SAC: application of double tax treaty to sale of domestic real estate business share

Under the Czech Income Tax Act, income of tax non-residents from the transfer of shares in corporations based in the Czech Republic is sourced in the Czech Republic and is therefore taxable here. The double tax treaty between the Czech Republic and Cyprus grants the right to tax this income in the source state if more than 50 percent of the company's value derives from Czech real estate.

In its decision in case 22 Afs 143/2025 - 40, the SAC recalled the general approach to the interpretation of double tax treaties, emphasising that these treaties can neither replace the domestic tax regulations of the contracting states nor establish a new right of the state to demand payment of tax. As a rule, they only change the tax regime established by domestic tax regulations, and in principle only to the benefit of taxpayers.

The SAC further reiterated that the Income Tax Act itself provides a sufficient legal basis for taxing income from the sale of shares in corporations based in the Czech Republic. The treaty does not prevent such taxation if, as in this case, the income stems from the transfer of shares in a company where more than 50 percent of its value is derived from real estate located in the Czech Republic.

In the present case, the taxpayer pointed to their legitimate expectations and the absurd consequences arising from the analogical interpretation of the Income Tax Act, according to which all income from the sale of shares of the largest Czech publicly traded corporation (ČEZ, a.s.), 75 percent of whose assets consist of real estate, would have to be taxed similarly (the court did not deal with the methodology for determining the value of real estate in the value of the company).

According to the SAC, a taxpayer’s legitimate expectations may also arise based on the passivity on the part of an administrative authority that is deliberate and intentional in the application of legal regulations. However, when assessing whether such practice can be considered binding, it is crucial that it is a consistent, coherent, and long-term activity or inactivity that repeatedly confirms a certain interpretation of the law and that the taxpayer can legitimately rely on. According to the SAC, however, the latter condition was not met in the present case. The taxpayer did not prove that the financial authorities had consistently, coherently, and over a long period of time not taxed income from the transfer of shares in ČEZ, a.s., nor that the taxpayer had knowingly relied on such practice. References to the passivity of the authorities therefore cannot give rise to legitimate expectations.