The Constitutional Court found no 232 / 2021 Coll.
The Constitutional Court found of 18 May 2021 sp. zn.
Valid
The Constitutional Tribunal found
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232
FIND
The Constitutional Court
On behalf of the Republic
The Constitutional Court decided under sp. zn. Pl. ÚS 87 / 20 on 18 May 2021 in plenary composed of the President of the Court of Paul Rychetský and judges and judges Louis David, Jaroslav Fenyk, Josef Fialy, Jan Filip, Jaromír Jirsa, Tomáš Licenčník, Vladimir Sládeček, Radovan Suchanek, Pavel Šámal, Vojtěch Šimíček, Milady Tomková (Judge of the Rapporteur), David Uhlíř and Jiří Zemánek, on the proposal of the group 41 Members of the Chamber of Parliament of the Czech Republic, for which Mr Marek Benda, legally represented by the Advocate General Zdenek Koudelka, Ph.D, the seat of the Opratov 46, Brno, on 1). In Part Three of Act No 364 / 2019 Coll., amending certain laws in the field of taxation in the context of the increase of public finances, possibly on the abolition of 3) Article IV (3) of Act No. 364 / 2019 Coll., and Article 23 (3) (a) (19), (c) (1), (2) and (2) (i) of Act No 586 / 1992 Coll., as amended by Act No. 364 / 2019 Coll., and Article 23 (3) (b) (4) (10) (3) (b) (1) (2) (2) and (2) (2) (2) (2) (6) (6) (6), (5), (5) (5) (6) (5) and (6) (5) of Law No 364 / 2019 Coll), and (4) (4) (10) (3) (b) (b).
as follows:
Motion denied.
Reasons
Definition of the case
1. A group of 41 Members submitted on 8 July 2020 a proposal for the repeal of Act No. 364 / 2019 Coll., amending certain laws in the field of taxation in the context of increasing public budget revenue (hereinafter "Act No. 364 / 2019 Coll.") on account of the inconstitutionality of the process of its adoption (above part of petit sub 1).
2. In the event that the Constitutional Court would not abolish that law as a whole, it proposes to abolish only some, part of the petit from above sub 2) defined by the provisions of that law.
3. In the event that the Constitutional Court does not comply with the second proposal with the consequences of the revival of the original legislation, it proposes to abolish some parts of the petit from above sub 3) defined, the provisions of Act No. 364 / 2019 Coll., Act No. 593 / 1992 Coll., on provisions for determining the income tax base, as amended by Act No. 364 / 2019 Coll., hereinafter referred to as "the Law on Reserves' and Act No. 586 / 1992 Coll., on Income Tax, as amended by Act No. 364 / 2019 Coll.
4. Apart from the previous parts of the petition, the appellant requests the withdrawal of the above parts of the petit sub 4) the defined provisions of the Income Tax Act and Act No. 187 / 2016 Coll., on Gambling Tax, as amended by Act No. 364 / 2019 Coll., hereinafter referred to as "the Gambling Tax Act '.
5. The appellant asks the Constitutional Court, in view of the urgency of the case under Article 39 of Act No. 182 / 1993 Coll., on the Constitutional Court, as amended, hereinafter referred to as "the Law on the Constitutional Court", to discuss and rule on a priority. If the Constitutional Court had decided on this proposal in such a way that the effects of the annulment of the contested law would not occur until 1 July 2021, when insurance companies would be forced to pay the tax authorities the first part of the non-constitutional levy, they would have suffered serious and subsequently irreparable damage.
Derogation of the contested provisions
6. The applicant contests (part of petit sub 2) the following provision of amending Act No. 364 / 2019 Coll. (Article III (12), (13), (14) and (15) and Article IV (3) of Part Two and Article V (3) - highlighted in the text):
Amendment of the Income Tax Act
...
12. in Article 23 (3) (a), the following point 19 is added: "19. The loss of reserves in insurance under the law governing the provision for determining the income tax base,"
13. in Paragraph 23 (3), the dot is replaced by a comma at the end of point (c) and the following point 11 is added: "11. increase in insurance reserves under the law governing the provision for determining the income tax base."
14. in Paragraph 23 (9), point (c) is replaced by the dot and point (d) is deleted;
15. in Article 24 (2) (i), the words "and with" shall be replaced by the words "and," and, at the end of the text of the letter, the words "and with the exception of the provision in the insurance sector under the law governing the reserve for determining the income tax base," shall be added.
...
Transitional provisions
...
3. In the first 2 tax periods starting from the date of entry into force of this Act, the result of the management or the difference between the income and expenditure shall be increased by one half of the difference between the amount of the adjusted reserves in the insurance sector under Act No. 593 / 1992 Coll., as effective from the date of entry into force of this Act, at the beginning of the first tax period beginning from the date of entry into force of this Act and the balance of the reserves in the insurance sector under Act No. 593 / 1992 Coll., on provisions for determining the basis of the income tax base, as effective before the date of entry into force of the Act, with the beginning of the first tax period beginning of the first tax year, with which the Czech Republic has entered into force on the date of entry into force of the international agreement on the date of the entry into force of the effective of this Act, the tax, the provision of the provision, the provision of the provision of the provision of the provision of the provision of the provision of the provision of the provision of the provision of the provision of the provision of the provision of the provision of the provision of the provisions on the provision of the provision of the provision of the provision of the provision
...
Amendment of the Reserve Act to determine the income tax base
In Act No. 593 / 1992 Coll., on provisions for the determination of the income tax base, as amended by Act No. 157 / 1993 Coll., Act No. 323 / 1993 Coll., Act No. 244 / 1994 Coll., Act No. 132 / 1995 Coll., Act No. 211 / 1997 Coll., Act No. 633 / 1998 Coll., Act No. 663 / 1999 Coll., Act No. 492 / 2000 Coll., Act No. 2 / 2009 Coll., Act No. 216 / 2009 Coll., Act No. 238 / 2002 Coll., Act No. 176 / 2003 Coll., Act No. 261 / 2007 Coll., Act No. 669 / 2004 Coll., Act No. 377 / 2005 Coll., Act No. 545 / 2005 Coll., Act No. 223, Act No. 223 / 2006 Coll., Act No. 261.
