The Supreme Administrative Court: Financial means provided to company executives are not necessarily just income form dependent activities


In the business environment, it is quite common for companies (e.g. Co. Ltd.) to provide their executives or partners with money loans or other forms of pecuniary consideration in addition to remuneration for the work performed. Retrospectively, after a lapse of time, it may not always be clear what nature these incomes are and by reason of what they were provided. The burden of proof then falls on the company that provides the financial assets.

In the current judgment of the Supreme Administrative Court (hereinafter SAC), the subject of the dispute was the situation where financial means were transferred to the private account of the sole executive and partner. The question was whether these funds represented a short-term loan (as claimed by the company) or the executive’s income from a dependent activity (as claimed by the tax authority). In the given case, the company did not submit sufficient contractual documentation or other relevant evidence. In the opinion of the financial administration and the regional court, it was a payment of remuneration to the executive of a business corporation, and therefore income from a dependent activity subject to tax and insurance premiums.

However, the SAC found the company in the right, as the administrative authorities evaluated the income in dispute as remuneration of a member of a body of a legal entity without a more detailed justification.  The decisive factor for assessing the nature of income is always the specific mutual relationship between the payer and the taxpayer. However, the tax office did not present any more detailed considerations in this regard.

It is always advisable to properly document and duly book the means provided to the executive or partner, so that there is no doubt as to the legal ground from which they derive.