SAC on taxation of travel allowances for foreign employees
In a recent judgment, the Supreme Administrative Court (SAC) addressed the question of which travel allowances paid to foreign employees on business trips to the Czech Republic may fall outside the scope of income tax.
The dispute concerned a situation in which a Polish company sent its employees on business trips to the Czech Republic and paid them meal allowances. The tax authority assessed personal income tax on the portion of the meal allowance exceeding the maximum amount set by the Czech Labour Code for domestic business trips. The company argued that the application of Czech rules to foreign employees was discriminatory and contrary to both EU law and the Czech-Polish double tax treaty.
The regional court accepted the tax authority’s argument that the Income Tax Act refers to the Czech Labour Code and that it was irrelevant that the employment contracts had been concluded under Polish law. It further stated that the Czech Labour Code does not expressly regulate travel allowances for foreign employees on business trips within the Czech Republic and that it was therefore necessary to apply an analogy, while respecting the prohibition of discrimination laid down in the double tax treaty. For the purpose of such analogy, it considered as an appropriate benchmark the meal allowance that would be granted to an employee travelling on business from the Czech Republic abroad.
The tax authority lodged a cassation complaint with the Supreme Administrative Court (3 Afs 112/2025-34) against that judgment. It argued that the regional court had erred and that its decision was internally inconsistent. At the same time, it maintained that the maximum meal allowance under the Czech Labour Code is the same for both tax residents and non-residents, disagreed with the use of foreign meal allowance rates (rather than Czech ones) and described the regional court’s proposed approach as discriminatory.
The SAC confirmed that Czech legislation does not directly regulate the situation of foreign employees on business trips in the Czech Republic and that an analogy may therefore be used. At the same time, however, it criticised the regional court for failing to explain sufficiently why it had chosen foreign meal allowance rates and why it had considered the tax authority’s approach discriminatory. The regional court should have explained in greater detail how it understood the prohibition of discrimination under the double tax treaty and should also have taken into account the Commentary to the OECD Model Tax Convention.
The SAC therefore overturned the regional court’s judgment on the grounds of insufficient reasoning and remitted the case for further proceedings. The regional court must reassess which legal framework is the most appropriate for use by analogy and explain consistently how it applies the prohibition of discrimination in the context of the international treaty, taking into account the Commentary to the OECD Model Tax Convention.