Supreme Administrative Court on beneficial owner of royalties
The tax administrator disputed foreign distribution companies as the beneficial owners of royalties and regarded them as mere intermediaries, therefore refusing the application of withholding tax in the amount under the double tax treaties based on the distributors’ tax residence, and assessing additional tax at the standard 15% withholding tax rate.
The taxpayer, a provider of television programmes to consumers in the Czech Republic, paid royalties to distribution companies (Czech tax non-residents) who then paid them to programme producers (also Czech tax non-residents). The tax administrator refused to apply the reduced withholding tax rate under the double tax treaties based on the distributors' countries of residence because it did not consider them to be the beneficial owners of the income.
In the subsequent proceedings, the taxpayer sought the application of the look-through principle, under which the tax administrator should apply the reduced tax rate under the double tax treaties concluded between the Czech Republic and the countries in which the programme producers were tax residents, arguing that those producers were beneficial owners of the royalties.
The tax administrator and subsequently the regional court rejected this on the grounds that there was no legal relationship between the taxpayer and the producers, and that the royalty payments were made to the intermediaries, not to the producers.
The tax administrator emphasised that the burden of proof as to the identification of the beneficial owner was on the taxpayer. Although the taxpayer had submitted to the tax administration a declaration of beneficial ownership by the individual companies producing the programmes (unrelated persons), in the tax administrator's view, this declaration was not sufficient evidence.
The taxpayer then also failed before the Supreme Administrative Court (10 Afs 47/2025-49).
The Supreme Administrative Court (SAC) stated that the presence of an intermediary in the business model (and the payment of royalties to that intermediary) does not prevent claiming tax benefits under international tax treaties relating to the beneficial owner of the royalties who derives economic benefits from the subsequent receipt of the royalties.
However, the SAC agreed with the regional court's conclusion that a precondition for claiming tax benefits is a relationship between the taxpayer paying the royalty and the beneficial owner of that royalty. In the present case, that relationship was absent: the SAC confirmed that the taxpayer had failed to bear the burden of proof and dismissed the cassation complaint.
This judgment may have a significant impact on Czech taxpayers. It confirms that a declaration of beneficial ownership is not in itself sufficient evidence. At the same time, from a practical point of view, taxpayers making payments to third parties often have limited possibilities how to verify whether the entities to which they pay royalties or other fees are their beneficial owners, and must often rely on the entities’ declarations in this respect.
The definition of the relationship between the taxpayer and the beneficial owner also remains an open question on which the SAC did not further elaborate as it only indirectly confirmed the conclusions of the regional court which required the existence of a legal relationship.
Given the taxpayer's obligation to withhold and pay tax in the correct amount, business disputes may arise if the beneficial owner of royalties is uncertain and a conservative withholding tax rate is subsequently applied.