Insurance provisions
(1) Insurance reserves are, for the purposes of income tax, technical provisions established under the law governing insurance.
(2) In the case of a taxpayer established in the territory of a Member State of the European Union or of a State forming a European Economic Area other than the Czech Republic, engaged in an insurance or reinsurance activity in the territory of the Czech Republic, insurance reserves for income tax purposes are technical provisions to settle liabilities arising from such activity established in accordance with the laws of the State of its registered office, governing access to, and pursuit of, insurance and reinsurance activities in accordance with European Union27).
(3) In the case of a taxpayer established in the territory of a State which is neither a Member State of the European Union nor a State forming the European Economic Area and with which the Czech Republic has concluded an international agreement governing the creation and amount of technical provisions in the insurance and reinsurance business which is carried out, carrying out an insurance or reinsurance activity in the territory of the Czech Republic with provisions in the insurance sector for the purposes of income taxes, the technical provisions to settle the obligations arising from that activity established in accordance with this international agreement.
(4) Adjusted insurance reserves for income tax purposes means insurance reserves
(a) less amounts recoverable from reinsurance contracts under the directly applicable European Union Regulation (28); and
(b) plus the balance of deferred acquisition costs of insurance contracts under the accounting legislation.
(5) The addition of reserves in insurance means the positive difference between the amount of adjusted reserves in insurance at the end of the tax period and the amount of adjusted reserves in insurance at the beginning of the tax period.
(6) The loss of reserves in insurance means the negative difference between the amount of adjusted reserves in insurance at the end of the tax period and the amount of adjusted reserves in insurance at the beginning of the tax period.
(7) For the purposes of determining the increase in insurance reserves and the loss of insurance reserves, the tax period shall also be considered as the period for which the return is to be made.
(8) Insurance provisions for the purposes of income tax are not technical provisions to settle insurance or reinsurance obligations in a State with which the Czech Republic has concluded an international agreement to prevent double taxation of all types of income carried out and under which double taxation of income is excluded by the exemption method.
27) Directive 2009 / 138 / EC of the European Parliament and of the Council of 25 November 2009 on the taking up and pursuit of the business of Insurance and Reinsurance (Solvency II), as amended.
(28) Commission Delegated Regulation (EU) 2015 / 35 of 10 October 2014 supplementing Directive 2009 / 138 / EC of the European Parliament and of the Council on the taking up and pursuit of the business of Insurance and Reinsurance (Solvency II), as amended. ';
7. In addition to the already mentioned transitional provision of Article IV (3) of Law No 364 / 2019 Coll. also Article 6 of the Reserve Act, § 23 (3) (a) (19) (c) (11) and § 24 (2) (i) of the Income Tax Act (highlighted in the contested parts) are contested:
Reservation Act
Insurance provisions
(1) Insurance reserves are, for the purposes of income tax, technical provisions established under the law governing insurance.
(2) In the case of a taxpayer established in the territory of a Member State of the European Union or of a State forming a European Economic Area other than the Czech Republic, engaged in an insurance or reinsurance activity in the territory of the Czech Republic, insurance reserves for income tax purposes are technical provisions to settle liabilities arising from such activity established in accordance with the laws of the State of its registered office, governing access to, and pursuit of, insurance and reinsurance activities in accordance with European Union27).
(3) In the case of a taxpayer established in the territory of a State which is neither a Member State of the European Union nor a State forming the European Economic Area and with which the Czech Republic has concluded an international agreement governing the creation and amount of technical provisions in the insurance and reinsurance business which is carried out, carrying out an insurance or reinsurance activity in the territory of the Czech Republic with provisions in the insurance sector for the purposes of income taxes, the technical provisions to settle the obligations arising from that activity established in accordance with this international agreement.
(4) Adjusted insurance reserves for income tax purposes means insurance reserves
(a) less amounts recoverable from reinsurance contracts under the directly applicable European Union Regulation (28); and
(b) plus the balance of deferred acquisition costs of insurance contracts under the accounting legislation.
(5) The addition of reserves in insurance means the positive difference between the amount of adjusted reserves in insurance at the end of the tax period and the amount of adjusted reserves in insurance at the beginning of the tax period.
(6) The loss of reserves in insurance means the negative difference between the amount of adjusted reserves in insurance at the end of the tax period and the amount of adjusted reserves in insurance at the beginning of the tax period.
(7) For the purposes of determining the increase in insurance reserves and the loss of insurance reserves, the tax period shall also be considered as the period for which the return is to be made.
(8) Insurance provisions for the purposes of income tax are not technical provisions to settle insurance or reinsurance obligations in a State with which the Czech Republic has concluded an international agreement to prevent double taxation of all types of income carried out and under which double taxation of income is excluded by the exemption method.
27) Directive 2009 / 138 / EC of the European Parliament and of the Council of 25 November 2009 on the taking up and pursuit of the business of Insurance and Reinsurance (Solvency II), as amended.
(28) Commission Delegated Regulation (EU) 2015 / 35 of 10 October 2014 supplementing Directive 2009 / 138 / EC of the European Parliament and of the Council on the taking up and pursuit of the business of Insurance and Reinsurance (Solvency II), as amended. '
Income Tax Act
Tax base
...
(3) Result or difference between revenue and expenditure referred to in paragraph 2
(a) is increased by:
...
19. The loss of insurance reserves under the Income Tax Base Act,
...
(c) may be reduced by:
11. the increase in insurance reserves according to the Act governing the provision for determining the income tax base.
...
