AGRO-B SPOL. S R.O. v. THE CZECH REPUBLIC
Inadmissible
Angelika Nußberger;Dean Spielmann;Elisabet Fura;Ganna Yudkivska;Karel Jungwiert
The applicant, Agro-B, spol. s r.o. is a Czech company with its seat in Kardašova Řečice. It was represented before the Court by Ms S. Sobolová, a lawyer practising in Prague. The respondent Government were represented by their Agent, Mr V.A. Schorm, from the Ministry of Justice. The facts of the case, as submitted by the parties, may be summarised as follows. On 16 December 1999 the applicant company created a joint stock company “AGRO-D, a.s.” which was entered in the Companies Register on 4 January 2000. On 25 January 2000 the applicant company affirmed to invest its real estate, the value of which was estimated at CZK 34,509,880 (EUR 1,225,117), as a non-cash investment in the joint stock company’s capital. The value of its investment was divided, for the purposes of accounting, into three parts, when CZK 10,000,000 (EUR 355,050) was booked as a registered capital (základní kapitál), CZK 2,000,000 (EUR 71,000) as a guarantee fund (rezervní fond) and the remaining part of CZK 22,509,880 (EUR 799,111) was placed on other capital funds. On 12 July 2001 the Jindřichův Hradec Finance Office (finanční úřad) levied on the applicant company real estate transfer tax of CZK 1,246,220 (EUR 44,241), the base of assessment being fixed at CZK 24,924,400 (EUR 885,005), calculated from the value of the immovable property which had not been booked as a registered capital. On 1 March 2002 the České Budějovice Finance Department (finanční ředitelství) dismissed the applicant company’s appeal on the following grounds: “Under section 20(6)(e) investment into companies or cooperatives shall be exempted from payment of gift tax and real estate transfer tax under the relevant legal provisions, i.e. the Second Part of the Commercial Code, which does not recognise any other investment than that in the registered capital, in contrast to the book-keeping procedure ... Moreover, it is clear from section 60(1) of the Taxation Act concerning the management of investments made prior to the creation of a company, that only investments into the company’s registered capital are to be considered as investments into the company ... Bearing in mind that the [Taxation Act] exempts from payment of tax only investments into the company, using the term of ‘investment’ as defined in the Commercial Code, the exemption only concerns those investments which increase the company’s registered capital. Other investments ... which do not increase the registered capital are liable to real estate transfer tax. ... It is to be added that e.g. the Ústí nad Labem Regional Court in its judgment no. 15 Ca 671/97-18 and the Constitutional Court in its decision no. III. ÚS 31/2000 affirmed that an investment ... within the meaning of section 20(6)(e) of the Taxation Act is an investment to the registered capital.” On 17 July 2002 the České Budějovice Regional Court (krajský soud) dismissed the applicant company’s administrative action against the tax order finding, in particular, that since the applicant company had invested to the joint stock company the immovable property in its entirety and not its part corresponding to the joint stock company’s registered capital, the difference between the total value of the invested property and the value of the property invested to the registered capital had constituted the base for the real estate transfer tax. Applying systematic and teleological interpretation it concluded that section 20(6)(e) of the Taxation Act covered only investments that increased the registered capital. The court further held that the fact that the joint stock company could not have the registered capital at its disposal - contrary to its other assets – was precisely taken into account in the tax assessment. The court found irrelevant the applicant company’s reference to section 163a of the Commercial Code that the transfer of immovable property to a joint stock company differed from the same operation involving other companies. In its judgment, the Regional Court made reference to the Constitutional Court’s judgment no. III. ÚS 31/2000 of 18 May 2000. On 4 October 2002 the applicant company lodged a constitutional appeal (ústavní stížnost) alleging a violation of Articles 2 § 2, 11 § 5, 26 § 1 and 36 §§ 1 and 2 of the Charter of Fundamental Rights and Freedoms (Listina základních práv a svobod). On 23 June 2004 the Constitutional Court (Ústavní soud) dismissed the appeal, endorsing the reasons on which the administrative and judicial authorities had based their decisions. It referred to the Ministry of Finance’s opinion which read, inter alia, as follows: “The Director of the Department of Real Estate Tax of the Ministry of Finance, upon the Constitutional Court’s request, submitted that the interpretation of sections 58 and 59 of the Commercial Code may allow a conclusion that the term of investment means property of a partner which he or she undertakes to invest in the company ... The total of the company’s partners’ monetary and non-monetary investments constitutes the registered capital which, in terms of book-keeping, is an accounting debit. Precisely, it is the partners’ real estate invested in the company, forming, after the transfer of the ownership, the registered capital, which constitutes the investment under section 20(6)(e) of the Taxation Act .... The Ministry of Finance is therefore of the opinion that the investment into the company which was exempted from payment of real estate transfer tax under the Taxation Act [then in force] was only the investment valuably expressed in the registered capital. ... The Ministry also referred to the ... opinion of certain courts, e.g. judgments of the Prague Municipal Court no. 28 Ca 362-97-44, of the Ústí nad Labem Regional Court no. 15 Ca 671/97, of the Ostrava Regional Court no. 22 Ca 230/2001-26, the Brno