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Before we get to what is prohibited, we need to state what is not. And that is tax optimization itself.
The Supreme Administrative Court stated this clearly in its judgment of July 23, 2024: a business owner has the exclusive right to choose a business structure that minimizes their tax liability. There is no obligation to conduct business in a way that maximizes state budget revenue.
The Court of Justice of the EU has previously declared the same. Choosing the most tax-advantageous option from available legal alternatives is a legitimate practice. Everyone has the right to do so. Both companies and individuals.
However, the line can be thin, and tax optimization can thus turn into tax fraud.
A key judgment of the Court of Justice of the EU established a two-step test, which Czech courts have adopted and repeatedly apply. If you want to know whether your tax optimization will withstand an audit by the tax authority, you must ask yourself two questions.
Was the main purpose of your action to obtain a tax benefit? Not the only one, but the MAIN or predominant one.
The Supreme Administrative Court (SAC) has repeatedly explained that a “main purpose” is one that, compared to other purposes, is so incomparably more significant that it overshadows and marginalizes other reasons, to the point where they can be disregarded when examining the economic purpose.
In other words: if you set up a holding company to centralize the management of five firms, reduce administration, and streamline cash flow, and “by the way” you save on taxes, that is perfectly fine.
If you set it up solely to pay out dividends through it without withholding tax, and no other reason exists, you may have a problem.
“Tax authorities have long since stopped looking only at formal paperwork; they are going hard after the reality. If a transaction exists only to artificially generate an expense or hide a profit, you will run into trouble sooner or later. What matters is whether you can present clear business arguments to officials from the time the transaction was created,” adds Petr Motyčka.
When assessing whether something is a legitimate saving or an abuse of rights, it is not enough to just formally comply with the “letter of the law.” The tax administrator examines the so-called objective condition – that is, whether the result of your action is not in conflict with the very purpose of the provision in question. Simply put: whether the legislator would have approved such a situation if they were writing the relevant section.
On this point, however, entrepreneurs have a strong argument in their hands. In its April 2022 ruling, the Supreme Administrative Court clarified that it is not enough for the tax authority to simply dismiss a transaction from behind a desk by labeling it an "artificial arrangement". If the authority intends to assess additional tax, it must clearly define the original purpose of the law in question, the situations it was designed for, and the specific reason why your case does not fall under it. The burden of proof therefore also lies with the state.
In practice, this means the tax authority takes the specific provision you are relying on (such as a dividend exemption for a parent company) and examines whether the legislator intended to cover your specific case. If your transaction formally meets the requirements but makes no economic sense without the tax savings, the objective condition for abuse is typically met.
Both conditions must be met simultaneously. In case of doubt, the tax administrator must prove that your activity fulfilled the purpose of the law only formally and that its primary purpose was, for example, to obtain a tax advantage. Only then does the burden shift to you, and you are given the opportunity to prove that your reasons were legitimate.
"Be careful here, though. Having the opportunity to prove it doesn't mean just saying 'we had a business reason.' You have to document it. Ideally with documents created at the time you were planning the action, not retrospectively at the request of the tax administrator. We will come back to this," warns Petr Motyčka.
Theory is one thing, but court decisions are based on precedents already established in the past. We have prepared an analysis for you on how courts have ruled in specific situations.
In 2002, a business owner donated nearly 3.9 million CZK to an association and deducted the value of the donation from their tax base. What happened to that money? The association paid 840 CZK for a safe deposit box rental. A year later, it donated a total of just under 12,000 CZK to two children's homes and purchased sports equipment for approximately 77,000 CZK, evidently for the donor's own use. By 2004, no further expenses were incurred. Out of the 3.9 million, only about 90 thousand was actually spent.
"This is a case where the motivation speaks for itself. The Constitutional Court stated that the disparity between the association's income and expenses is such that it clearly falls outside the intended benefits of the Income Tax Act. The entrepreneur was assessed additional tax, which they were required to pay," comments Zuzana Brečková Lovíšková.
