SAC on definition of beneficial owner of royalties

In the case under review (SAC 6 Afs 56/2023), the taxpayer paid royalties to distributors of television programmes who were part of its corporate group. The payments were then in full passed on to the programme producers. According to the tax administrator, the reduced rate under the double taxation treaty between the Czech Republic and the jurisdiction of the programmes’ distributors should not have been applied, as the distributors were not the beneficial owners of the royalties. Instead, the taxpayer should have applied a withholding tax rate of 15%, as prescribed by Czech laws.

The case concerns the period before the adoption of important tax rulings by the Court of Justice of the EU (CJEU) and the amendment to the EU directive on the common system of taxation of interest and royalties which clarifies the beneficial owner definition. However, the SAC emphasised that even these later sources of law can be used as an interpretative aid to understand the beneficial owner concept correctly.

Recent case law defines the beneficial owner of royalties by the following characteristics:

• Receipt of income into the sphere of disposition: The beneficial owner must actually receive the income and have control over it.
• Freedom to dispose of income: The beneficial owner must be free to dispose of the income. This includes the right to control, use and enjoy it without being restricted by contractual or legal obligations to pass on the income to others.
• Economic benefit: The beneficial owner should benefit economically from the income, which means that they can benefit from the income without having to pass it on.

In the course of the proceedings, it became apparent that the beneficial owner had probably been the producer of the programmes, a resident of a state whose double taxation treaty is in fact even more favourable to the Czech Republic than the treaties of the distributors' states. However, the SAC confirmed that the tax administrator had not been obliged to take this into account (the look-through principle) without explicit evidence provided by the taxpayer. The court stressed that the burden of proof lies with the taxpayer, and they must prove that the royalty payments were passed on to a beneficial owner within the meaning of the international treaties.

This SAC decision therefore indicates that during tax proceedings, it is possible to determine the actual owner of the royalties even if they are not the same as the entity stated as the recipient of the royalties in the agreement. By this important step, the court confirmed that when assessing beneficial ownership, the broader context of the transactions and their economic implications must be considered, not just the formal data stated in the contracts.