Expats’ income tax base to be ‘super-grossed’ by fictitious premium only once

The remuneration of expatriates working under an international lease of workers that is paid partly by their formal/legal employer abroad and partly by their economic employer in the Czech Republic shall be increased for the purposes of determining the income tax base by a ‘fictitious’ social security premium only once, i.e. applying a single maximum assessment base. The Supreme Administrative Court (SAC) thus sided with us on an issue where tax administrators’ approach was so far divided.

The case in question involved an employee assigned from Japan whose remuneration for work performed in the Czech Republic was paid partly by the Czech (economic) employer, and partly by the formal/legal employer in Japan, who did not bill this part to their Czech counterpart. The employee was not covered by Czech social security insurance and remained covered by health and social security insurance in Japan, based on the Certificate of Coverage by Social Security Legislation issued by the Japanese authorities.

When determining the employee’s income tax base, the remuneration was increased by a ‘fictitious’ premium, i.e. the social security and health insurance premium that they would have paid had they been employed in the Czech Republic. The social security premium was only calculated on one maximum assessment base. The tax authority first accepted this approach but later, in the course of the worker’s assignment, started to challenge it. In their opinion, the money paid from the Czech Republic and that paid from Japan constituted two separate incomes from employment, and should be increased by the fictitious premium on a separate basis, which means applying a separate maximum assessment base to each of them.

The case proceeded to the SAC. Referring to an explanatory report to the law, the court confirmed that income indeed has to be increased by statutory insurance premiums in the same manner as if the taxpayer had been covered by Czech insurance legislation. However, the taxpayer only performed one work under an employment contract concluded with a single formal/legal employer, and the manner of dividing the costs between the economic employer and the formal /legal one was not relevant for calculating the employee’s income tax base.

The SAC also pointed out that the financial administration did change their approach without a sufficient explanation, as previously they had not challenged the taxpayer’s approach.

So far, the approach applied by individual bodies of the financial administration has not been unified, as a number of tax authorities historically accepted the application of a single maximum assessment base, yet the Appellate Financial Directorate confirmed orders to pay tax issued based on a contrary approach. We are pleased with the SAC’s conclusions for several reasons. After many years of a pending dispute, the court finally granted our objections. Also, we believe that the judgment has now clearly resolved the issue and the tax authorities’ future approach will finally be unified.