...
(1) Expenditure (costs) incurred to achieve, secure and maintain taxable income shall be deducted from the amount shown by the taxpayer and the amount laid down by this Law and the special legislation.5) Expenditure already incurred in the previous tax periods in the expenditure to achieve, secure and maintain revenue cannot be used in the expenditure to achieve, secure and maintain revenue. Where a taxpayer charges certain accounting operations compensated in accordance with special legislation20), costs whose eligibility is limited to the amount of income related to them shall be assessed as if costs and revenues were charged separately.
(2) The expenditure (costs) referred to in paragraph 1 is also:
...
(i) provisions and adjustments, the method of production and the amount of which for tax purposes is laid down by special law 22a) and paragraph 9 for cases where a claim has been acquired by a transformation131), with the exception of provisions created by taxpayers in connection with the achievement of the income generated by them under Paragraph 10, with the exception of the provision for the management of electricity waste from solar panels under the law governing the provision for the establishment of the income tax base and with the exception of the provision for the provision for the provision for the establishment of the income tax base, ';
8. The appellant further challenges (part of petit sub 4) the following provisions of the Income Tax Act (highlighted in the contested text):
Other revenue
...
(3) In addition to the revenue referred to in Section 4, tax is exempt:
(b) winnings from
1. lottery and raffle, if the winning amount does not exceed CZK 1 000 000,
2. gambling, which is a particular type of income as referred to in paragraph 1 (a). (h) points 2 to 6 where the difference between the sum of the winnings covered by this type of income and the sum of the gambling deposits within this type of income for the tax period does not exceed CZK 1 000 000;
...
(5) In the case of revenue referred to in paragraph 1 (b), expenditure shall be the price at which the debtor has demonstrably acquired the case and, where the case is acquired free of charge, the price determined in accordance with the special law on the valuation of the property (1a) at the date of the acquisition. In the case of tangible assets written down in accordance with § 26 et seq., which was included in the commercial property for the pursuit of an activity which results in income from a separate activity or was used for rent, the expenditure shall be the balance price referred to in § 29 (2). If it is an exchange or a win, the price shall be based on the special rule (1a) (§ 3 (3)). The expenditure shall also be the amounts evidenced for the technical evaluation, correction and maintenance of the case, including other expenditure relating to the execution of the sale, with the exception of expenditure on the personal need of the taxpayer. The value of the taxpayer's own work on the items he has produced or evaluated himself shall not be taken into account in determining expenditure. In addition to the acquisition price of a share or a Common Line and the purchase price of other securities, the expenses related to the execution of the transfer and the payment for trading on the securities market on the acquisition of securities may be applied to the proceeds of the transfer of the securities. Expenditure in excess of the revenue referred to in paragraph 1 (b), (c), (f) and (g) in the tax period in which repayments or advances for the first time arise for the sale of goods, for the future sale of immovable property or for the sale of a holding in a limited company, a limited partnership, a share in the capital of a cooperative or a claim under Paragraph 33a of the Land and other agricultural assets may be applied in that tax period up to the amount of that income. Where income is generated in other tax periods, the same procedure shall apply, up to the total amount that can be applied under this provision. For the revenue referred to in paragraph 1 (b), the expenditure shall be the advance paid, even if it is refunded in another tax year. In the case of income arising from the appeal, it grants a fee for the evaluation of the gift. In the case of revenue referred to in paragraph 1 (h) (2) to (6), expenditure shall only be a gambling deposit.
...
(8) The income referred to in points (f) and (g) of paragraph 1 shall also be the positive difference between the valuation of the assets under the special legislative provision (1a) and the amount of its value recorded in the accounts of the commercial corporation at the time of the termination of the membership of the trading corporation, provided that the share of the liquidation balance or settlement interest is settled in non-monetary form. If, in addition to the right to a settlement interest in non-monetary form, a member of a trading corporation, in the event of the termination of its participation in it, creates a debt to the trading corporation at the same time, this positive difference in the amount of the debt shall be reduced. The income referred to in points (f), (g), (h) (1), (ch) and (o) of paragraph 1, with the exception of the income from the share of the liquidation balance and the share of the settlement interest of members of a public commercial company and Associates of a limited company resulting from resources in the Czech Republic, is a separate tax base for taxation at a specific tax rate (§ 36). If this income comes from sources abroad, the tax base (the sub-base of the tax) is as defined in Section 5 (2). Where a contract price includes a remuneration for the use of a work or performance, the amount attributable to that remuneration shall be reduced by the taxable amount taxed at a special tax rate and shall be included in the revenue referred to in Section 7. For the taxpayers referred to in Article 2 (2), where the sport activity is an activity which results from income from a separate activity, the prices received from sports competitions shall be considered as revenue pursuant to Article 7.
...
(1) Expenditure (costs) incurred to achieve, secure and maintain taxable income shall be deducted from the amount shown by the taxpayer and the amount laid down by this Law and the special legislation.5) Expenditure already incurred in the previous tax periods in the expenditure to achieve, secure and maintain revenue cannot be used in the expenditure to achieve, secure and maintain revenue. Where a taxpayer charges certain accounting operations compensated in accordance with special legislation20), costs whose eligibility is limited to the amount of income related to them shall be assessed as if costs and revenues were charged separately.
(2) The expenditure (costs) referred to in paragraph 1 is also:
...
(u) a tax on the income of natural persons paid by a payer to a taxpayer on the income referred to in Article 10 (1) (h) (1) or (ch), which applies a special rate of tax (Paragraph 36), if the prize or price is in non-cash transactions, and the road tax paid by one of the spouses, registered as the holder of a motor vehicle in a technical licence, is used for an activity which results from the income from a separate activity, by the other of the spouses who are not registered as the holder of the technical licence, and the road tax paid by the public commercial company for the members of a public commercial company or by a limited company for the accomplices to their own vehicle;
...
