, rejected by the financial authority, which issued new adjustment notices. Czech Radio appealed against these adjustment notices. The Appellate Financial Directorate (at that time the financial directorate) confirmed the adjustment notices, which were issued in March 2007, nonetheless.  

Czech Radio filed a suit to the Prague Municipal Court against these decisions. There were actually several of these lawsuits, and the Municipal Court passed the judgements on the first lawsuits in June 2009. In these first verdicts, the municipal court decided against Czech Radio and rejected the complaints.

Czech Radio submitted an appeal in cassation against these verdicts to the Supreme Administrative Court in Brno. The Supreme Administrative Court decided the appeal in cassation in June 2010.

The Supreme Administrative Court granted the complaint of Czech Radio, cancelled the judgments of the Municipal Court due to irreviewability and other procedural faults and returned the matter for further proceeding.

The proceedings at the Prague Municipal Court and a subsequent proceeding at the Supreme Administrative Court due to the filing of an appeal in cassation were repeated once more with the same result.

Only in June 2014 did the Municipal Court issue a decision, which was in favour of Czech Radio (that is a judgment, which was of the opinion that radio fees cannot be considered a transaction, which is subject to taxation).

The General Financial Directorate also filed an appeal in cassation against this decision of the Prague Municipal Court, though. Only upon this appeal in cassation submitted in December 2014 (that is nearly ten years after the dispute arose in this matter) did the Supreme Administrative Court decide to suspend the proceeding and submitted a request to the CJEU for assessment of a preliminary question.

In March 2016, the advocate general issued his viewpoint.

In June 2016, the CJEU issued its decision.

In August 2016, the Supreme Administrative Court issued a decision, where it confirmed the conclusions of the CJEU and the opinion of Czech Radio. The Supreme Administrative Court has further accentuated, nonetheless, that it needs to be further assessed, how high an entitlement to VAT deduction Czech Radio can apply.

Will we will further lawsuits and a cycle of a number of uneven decisions of the Municipal Court, which, at best, may take another few years?

With this summary, we wanted to point out that it is unfortunately still a sad fact that the defending the rights of taxpayers may be connected to many years of efforts, legal uncertainty, considerable financial expenditure and the impossibility of reliably assessing the tax effects on business activity.

If you are interested in more detailed information on this area, please turn to the author of this article.