Prevention of double taxation: SAC deals with mutual agreement procedure between Czechia and Germany
The Supreme Administrative Court (SAC) has held that it is not for a court to determine whether any agreement concluded with another contracting state under a double tax treaty is invalid.
The SAC judgment No. 5 Afs 468/2019-68, published just before Christmas, dealt with Article 25 of the Double Taxation Treaty between the Czech Republic and Germany. Under the article, if there are any doubts whether taxation took place in accordance with the treaty, both contracting states may resolve the dispute by mutual agreement.
Administrative authorities in Germany had concluded that an individual who was both a Czech and a German citizen had a tax domicile in Germany between 1997 and 2008, and assessed additional tax on dividend for that period. The individual claimed that under the treaty their tax domicile had been in the Czech Republic, and asked the Czech Ministry of Finance as the competent authority to initiate a procedure to resolve the case by mutual agreement with the German Federal Tax Authority pursuant to Article 25 of the treaty.
The Ministry of Finance of the Czech Republic initiated the procedure and informed the German authorities that the individual had been issued a certificate of tax domicile in the Czech Republic for the period 1993 – 2010. The German authorities then submitted evidence indicating that individual’s tax domicile had been in Germany. The Czech Ministry of Finance accepted these arguments and confirmed the conclusions of the German authorities.
The individual disagreed with the Czech ministry’s approach and, even before the mutual agreement procedure was closed, filed an action with a municipal court demanding the duty to protect their rights as a Czech tax resident to be imposed, and the procedure of the Czech Ministry of Finance to be declared unlawful. The municipal court found the action to be unfounded and dismissed it, and the individual then filed a cassation complaint with the SAC.
The SAC noted that if an individual submits their case for resolution to the competent authority of the contracting state (i.e. the Ministry of Finance of the Czech Republic), the authority has in principle three options how to respond to this request: they can reject the request as unjustified, find a satisfactory solution to the case itself, or initiate a procedure to settle the dispute by mutual agreement.
In the case in question, the Ministry of Finance of the Czech Republic chose the third option and initiated the mutual agreement procedure. According to the SAC it is also the responsibility of the administrative authority to inform the taxpayer of its choice. If the competent administrative authority considers the objections raised by the taxpayer justified and seeks to resolve them through mutual agreement procedure, such a procedure then already constitutes a negotiation within the realm of public international law, where two sovereign states are seeking an agreement. Although the taxpayer has a primary interest in reaching an agreement in their favour, they are neither a party to nor a participant in this negotiation. Article 25 of the treaty does not grant them any subjective public rights as to the outcome of the procedure to which the administrative court could afford protection. It is therefore not for the court to decide how international negotiations are to be led. Neither should it assess whether the competent authority has defended the taxpayer’s rights vigorously enough in the particular case.
As the SAC summarised in its decision, a review of the competent authority's opinion pursuant to Article 25 of the treaty is only possible in two cases: firstly, if the competent authority rejects the taxpayer’s request for the procedure provided for by Article 25 of the treaty as unjustified – which did not happen in this case; and secondly, after the mutual agreement procedure has been closed, which had not yet happened in the case in question. In view of this, the SAC dismissed the cassation complaint. However, as the SAC added, even if the administrative court had dealt within its review with the competent authority’s approach to a mutual agreement procedure already concluded, its assessment would have no effect on that procedure, since it is not for the court to determine whether any agreement concluded with the other contracting state is invalid.
To conclude, the SAC inter alia noted that the fact that tax liabilities may have expired shall not lead to a refusal to initiate a mutual agreement procedure, not even if this resulted in a double non-taxation of income; the treaty does not contain any clause that would make non-taxation in one contracting state conditional upon taxation in another contracting state. According to the SAC, the Ministry of Finance of the Czech Republic should therefore not take a passive approach to the mutual agreement procedure just because the income can no longer be taxed in the Czech Republic due to expiry of the lapse period.