Specific rate of tax
(2) The specific rate of income tax for taxpayers referred to in Sections 2 and 17, unless otherwise provided for in paragraph 1 or 5, is 15%, namely:
(i) income in the form of a receipt lottery price, income generated by individuals from advertising and writing, awards from competitions, sports competitions and contests in which the competition is restricted by the conditions of the competition or, or competitors selected by the organiser of the competition [§ 10 (1) (ch)] and income from winning the lottery and raffle,
...
(6) Where a taxpayer who is a tax resident of the Czech Republic includes all the revenue referred to in § 6 (4) or all the revenue referred to in § 10 (1) (h) (1), which was a separate tax base for taxation at a specific tax rate under § 36, not reduced by the expenditure until the tax return for the tax period in which the income was paid, the tax deducted from that income on its tax shall be taken into account (at the time of the submission of the proposal was made by paragraph 7, the numbering of the provisions of § 36 took place in the interval of point 70 of Act No. 609 / 2020 Coll. - note of the Constitutional Court).
9. Finally, in the fourth part of the petition, the following provisions of the Gaming Tax Act (highlighted) are also contested:
Tax rate
The rate of gambling tax shall be:
(a) 35% for the lottery tax sub-base;
(b) 23% for the sub-base of the exchange rate tax;
(c) 23% for the sub-base of the tax on totalizator games;
(d) 23% for the bing tax sub-base;
(e) 35% for the technical game tax sub-base;
(f) 23% for the part-taxable basis for live games;
(g) 23% for the raffle tax sub-base; and
(h) 23% for the sub-base of the small-scale tournament tax. "
Claim of the appellant
How the law is adopted
10. The author sees a defect in the process of adopting Act No. 364 / 2019 Coll. The Chamber of Deputies of the Parliament of the Czech Republic ("the Chamber of Deputies'), namely in:
1) Resolution No 9 of the Chamber of Deputies of 1 November 2019 at the 36th session, which was firmly included in the vote on the draft of the contested law at third reading at 6.11.2019 from 10 a.m., without taking into account whether all Members' applications for the debate will be exhausted,
2) Resolution of the Chamber of Deputies of 6 November 2019 No 14 at the 36th session, which concluded the debate at the third reading of the government proposal for the contested law, without being able to complete its speech by Mr Kalousek and to speak to 25 other Members who have applied for it,
3) Resolution of the Chamber of Deputies of 6 November 2019 No 770 at the 35th meeting by which it gave its assent to the Government's proposal for the contested law, as approved by the Chamber of Deputies,
4) the State's intervention in the procedure of Vice-President Vojtěch Filip of the Chamber of Deputies on 6 November 2019, which, as part of its chairmanship of the Chamber of Deputies, acted in such a way as to prevent some Members from speaking at third reading on the government proposal for the contested law, to end the debate and to allow the vote on amendments.
11. The applicant submits that Article 1, Article 2 (3) and Article 6 of the Constitution of the Czech Republic (hereinafter referred to as the Constitution) and Article 2 (2) and Article 21 (1) of the Charter of Fundamental Rights and Freedoms (hereinafter referred to as the Charter) have been infringed by the above procedure. These resolutions and the President's procedure infringed both the constitutional order and the subjective constitutional rights of Members to the proper and unhindered exercise of their public office. It is an abuse of power and a restriction of opposition rights that, when discussing the draft contested law, it was not possible for some Members to speak at third reading.
12. The appellant is aware that the Constitutional Court has already dealt with a similar situation in the sp. zn. The difference is that the majority of the government has already been aware of the view of the Constitutional Court that it is in breach of the Rules of Procedure of the Chamber of Deputies, and that the draft law on the registration of sales has been discussed for a long time. According to the appellant, a government majority could have accelerated the approval of the bill differently, not at third reading.
13. The appellant requests, since the contested law is an amendment, that its annulment (or withdrawal of its selected provisions) should take place with the effect of ex tunc, and "revive" the previous legislation. According to the appellant, it is otherwise not possible to ensure that the unconstitutional consequences of the new taxation of reserves in the insurance sector can be eliminated, since there is no doubt as to the constitutionality of the previous legislation and, in view of the timescale, it cannot be expected that the legislator could respond to the possible derogatory findings of the Constitutional Court sufficiently quickly, under the new legislation, that it can already be implemented in the fulfilment of the tax obligations for 2020. The appellant then argues the principle of legal certainty, mentions the first publication literature and findings sp. zn.
The content of the contested provisions
On the taxation of insurance reserves
14. The appellant contests the amended version of Section 6 of the Reservation Act, the amended version of Sections 23 and 24 of the Income Tax Act and the transitional provision of Article IV (3) of Law 364 / 2019 Coll. alleging that they are intervening in the right to the protection of the ownership of insurance undertakings, retroactive step-taxation of insurance undertakings' reserves, as a result of the enormous increase in the tax burden on insurance undertakings, in some cases in the so-called choking effect. At the same time, insurance companies are discriminated against, as a sector against, or between, other taxpayers in other sectors.
15. The appellant recalls that insurance or reinsurance undertakings (hereinafter referred to as "insurance undertakings") are obliged to establish technical provisions with regard to the full scope of their business and to a sufficient level to be able at any time to meet their obligations towards clients.
16. Act No 364 / 2019 Coll. by means of the contested transitional provision (Article IV (3)), in conjunction with the amended form of Article 6 of the Reservation Act, provides for the taxation of insurance reserves by insurance undertakings consisting of a tax on corporate income from the negative difference between the technical provisions in insurance under Act No. 277 / 2009 Coll., as amended (hereinafter referred to as "the Solvency II Reserve"), respectively, and the European Parliament and Council Directive 2009 / 138 / EC on access to and pursuit of insurance and reinsurance activities (hereinafter referred to as "Solvency II Directive"), on the one side (hereinafter referred to as "the Solvency II Reserve"), and the technical provisions under the Financial Regulations under Law No 563 / 1991 Coll.