A company within a corporate group issued bonds. The transactions were decided by the same individuals, who acted in different capacities: first as statutory bodies, second as loan recipients, and third as bond subscribers. The issuer claimed the bond interest as a tax-deductible expense, thereby reducing their tax base.
However, the money from the issuance never actually went anywhere. It did not go into a new project, it was not used to expand production, and it did not finance any acquisitions.
The tax authority assessed not only a tax base of CZK 2,280,000 for each taxable period but also a penalty of CZK 456,000. The transactions were, in fact, an artificial financial operation whose primary purpose was to obtain a tax advantage. The company sought relief in court, but was unsuccessful. The Regional Court dismissed the company's lawsuit and agreed with the conclusions of the administrative authorities that: “the chain of transactions and actions taken by the plaintiff in connection with the bond issuance lacks economic substance.” The Supreme Administrative Court also concluded that this was a case of abuse of rights and that such conduct cannot be granted legal protection.
“For entrepreneurs who use bonds legitimately (and fortunately, they are the majority), this means one thing: the issuance must have an economic rationale that exists independently of any tax savings. Financing growth, diversifying resources. Anything real. If that reason is missing and money is simply being cycled between related entities, you are taking a risk,” adds attorney Michal Kapitán.
The Supreme Administrative Court sent an important signal in a July 2024 ruling. When assessing a holding structure, it is necessary to take into account the legal, tax, economic, and potentially business aspects of the transactions. Comprehensively and individually.
“If you, as a taxpayer, provide multiple legitimate business reasons for establishing a holding company or restructuring (e.g., asset protection, centralized management, cash flow simplification, or succession planning), the tax authority cannot simply dismiss your structure based on its own assumptions,” says Petra Stoklasová, an attorney and expert in corporate law.
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The tax administrator must examine the actual factual situation in detail. If they want to label a transaction as an abuse of rights, the burden of proof lies with them: they must irrefutably demonstrate that none of the purposes you presented—nor all of these purposes taken together—were significant enoughto outweigh the tax motive.
It is therefore not enough for officials to simply state during an audit: “We see a tax advantage here, and therefore we do not recognize the transaction.” The courts have set strict rules for them. The tax authority must demonstrably prove that your legitimate commercial reasons either do not exist in reality or are so negligible compared to the tax purpose that they were merely an empty facade.
In this case, an entrepreneur acquired a car wash through a financial lease. After the lease ended, they purchased it for a contractual 100 crownsThen he began creating a repair reserve for it amounting to nearly two million. The tax office said: the entry price is 100 crowns, that is not tangible property, you cannot create a reserve.
But beware of the other side of this coin. In a follow-up ruling, the Supreme Administrative Court clarified that a reserve is unlawful if its sole purpose is to obtain an undue tax advantage. This will be the case especially in situations where the repairs to the tangible assets for which the reserve is being created are not feasible from the outset. When creating a reserve, the owner must prove the nature of the property, as well as the legitimacy and purposefulness of the reserve. It is not enough to say "I will be making repairs." You must document what, when, and for how much.
The entrepreneur cancelled his VAT registration in May 2016 because his turnover for the previous 12 months did not exceed one million crowns. Five months later, he sold land to his companies. As a non-VAT payer, he did not pay tax on the sale.
None of these steps are illegal in themselves. Cancelling registration when turnover drops is a taxpayer's right. Selling land to an affiliated company is also not prohibited by law. But the sequence and timing of these steps told a different story.
In March 2025, the Regional Court in Ústí nad Labem concluded that the overall sequence of actions leads to the conclusion that the primary purpose was to obtain a tax advantage contrary to the intent of the VAT Act. Deregistration, a short time interval, and sales to related parties. In the case at hand, both the objective and subjective criteria for abuse of rights are met.
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Case law reveals several principles that repeatedly determine the outcome. These are exactly the things that the tax administrator looks at when assessing your tax structure. We mentioned the two-step test above, but besides that, there are several other tips worth keeping in mind.
