CASE OF SPACEK, s.r.o. v. THE CZECH REPUBLIC
Preliminary objection rejected (estoppel);No violation of P1-1
6. The applicant is a limited liability company incorporated under Czech law with its head office in Prague. 7. In 1991 Špaček SW (the predecessor of the applicant company) maintained its accounts by single-entry book-keeping in accordance with section 25 of Private Business Activities Act (No. 105/1990) (zákon o soukromém podnikání občanů) ("the Private Business Activities Act") and the Private Business Accounting Rules (zásady vedení účetnictví při soukromém podnikání občanů) ("the Rules") published in the Ministry of Finance's Financial Bulletin No. 5 on 15 June 1990. 8. On 31 May 1991 Špaček SW was registered in the Register of Commerce (podnikový rejstřík) pursuant to section 13(3) of the Private Business Activities Act. 9. On 1 January 1992 Špaček SW passed to double-entry book-keeping. On 19 November 1992 it ceased to exist, and the applicant company, Špaček, s.r.o. (společnost s ručením omezeným) was incorporated. 10. On 22 April 1993 the Prague 5 Finance Office (finanční úřad) notified the applicant company that it was required to pay additional income tax of CZK 385,600, including a penalty of CZK 37,200, for the 1991 tax year because Špaček SW had not increased the income tax base for the 1991 tax year by including certain assets amounting to CZK 713,971 even though, pursuant to section 4(e) of the Regulations on the procedure for passing from single to double-entry book-keeping (postup přechodu z jednoduchého na podvojné účetnictví) ("the Regulations") of 17 April 1991, published in Financial Bulletin No. 6/7 on 30 May 1991, it had been required to do so. The Finance Office held that Špaček SW had violated both section 25 of the Private Business Activities Act and the Regulations. 11. On 17 August 1993 the Prague Finance Department (finanční ředitelství) dismissed the applicant company's appeal. It stated that the Finance Office had correctly decided the case in accordance with the Rules published in Financial Bulletin No. 5 and the Regulations published in Financial Bulletin No. 6/7. It also stated that the Rules and Regulations were issued in order to clarify obligations arising from section 25 of the Private Business Activities Act. 12. On 14 October 1993 the applicant company appealed to the Prague Municipal Court (mĕstský soud). It submitted that in 1991 Špaček SW had maintained single-entry book-keeping in accordance with section 25 of the Private Business Activities Act and section 1(2) of the Rules issued by the Ministry of Finance on 18 April 1990 under number V/2-4900/90. It claimed that the Rules provided for single-entry book-keeping by businesses which were not registered in the Register of Commerce, or businesses which were registered in the Register of Commerce under section 13(3) of the Private Business Activities Act (i.e. voluntarily and not pursuant to the obligation to register under section 13(1) of the Act). The applicant company also submitted that, even though the contents of the Rules were not legally binding, businesses were applying them for the sake of convenience. It further maintained that the Prague Finance Department, having applied the Regulations which were not legally binding, had breached section 2(1) of Administration of Taxes Act (No. 337/1992) as amended (zákon o správě daní a poplatků), which had provided that tax administrators were obliged to act and decide in compliance with statutes (zákony) and other legislative or regulatory instruments binding in general (obecně závazné právní předpisy), and section 4(1) of the Income Tax Act (No. 157/1989) as amended (zákon o důchodové dani), as it had concluded that the profits of the applicant company had been increased by amounts by which its expenses had not been increased contrary to the law. 13. On 22 December 1993 the Prague Municipal Court rejected the applicant company's appeal. It considered that in 1991 the Ministry of Finance was entitled to regulate the way in which accounts were to be kept and that there was no law obliging the Ministry to publish principles and regulations concerning this matter in the Official Gazette. Under section 8(1)(b) of the Official Gazette Act (No. 131/1989) (zákon o sbírce zákonů), measures (opatření) of central administrative authorities and other central authorities were to be published only where statute so required. As the applicant company did not increase its income tax base for 1991, it had not complied with the Regulations, and there was a breach of section 25(2) of the Private Business Activities Act. 14. On 1 March 1994 the applicant company lodged a constitutional appeal alleging a violation of its right under Article 2(4) of the Constitution, according to which “everyone shall be allowed to do anything which is not forbidden by law, and no one shall be forced to do anything which is not required by law”. It also invoked Article 4(1) of the Charter of Fundamental Rights and Freedoms, according to which “obligations shall be imposed only by law, within its limits, and by observing fundamental rights and freedoms”. The applicant company claimed that the Prague Municipal Court had not decided whether the Regulations met the requirements of the Official Gazette Act regarding generally binding legislative or regulatory instruments, and had not taken into consideration the principle that any secondary legal act must be published in the Official Gazette (sbírka zákonů), must have an appropriate title and form, and must be intended to become valid and enforceable in order to be binding on individuals and legal entities not subordinate to the issuing body. 15. The applicant company also criticised the opinion of the Prague Municipal Court that it was obliged to observe internal regulations (interní normativní akty) which were not accessible to it and whose contents could not objectively be found out and applied. The applicant company concluded that in 1991 it had been required to fulfil obligations imposed on it by the Regulations, of which it had not been, and could have not been, aware as they had been imposed in a manner and form incompatible with the Official Gazette Act. 16. On 2 June 1994 the Constitutional Court (Ústavní soud) dismissed the applicant company's constitutional appeal as ill-founded. The Court found inter alia that: "Section 25 of the Private Business Activities Act ... established the obligation to keep single or double-entry book-keeping in compliance with accounting rules as prescribed by law. In 1991 the ... Ministry of Finance was entitled to set up conditions and requirements for accounting ... To specify obligations set out in section 25 ..., the ... Ministry of Finance issued the Private Business Accounting Rules, ... published in Financial Bulletin No. 5. This measure ... further defined obligations on businesses in respect of book-keeping. Moreover, section 29(1) and (3) define the responsibility of businesses for the state of their accounting