17. The nature of its reservations is summarised by the appellant by the fact that, according to the legal status by 1.1.2020 (before the entry into force of Act No. 364 / 2019 Coll.), the technical provisions constituted the expenditure to be achieved, secured and maintained by the insurance undertakings in the amount to which the insurance undertaking recorded the expenditure in accordance with § 27 (1) (c) of the Accounting Act. Such an adjustment led to a situation where it was not necessary to respond in fact to the fact that the concept of a technical reserve used in the accounting rules for insurance undertakings included, for the most part, a different group of economic categories than the concept of a reserve to which accounting rules operate, an income tax law and a reserve law for non-insurance entities. However, as a result of the amendment carried out by Act No. 364 / 2019 Coll. the technical provisions of insurance undertakings are subject to a flat-rate approach which wipes out the specific technical provisions of insurance undertakings.
18. The value of the technical provisions recorded from the accounts was also taken into account when determining the solvency of insurance undertakings under the insurance business rules effective until 23 September 2016. From that date, new business regulations have become effective, which, among other things, also provide for the identification and valuation of the value of insurance liabilities for the purpose of establishing the solvency of insurance undertakings. In addition to the technical provisions, insurance undertakings "in parallel 'therefore value the value of the liabilities (provisions) of the insurance contracts entered into for the purposes of establishing solvency and according to the Solvency II procedures. These provisions are not reflected in the accounts and had no relevance until the adoption of the contested rules for determining the taxable base. The Solvency II procedure is regulated by directly feasible provisions issued by the European Insurance and Occupational Pensions Authority (EIOPA) under the responsibility of the European Commission and the European Parliament, and the main aim is to determine what minimum capital value the insurance undertaking must hold to meet the requirements of the Capital Equipment Act.
19. According to the contested legislation, the provisions of Solvency II are newly recognised for insurance undertakings, thus replacing the technical provisions under the accounting rules with provisions under Solvency II.
20. The impact on individual insurance undertakings will be different because the ratio between Solvency II provisions and technical provisions under accounting rules may differ for each insurance undertaking. The amendment of the Act will affect insurance undertakings which, as a result of better risk management or, where appropriate, the setting of parameters for the valuation of insurance obligations under directly feasible rules, will have lower requirements for sufficient capital (solvency) and hence the value of provisions under Solvency II than the value of technical provisions created in accordance with accounting rules.
21. The contested provisions act retroactively according to the author. On the basis of the transitional provision of Article IV (3) of Law No 364 / 2019 Coll., there is a step-by-step taxation (however spread over two periods) under the new rules, thereby causing disproportionate prejudice to the legal relationships and relationships established before 1 January 2020 and the legitimate expectations of the tax effects on insurance undertakings which were in possession of technical provisions at the time of the creation of the technical provisions. According to the appellant, at least the retroactivity was incorrect, arguing also for the retroactivity to be genuine. The transitional provision interferes with past tax-relevant taxpayers' behaviour, which they have done with the assumption that the technical reserves, as they have been created so far, are tax-relevant. The contested legislation thus constitutes legal consequences on the legal facts that occurred in the past, but were reclassified ex post in such a way that claims based on the original legislation (entitlement to tax recognition of technical provisions) are governed by new legislation. Therefore, the subject matter of taxation has only been defined now and it is intended to make a negative difference between the provisions under Solvency II and the technical provisions under accounting rules calculated for the past tax period. The provisions of Solvency II were not relevant in the past. The appellant recalls the conclusions of sp. zn.
22. Legal relations in the past, i.e. reserves created and then tax-deductible (technical provisions under accounting regulations), must now be "reclassified" in the form of a difference between technical provisions under accounting rules and provisions under Solvency II, which was not required at all by the legislation in force at the time of the provision. This difference is now excluded from the tax deductible scheme and de facto subsequently taxed. The legal circumstances established before the law is effective are therefore assessed in accordance with the new law, or the formation of tax obligations depends on the legal facts established before the law which it was established.
23. The applicant also refers to the finding of sp. zn. The Constitutional Court has not found a breach of the prohibition of genuine retroactivity in relation to the taxation of electricity on the ground that the electricity produced before the contested law was put into effect was not the subject of the levy on the case. In the present case, however, the technical reserve created by insurance companies before the law is effective is subject to taxation and therefore the appellant objects to the true retroactivity. The insurance companies had a legitimate expectation that their situation for the purposes of calculating income tax would be assessed according to the legislation applicable and effective when they decided to make the relevant provisions in accordance with § 27 (1) (c) of the Accounting Act.
24. Even if it were just a retroactive improper, the appellant said that the new legislation cannot interfere with the legal status of tax entities in a way that denies their trust in law. The solution to the conflict between the new and the old legislation should not be a matter of chance or a matter of pleasure, but a consideration in the collision of standing values and an assessment of proportionality. According to the appellant, the first step of appropriateness is no longer fulfilled, since, in view of the objective of increasing tax collection, it only causes time compression of what would ultimately be collected in the context of the payment of insurance income tax to the public budget anyway. Instead of the time horizon of the materialisation of liabilities covered by technical provisions (which will be very different according to the different types of insurance or situations, but in practice can be up to 35 years), the relevant tax levy will be selected quickly (jump) within the following two tax periods. The change is not capable of achieving even the stated objective of higher "objectivity" of a tax-deductible reserve system. Even in the step of necessity and proportionality, the change in legislation would not have stood in relation to the objective of increasing the collection of public budgets. The Czech Republic (hereinafter the "Czech Republic") does not deal with the immediate lack of financial resources for the public budget, there is no public interest in this accelerated, individual interest of the current government motivated by tax collection. According to the appellant, other measures were available, namely the retention of the adjustment effective before the application of Act No 364 / 2019 Coll. and applicable to the balance of technical provisions having their origin at the time before the application of the change in the legislation or the distribution of taxation on the different types of provisions to a longer period than two tax periods. Even if it were found that retroactive application of the amended legislation is necessary and necessary to achieve the declared objectives, it is a measure that causes the so-called "choking 'effect. According to the appellant, it is necessary to assess whether the degree of intervention in the" disappointed' confidence of insurance undertakings in the previous legal situation corresponds to the importance and urgency of the reasons for the legal change brought about by the amendment to the tax laws.
