On July 9, 2018, the Constitutional Court of the Czech Republic issued ruling no. II. ÚS 955/18 concerning the “definition” of the close person.

The dispute debated by the Constitutional court arose when the complaining party P.Z. refused to testify to the police of the Czech Republic because her testimony could put a close person in danger of being prosecuted where the close person concerned were her friends.

The police and the district court denied her statement saying that in this case she is not entitled to refuse to testify because friends cannot be close persons in this sense.

The Constitutional Court did not agree with the opinion of the police and the district court and in their analysis reached the conclusion that her refusing to testify was in accordance with the relevant regulations because the complaining party adequately proved that her friends are close persons to her in the sense defined by the Charter of Fundamental Rights and Freedoms, the code on criminal procedure, the penal code, and the civil code.

According to the Constitutional Court, to assess whether someone is a close person or not, the important fact is whether the emotional relationship between the two people is so strong that the other person suffering would be felt as a personal suffering by the first person. The assessment of such a relationship always lies with the subjective feeling of the person, however, this relationship, its existence and strength, must be sufficiently explained and convincing reasons must be provided to the relevant institutions (in this case the police and district court).

In light of this judgment of the Constitutional Court it is important to think about what effects this decision might have in the area of taxes, because the term “close person” is mentioned often in tax legislation.

If my friend can now “newly” be considered a close person (providing that I feel that way and can satisfyingly explain or justify it) we could, for example according to the Act on Income Tax, be advantaged in some cases and disadvantaged in others.

My friend will not tax e.g. income from transfer of property if he continues the farming activity which I have terminated (Article 3 (4)(f) of Act on Income Tax, further only AIT), or he will receive a tax free care allowance for care about my person according to the legislation providing for social services and not only the amount of allowance for persons of IV. order of dependence (Article 4 (1)(i) of AIT).

On the other hand my friend could cause a foundation established by me to not be assessed as a community taxpayer but as a family foundation (Article 17 (2)(f) of AIT).

My friend can also become an otherwise associated person which would mean, according to Article 23 (7) of AIT, that values agreed on between the two of us would have to correspond to open market values.

It is important to note that with the last two mentioned instances the tax administration cannot assess my subjective feeling towards my friend without my free will, much less with a sufficient justification. At the same time, they have other tools available how to prevent eventual tax evasions.

The Act on Value Added Tax defines close persons with relation to open market values in Article 36a. Thus, the judgement of the Constitutional Court will have virtually no actual impact in the area of VAT (see previous paragraph).

Probably the last of the tax legislations which mentions close persons is the Tax Code.

Article 77 of the Tax Code excludes officials from proceedings for partiality in cases where the proceedings are about rights or obligations of a close person of the official. Therefore, if there is a case pertaining to my tax obligations and the relevant tax administration official is my friend, he or she should be excluded from the proceedings based on our “closeness” alone (Article 77 (1)(a)) and not only when doubts arise about his or her partiality and biasness (Article 77 (1)(c)).

And finally, the last regulation we’ll talk about that mentions close persons is Article 96 (2) of Tax Code which states that one can refuse to testify only if he or she would cause the danger of prosecution to himself/herself or to close persons, which is where we circle back.

One can thus conclude that the new decision of the Constitutional Court regarding close persons has real impact only in the area of criminal law, eventually also administrative or civil law, but in the substantive area of taxes the impact will be minimal.