records and set out the sanctions arising from a violation of the obligations under ... section 25 ... or from a failure to observe the Rules. This measure, which sets up standards of book-keeping for private businesses, was followed by the Ministry of Finance Regulations ... of 17 April 1991, ... published in Financial Bulletin No. 6/7 ... The date of the entry into force of these Regulations is not specifically given; nevertheless, it states that the transfer from single to double entry book-keeping shall always take place on 1 January of an accounting year ... ... as regards any insufficiency in the publication of those Regulations ..., the Court can, in general, agree with the applicant that ordinary legal acts become valid only when published in the Official Gazette. In cases where there is no reason to publish generally binding legal acts of central administrative authorities, such legal acts must be announced in the Official Gazette. The present case concerned a regulation of a ... central administrative authority which, in the light of section 8(1)(b) of the Official Gazette Act, had to be published in the Official Gazette only if so provided by law. This was not the case for section 25 of the Private Business Activities Act." 17. Czech tax legislation has adopted the principle that taxes and contributions may be imposed only on the basis of statute (zákon), as enunciated in Article 11(5) of the Charter of Fundamental Rights and Freedoms. 18. At the material time income tax was governed by the Income Tax Act (No. 157/1989) which came into force on 1 January 1990. Under section 4(1)(a), the tax base was the profits resulting from the activities caught by the tax, as established in the taxpayer’s accounts, together with any amounts by which the expenses shown in those accounts had been increased or the revenues reduced in violation of the law. The Act was successively amended by Acts Nos. 108/1990, 574/1990 and 578/1991. 19. On 1 January 1993 the Administration of Taxes Act (No. 337/1992) came into force. It governed, inter alia, the procedure for the assessment of tax obligations and the calculation of taxes to be applied by financial authorities and taxpayers. Under section 2(1), tax administrators were obliged to act in compliance with statutes and other generally binding legislative and regulatory instruments, and to protect the interests of the State while maintaining the rights and legal interests of taxpayers and other persons involved in tax proceedings. The Act was successively amended by Acts Nos. 35/1993, 157/1993 and 302/1993. 20. The obligation for businesses to keep single or double-entry book accounts in compliance with prescribed accounting principles was laid down by section 25(2) of the Private Business Activities Act (No. 105/1990), which came into force on 1 May 1990. According to the first paragraph of this provision, businesses were required to keep accounts showing their revenues, their expenses and the results of their business activities, and the assets used for, and the liabilities ensuing from, those business activities. The Act specified neither the legal form under which accounting principles be adopted nor the authority entitled to issue them. 21. The Ministry of Finance had jurisdiction over accounting matters by virtue of section 14 of the Socio-economic Information Act (No. 21/1971), as amended by Act No. 128/1989, which empowered the Ministry to regulate accounting, budgeting, calculation and matters of financial reporting, and to issue model accounts, related guidelines and other accounting standards. The Act did not require the Ministry to publish measures taken by it in the Official Gazette. 22. The Private Business Accounting Rules (“the Rules”), published in Financial Bulletin No. 5 on 15 June 1990, introduced the requirement for businesses to use single or double-entry book-keeping and indicated that the base accounting period was to be the calendar year. The Rules came into effect on 1 June 1990. They referred to the Private Business Activities Act and the fact that they were issued by the Ministry of Finance for the purposes of specifying the obligations introduced by section 25 of the Act. They did not, however, make transitional regulations for businesses which were starting to use double-entry book-keeping. They set out the sanctions arising from a violation of the obligations under section 25 and from a failure to observe the Rules. 23. The Regulations on the procedure for passing from single to double-entry book-keeping (“the Regulations”), published in Financial Bulletin No. 6/7 on 30 May 1991, made provision for the transition from single to double-entry book-keeping. Amongst other matters, Section 4(e) provided that, when the transition was made, the business’ income tax base for the current year was to be increased, apart from non-deductible and deductible items specified by statute, by the value of materials, depreciating assets and stock, if the relevant invoices were entered in the accounting books and had been paid before 31 December of the previous year. The Regulations did not contain any reference to the Private Business Activities Act and did not specify the date on which they would become effective. 24. Neither the Rules nor the Regulations were published or announced in the Official Gazette. 25. The Official Gazette Act (No. 131/1989), as amended by Act No. 426/1990, governed, inter alia, the manner of promulgating legislative or regulatory instruments binding on individuals and legal entities in general, as well as the measures of central authorities. 26. According to section 2, the full wording of all constitutional and other statutes (zákony) enacted by Parliament and legal measures (zákonná opatření) taken by the Parliamentary President’s office, orders issued by the Government (nařízení vlády) and legislative statutory instruments taken by central administrative or other central authorities - decrees (vyhlášky), save for the exceptions enumerated in section 3, must be published in the Official Gazette. 27. According to section 3, in the case of rulings (výnosy) issued by the central administrative or other central authorities, an announcement in the Official Gazette of their delivery will suffice if they concern, inter alia, a small number of recipients, or govern details of labour and social security rights and obligations of a group of closely linked persons. 28. Section 6 provides that the legal acts enumerated in sections 2 and 3 become valid on the day of their publication in the Official Gazette and are enforceable on the fifteenth day after such publication, unless otherwise postponed. 29. Section 8(1)(b) provides that measures (opatření) taken by the central administrative or other central authorities can either be published in full in the Official Gazette, or simply announced there where a statute so requires. According to section 8(2), such measures or internal instructions (vnitřní směrnice) are not to be described as “decrees” or “rulings”.