25. According to the appellant, a number of insurance companies will be the result of a step up in their tax burden with a potentially extremely disproportionate impact. Almost half of the insurance companies will be higher than their total annual profits; in some cases it will be double and in one case four and a half times the annual profit, while the author shows the data of the Czech Insurance Association on 31 December 2018 showing the impact of one-off taxation on insurance companies. The appellant contradicts the argument of the explanatory memorandum, consisting of the possibility of using the postponement institution in the form of the distribution of the payment of the tax on instalments pursuant to § 156- 157 of Act No. 280 / 2009 Coll., Tax Code, as amended, hereinafter referred to as the "Tax Code '. They claim that this does not eliminate the unconstitutionality as the outcome of the procedure depends on the discretion of the tax administrator.
26. According to the appellant, there is also a breach of the principle of equality, both equality of action under Article 3 (1) of the Charter in conjunction with the right to own property within the meaning of Article 11 of the Charter and of non-action of equality under Article 1 of the Charter, or a breach of the prohibition of discrimination within the meaning of Article 14 of the Convention on the Protection of Human Rights and Fundamental Freedoms ("the Convention ') in conjunction with the right to protect property within the meaning of Article 1 of the Additional Protocol to the Convention. The specificities of the insurance sector are not taken into account and there is unequal treatment of insurance companies in general as a specific sector, as well as of certain insurance companies established in the Czech Republic operating abroad through a branch and also with branches of foreign insurance companies in the Czech Republic.
27. As regards the alleged discrimination against insurance undertakings as a sector, the appellant submits that the technical provisions themselves are of a broader economic nature for insurance undertakings and are of a different nature and a link to the main object of the business than those of other taxpayers. The insurance undertakings, by definition, deal with the obligation to comply with a contract defined by random events and the reserves are therefore an inherent component of the business of the insurance undertakings. Thus, entities in a different position are treated in the same way without taking into account the specificities of insurance business compared to other taxpayers.
28. According to the appellant, the "mechanical 'take-over of the provisions under Solvency II and their" exchange' of technical provisions under existing legislation without detailed analysis means in some cases double taxation or taxation of future profits of insurance undertakings.
29. In the case of insurance companies located in the Czech Republic, however, the foreign branch (so-called permanent establishment abroad) is discriminated against when the relevant double taxation contract provides for a simple credit as a method of avoiding double taxation. The jump difference taxable according to the contested legislation in 2020 and 2021 represents taxable income, with "not meeting" taxable income in the Czech Republic (i.e. in the calculation method of all income, including foreign income) and taxable income abroad; they will not "meet" or the relevant taxes (domestic and foreign) to be credited in the Czech Republic. In the years 2020 and 2021 the taxable income in the Czech Republic will be "too large" (adding the difference according to the contested transitional provision) and later "too small."
30. According to the author, discrimination will also occur against foreign insurance companies with branches (permanent establishments) in the Czech Republic, as the provisions according to Solvency II in the relevant state of foreign insurance companies will generally not be a measure for tax-deductible reserves. In practice it will be a difficult to control or uncontrollable quantity, since reserves captured abroad in accordance with the regulations and their "allocation" (if any) to a branch in the Czech Republic can again cause disputes according to the regulations there. For branches of foreign insurance companies from a third State (pursuant to § 6 (3) of the Reserve Act), the situation may arise that the branch will not have any tax-deductible reserves.
31. There is also disproportionate interference in the right to own property under Article 11 of the Charter, or the right to protect property under Article 1 of the Additional Protocol to the Convention, and as a result of the infringement of the right to do business guaranteed under Article 26 of the Charter. The appellant disputes the legality of the intervention by failing to adopt the legislation in a constitutionally consistent manner, calling into question the existence of a legitimate objective of the intervention in question as it considers that the objectives declared in the explanatory memorandum (higher collection of revenue and greater objectivity of the chosen method of determining reserves) cannot be fulfilled by the contested regulation. At the same time, the jumping tax on insurance companies' reserves is considered an excessive and disproportionate burden, since almost half of insurance companies operating on the Czech market will have an additional tax burden higher than their total annual profit, sometimes multiple times. At the same time, there is no means to give the insurance companies concerned real hope of spreading the tax burden over time.
To tax lotteries
32. The provisions challenged by the fourth part of the petition create, according to the appellant, an unjustified inequality in income taxation - gambling winnings. While for lotteries and raffle, the entire income from each win above CZK 1 000 000 is taxed on a one-off basis without the possibility of deducting the deposit, for all other games, deposits to these games can be deducted from the tax base within the tax period. This makes the winner of the lottery and raffle an unacceptable burden on the winner of another gambling game. The appellant submits that the purpose of the proposed deregulation is uniform taxation, that is, allowing the deduction of expenses to be won, i.e. deposits for all games.
33. According to the appellant, the contested regulation is contrary to Article 3 (1) of the Charter and Article 4 (3) of the Charter. The State is obliged to tax revenue from gambling in the same way and to the same extent, unless there is a reason for a different procedure. However, according to the appellant, such a reasonable reason does not exist in the case of lotteries and raffle. Lottery is the least risky form of gambling.