Regional Court no. 29 Ca 525/2000-39 which are published in ASPI, or in professional bulletins ... The Constitutional Court adopted a concordant opinion in its decisions no. III. ÚS 31/2000 and no. II. ÚS 184/2000. According to the Ministry, the tax legislation and its interpretation is accessible to the public, clearly defined and consistent, and so foreseeable.” The Constitutional Court held that the imposition of tax was in conformity with the Constitution as it was based on the law. It further held that having carefully reasoned their decisions, it could not be said that the fiscal authorities had applied the law arbitrarily. The court found irrelevant the applicant company’s reference to section 163a of the Commercial Code that the taxation regime applicable to joint stock companies differed from that which applied to limited liability companies. Under section 9(1)(a) real estate transfer tax is payable on the transfer of an estate carried out in return for payment. Section 10a provides that the real estate transfer tax base is the price established under the relevant legal provisions on the day of the acquisition of the estate, even if the price agreed between the parties is lower than the legally established price. Section 20(6)(e) provided, inter alia, that investments into companies or cooperatives under a special law, i.e. the Second Part of the Commercial Code, shall be exempted from payment of gift tax and real estate transfer tax. Section 20(6)(e) provides, inter alia, that investments into the registered capital of companies or cooperatives under a special law, i.e. the Second Part of the Commercial Code, shall be exempted from payment of gift tax and real estate transfer tax. Section 58 provides, inter alia, that a company’s registered capital consists of the total of its partners’ monetary and non-monetary investments in the registered capital. Under section 59(1), a partner’s investment in the company shall be the total sum of his or her monetary contribution and any other investment appraisable in monetary terms which the partner undertakes to invest in the company. Section 60(1) provides, inter alia, that ownership title to real estate is acquired by the company upon the recording of the ownership title in the Land Registry on the basis of a written declaration by the party concerned, to which are appended officially authenticated signatures. Under section 163a(1) the issue price of a share is the sum at which a company issued shares. The issue price cannot be lower than the nominal value of a share. The second paragraph provides, inter alia, that if the issue price of a share is higher than its nominal value, the difference constitutes a share premium. Under the third paragraph, the difference between the value of non-monetary investment and the nominal value of shares which are to be issued to the shareholder as consideration, is considered as a share premium, providing that the company’s statute, articles of association or a decision of the general meeting do not specify that that difference or part thereof is to be paid to the subscriber, or, that it is to be considered as a guarantee fund. The court held that if the claimant’s investment had not been intended to increase the company’s registered capital, it could not be considered as an investment within the meaning of section 20(6)(e) of the Taxation Act. The court held that only investments that increase a company’s registered capital are exempt from payment of tax under section 20(6)(e) of the Taxation Act. The court stated that section 59(1) of the Commercial Code defines the investment of a partner as the total sum of his or her monetary contribution and any other investment appraisable in monetary terms which the partner undertakes to invest in the company. The registered capital is then defined as the total of the partners’ monetary and non-monetary investments in the registered capital. Section 20(6)(e) of the Taxation Act exempts from payment of gift tax investments into companies or cooperatives under the relevant legal provisions, i.e. the Second Part of the Commercial Code. It follows that the Commercial Code does not provide for any other investment than that into the registered capital, contrary to accounting rules. Taking into account that the Taxation Act exempts from payment of taxes only investments into a company when using the term of investment as defined by the Commercial Code, the exemption applies only to the investments which increase the company’s registered capital. The court held that the terminology used by the legislator in section 20(6)(e) of the Commercial Code was not equivocal. The legislator used the term of non-monetary investment, which can only be exempted from payment of tax, in meaning both the investment of a partner and, at the same time, the whole substance of the investment, i.e. not only the part which constitutes the partner’s investment but also the part which was considered as a share premium. The Taxation Act had not specified, until 1 June 2001, which of the two meanings of the investment had to be used by section 20(6)(e). The court found in relation to litigation prior to the change in June 2001 that the exemption from payment of real estate transfer tax only applied to an investment into the registered capital of a company. In that case, the real estate transfer tax will not be levied. The court, applying the version in force before June 2001, found that the exemption from payment of real estate transfer tax only applied to investment into a company within the meaning of the Commercial Code. Only those investments which were to increase the registered capital could be exempted from payment of real estate transfer tax. Investments which did not increase the registered capital are liable to tax. The domestic courts held that real estate transfer tax had to be paid on investments into companies that did not form part of the registered capital.