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When does the super-gross salary concept apply to benefits from third persons?

The Regional Court in Hradec Králové has recently dealt with the income tax implications of employee benefits provided by third persons. The court’s decision affects the determination of employees’ super-gross wages.

The Regional Court in Hradec Králové (Judgement Ref. No. 52 Af 48/2017-44) had to decide whether the tax administrator had rightfully assessed additional tax on income from employment to a company that had provided benefits to employees of another entity, Česká pošta (Czech postal company). When performing their employment duties, the employees of Česká pošta also offered the products of the company in question based on a contract with Česká pošta and simultaneously could participate in the company’s motivation programme, receiving various forms of non-monetary benefits based on their sales efforts. The company taxed these non-monetary benefits as the income of Česká pošta employees generated in connection with employment, but without increasing the tax base to the super-gross salary. The tax administrator challenged this procedure, claiming that the income tax prepayments should have been calculated from the income increased by relevant social security and health insurance contributions, i.e. from the super-gross wage.

The Regional Court agreed with the tax administrator’s opinion. According to the court, the current legal regulation of social security and health insurance offers wider definitions of employers and employees: an employee is not only a person active based on a specific legal relationship but also a person whose income is liable to tax on income from employment, irrespective of the legal nature of such an activity. Since 2014, any person who provides income that is liable to tax on income from employment, provided that such income is generated from the activity performed for this person, has been regarded as an employer, which undoubtedly occurred in this particular case, according to the court.

The company filed a cassation complaint against the Regional Court’s decision with the Supreme Administrative Court. If the SAC confirms the above interpretation, it would mean that relevant social security and health insurance contributions would have to be paid on benefits paid by third persons. When preparing motivation programmes for employees, it is therefore necessary to pay appropriate attention to the above issue to minimise any potential adverse tax implications.