34. The appellant also challenges the amount of the tax rate enshrined in Article 4 (a) of the Gaming Tax Act (increasing the lottery tax from 23% to 35%) for the contradiction with Article 3 (1) of the Charter and Article 4 (3) of the Charter. According to the appellant, there is no reason for a different rate. The change in tax rate is sudden and vigorous; the lottery operator entered the market under certain tax circumstances. The state may change taxes, but the increase from 23 to 35% is disproportionate. The change looks like a general standard, but it is actually an individual act, because the absolute majority of the market for traditional lotteries is owned by the trading company Sazka, a. s. The strong taxation of lotteries is a denial of the meaning and purpose of regulation, as the main criterion for determining the level of the tax rate is primarily to be the harmful nature of a particular type of game.
Observations of the parties and the intervener
35. The Constitutional Court requested the expression of the two chambers of Parliament of the Czech Republic, the Government and the Ombudsman.
36. The Ombudsman, Dr Stanislav Křicek, has stated that he will not exercise his procedural right under Paragraph 69 (3) of the Constitutional Court Act and will not enter the proceedings.
Observation of Parliament's chambers
37. For the Chamber of Deputies of the Parliament of the Czech Republic, its President, Mgr. Radek Vondráček, sent his observations. It summarises the course of the legislative process in the Chamber of Deputies and states that the rights of the opposition must be guaranteed when adopting laws, but, on the other hand, it must be taken into account that political decisions are based on the will of most of the elections. In accordance with the procedure of the Chamber of Deputies at third reading, that is to say, by ending the debate, even though other Members have been enrolled in it, the Constitutional Court has already dealt with the examination of the proposal for the annulment of the law on the registration of sales from which it is cited. The President of the Chamber of Deputies states that the majority of the House did not agree to limit the speaking time of Members or to limit their speech to a maximum of two speeches under Rule 59 (1) and (2) of the Rules of Procedure of the Chamber of Deputies, because it did not want to limit the right of Members to comment on the law under consideration in this way. Coalition Members have repeatedly proposed the third reading on other days and hours other than Wednesday and Friday from 9: 00 to 14: 00, that has always been vetoed by opposition representatives. The President of the sitting has repeatedly drawn the attention of some of the acting Members to the purpose of Paragraph 95 (2) of the Rules of Procedure of the Chamber of Deputies, according to which it is possible to propose at third reading the correction of legislative technical errors, grammatical and written errors and modifications which logically result from the amendments tabled. These warnings, however, have not generally been responded to by the opposition Members. Sufficient space has been created for the possible correction of errors as well as for the expression of the draft law within the limits of the third reading. Thus, according to the President of the Chamber of Deputies, there was no breach of the fundamental preconditions for the adoption of draft laws and was followed in accordance with the principles of constitutional order and the values of the rule of law.
38. On behalf of the Senate of the Parliament of the Czech Republic (hereinafter referred to as "the Senate"), the President Miloš Vyšl sent his observations. Recalling the course of the Senate hearing, it recalls that, during the discussion, there was also discussion of the issues which are the subject of a constitutional complaint as well as the way in which the Chamber of Deputies was consulted. It then quotes the statements of some of the senators criticising the regulation adopted, as well as those who defended it. The Senate returned the draft to the Chamber of Deputies, as amended by the approved amendments, and the Chamber of Deputies subsequently insisted on its original bill. According to its President, the Senate has discussed the draft law within the limits of the Constitution and the constitutional procedure.
Government observations
39. The Government of the Czech Republic ("the Government") approved the entry into the proceedings, proposed the rejection of the petition in all parts of the petition, authorised the Minister of Justice, in cooperation with the Vice-President of the Government and the Minister of Finance, to draw up detailed observations of the Government and to authorise the Vice-President of the Government and the Minister of Finance to represent the Government in the proceedings before the Constitutional Court.
Concerning the repeal of the amendment and the possibility of "revival 'of the original provision
40. In its observations, the Government contradicts the possibility of the repeal of Act No. 364 / 2019 Coll., as it is an amendment which, by the entry into force of the Act on 1 January 2020, became part of the amended Act and lost its separate legislative existence. It contradicts the possibility of "revival" of the original regulation even if the amending regulation is repealed. The draftsman presented the theory contradicts the character of legal acts from the point of view of law theory. That consequence would correspond to the category of nothingness used for individual legal acts, but in the case of legislation this category does not exist and even if it did exist, the nothingness assumptions would not be fulfilled in the present case. It also refers to paragraphs 70 and 71 of the Law on the Constitutional Court, as well as to the literature showing that the repeal of the law has an effect of constitutional and not declaratory, or that the powers of derogatory powers of the Constitutional Court only apply to futuro. In the overall context of the case law of the Constitutional Court, decisions abolishing the amendment are quite exceptional.
The process of adopting Act No. 364 / 2019 Coll.
41. The Government does not agree that the circumstances of the hearing of the Law currently under consideration are fundamentally different from those of the Act on the Registration of Sales, in which the Constitutional Court found no reason for deregulation in the sp. zl. According to the Government, the conclusion of a third-reading debate is not a defect that has a constitutional legal dimension and justifies the repeal of the law thus adopted.
42. The fact claimed by the appellant that the majority of governments did not make use of the possibility of shortening the proposal in committees should be considered as proof that the majority of governments respected the opposition's rights and allowed the proposal to be discussed properly. The Government also contradicts the appellant's assertion that the majority of governments did not use the opportunity to convene an extraordinary meeting, as the 36th meeting, where the proposal was also discussed, was extraordinary. According to the Government, the appellant erroneously mentions the number of days and hours of the third reading proposal as the proposal was discussed five days, not three days, and the third reading did not last for 15 hours, but more than 19 hours. Overall, the proposal was discussed at four meetings in eight days, and the total duration of the hearing exceeded 27 hours, with no comitology period being included. The Members therefore had sufficient opportunity to comment on the proposal. He also points out that, for example, the opposition Member Miroslav Kalousek spent more than 4 hours reading European regulations in the third reading process, despite being repeatedly alerted to the meaning of third reading. The argument that opposition Members did not have enough room to discuss the proposal is difficult to stand up. The opposition was given sufficient space in plenary and in committees, including the possibility of making amendments and procedural proposals.