In the case of the bonds mentioned above, there was no economic rationale. Money was just going in circles, with nothing real being financed. For a holding company that centralizes management, cash flow, and reporting, there is an economic rationale. In the case of deregistering for VAT 5 months before selling land to related parties, it looked like a calculated move.
The car wash case shows that even legitimate optimization can fail due to insufficient supporting documentation. In another case, the Supreme Administrative Court did not recognize repair reserves because there was no clear identification of the assets, a repair plan, and a verifiable budget at the time the reserve was created.
"Moreover, some of the supporting documents were created retroactively, after the end of the tax period. The taxpayer bears the burden of proof regarding the facts asserted in their tax return," notes Petr Motyčka.
Therefore, the rule is: whatever you optimize, document in real time. An economic justification written only after a request from the tax authority looks like a pretext. Minutes from a managing director's meeting regarding the reasons for establishing a holding company, recorded on the day of its founding, carry more weight than an explanation written three years later at the request of the tax office.
When the same people make decisions on both sides of a transaction, when money moves in a closed loop, or when there is a suspiciously short interval between individual steps, the tax authority will take notice. And the court may agree with them if the overall sequence of actions reveals that it was an artificially created structure.
The Tax Code states that the tax authority must base its assessment on the actual substance of a legal act. If the documentation says one thing and reality says another, reality prevails. This rule runs like a common thread through all case law.
However, there are situations where a matter moves beyond a dispute with the tax office. At that point, the Criminal Code comes into play, specifically Section 240 – the crime of tax evasion, or evasion of fees and similar mandatory payments.
Criminalization of conduct is a risk wherever the taxpayer acted intentionally (with indirect intent also establishing criminal liability) and where the legal acts performed were simulated, absolutely void due to circumvention of the law, or entirely devoid of economic substance.
Specifically, actions such as entering into fictitious contracts with the sole purpose of claiming a VAT deduction have been found to constitute a criminal offense.
As consistently summarized by the case law of the Supreme Court, such evasive conduct is not entitled to tax protection, and its execution directly fulfills the elements of a criminal offense.
Judicial practice has long confirmed a fundamental cornerstone: the consistent use of all legal options to reduce a tax base cannot be considered a criminal offense. However, this principle applies exclusively on the condition that the taxable supply in question is based on real and valid legal relationships, rather than on artificially created structures.
If you have carried out a real transaction with real economic substance and the tax authority has retroactively reclassified it as an abuse of rights, you are dealing with a tax dispute. If you have issued invoices for services that never took place or entered into contracts whose sole purpose was to create a claim for a VAT deduction, you may already be entering the realm of criminal law.
Sometimes life happens, and you find yourself in an unexpected situation. Perhaps you have received a summons from the police. Perhaps criminal proceedings have been initiated against you. Perhaps you are not sure what is actually happening or what you should do. You are not alone in this.
Write to us about your situation at trestni@endors.cz. We respond within 24 hours. If the situation is urgent, call us NOW at +420 721 208 275.
Attorney and Partner at endors for criminal law. Defense counsel for criminal matters. Over 12+ years of experience before all law enforcement authorities and at all court levels.
Yes. Every entrepreneur has the right to choose a business structure that leads to the lowest possible tax liability, provided they use legal means and procedures.
The deciding factor is the so-called two-step test:
If both conditions are met, it may constitute an abuse of rights.
No. Tax savings are a common consequence of legitimate business decisions. A problem arises when there is no real economic justification or if the tax saving is the sole purpose of the transaction.
During a tax audit , they do not just look at the documents, but primarily focus on the reality:
Therefore, what matters is the actual substance, not just the formal structure.
For example:
In cases involving:
In such cases, the matter shifts from tax proceedings to criminal law.
We have prepared a series of three articles that guide you through the entire spectrum of tax risks. From legal optimization and tax audits to criminal prosecution for tax evasion.
→ When tax optimization turns into tax fraud. You are reading this now.
→ What to do when a tax audit arrives?
→ Tax evasion, additional assessments, and potential criminal prosecution. How to defend yourself
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