43. As regards the alleged violations of the subjective rights of individual Members, the Government refers again to the finding of sp. zn.
On the alleged unconstitutional nature of taxation of insurance reserves
44. According to the Government, the appellant's arguments show a different approach for insurance undertakings to develop technical provisions according to accounting rules and the Solvency II scheme. However, the logic of the matter would suggest that, when an insurance undertaking treats risks on the basis of better management and therefore has lower capital requirements, it should also have lower requirements for technical provisions under accounting legislation, i.e. the value of both types of reserves should in principle be the same. Consequently, the same difference in the tax base would also be reflected at present.
45. The government contradicts the argument that it would be an unexpected and surprising adjustment. The intention to implement this adjustment was discussed in the context of a public consultation of a substantive solution to the reclassification of income taxes at the beginning of 2017, the Government's programme statement approved in June 2018 explicitly states that "tax-eligible technical reserves will be reconnected to the rules contained in the European Solvency II Directive '. The proposal was circulated to the inter-ministerial comment procedure in April 2019 and the impact on taxpayers will be reflected in mid-2021 due to the deadline for filing the tax return.
46. The Government denies the true retroactivity of the contested regulation, the new rules do not affect the past tax period, but only the tax period started from the effective date of Act No. 364 / 2019 Coll., i.e. 1 January 2020. Although an obligation relating to past reserves is established by the transitional provision, this obligation shall not arise until the first date of the tax period starting from the date of entry into force of the amending Act.
47. The appellant, according to the Government, unaccurately interprets the finding of sp. zn. Incorrect retroactivity was found not in relation to the levy introduced as such, but only following guarantees in the form of electricity purchases.
48. Incorrect retroactivity is typical of tax and tax laws. The new legislation also applies to revenues from legal relations already established before the date of entry into force of this new regulation.
49. The appellant's argument that the change was not aimed at a long-term increase in tax collection, but rather at speeding up the collection so as to concentrate it on the current government's term of office, the government opposes that fiscal adjustment will begin to take place from June 2021, with elections due to take place in October 2021, and increased revenue from the state budget can be used mainly by future governments.
50. The government advocates the legitimate objective of the new legislation, which is to ensure greater objectivity in determining tax-deductible reserves. Under the Reserve Act in the original version (before amendment by Act No. 364 / 2019 Coll.), the tax-deductible reserves in the insurance sector were created under the accounting legislation. However, the precautionary principle applies in accounting, while taxpayers tend to overestimate their reserves under accounting legislation, which is subsequently reflected in the reduction of the tax base. Moreover, each taxpayer regulates the creation of reserves in the insurance sector under the accounting legislation, which is okay from the accounting perspective, but at the same time the objectivity of the determination of the total tax deductible cargo is reduced. In the field of taxation, there is a need to establish an objective procedure for establishing the tax base, including tax deductible expenditure. Given the lack of objective criteria for the amount of reserve formation under accounting rules, the tax administrator cannot, in principle, check it sufficiently. The provisions in the insurance sector are one of the very important elements affecting the tax base for the taxpayers who make them, so the situation under the legislation before the contested amendment was unsatisfactory in the long term. The change responded to the considerable freedom to create technical provisions for insurance undertakings, which, in terms of equality, favours and allows them to optimise their income tax with reference to prudence.
51. The Government recalls that the principle of the reverse production cycle is typical for the business of insurance undertakings, i.e. first the service is provided at "price" (insurance) estimated on the basis of actuarial methods and only then the costs associated with the service (in particular insurance benefits) arise. According to the Government, the technical provisions created under Solvency II can be considered more consistent with the actual development of insurance risk. The contested change in the determination of the tax base does not interfere with the actual formation of technical provisions under accounting rules or the requirements applicable to insurance. The Insurance Act provides for a system that is more resilient to possible overvaluation of reserves, since the level of reserves in that system may be significantly less influenced by taxpayers. Such an approach is more in line with tax law. The purpose of applying the expenditure in the income tax base is to recognise only the expenditure needed to achieve, secure and maintain the taxpayer's income, that is to say, in the case of reserves, the minimum reserves that the taxpayer needs, not those that he creates beyond that.
52. The Government also states that, in international comparison, there are significant differences between Member States in the tax eligibility of the production of technical provisions, most of which are subject to a certain reduction or special cash performance of a tax nature, or, where appropriate, to a specific check. Some countries limit the tax recognition of reserves created under accounting rules to a certain part of them, others have a sectoral tax on insurance companies. The full tax recognition of reserves is rather an exception. The fact that provisions under the Solvency II Directive are not recognised for tax purposes in other Member States of the European Union is, according to the Government, given that they are a relatively new Directive and that the other Member States have not yet had much time to adjust their tax deductible. The Government therefore considers that the new provisions on the taxation of reserves are appropriate to achieve the objectives set.
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Regulation Information
| Citation | The Constitutional Court found No 232 / 2021 Coll., on the application for annulment of Act No. 364 / 2019 Coll., amending certain laws in the field of taxation in the context of increasing public budget revenue, and on certain provisions of Act No. 586 / 1992 Coll., on Income Tax, as amended, Act No. 593 / 1992 Coll., on Reserves for the Determination of Income Tax Base, as amended, and Act No. 187 / 2016 Coll., on Gambling Tax, as amended |
|---|---|
| Regulation Type | The Constitutional Tribunal found |
| Author | - |
| Collection | Code of Laws |
| Date of Promulgation | 17.06.2021 |
|---|---|
| Effective from | - |
| Effective until | - |
| Status | Valid |
The regulation text is for informational purposes only.
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