AGRO-B SPOL. S R.O. v the Czech Republic - 740/05 [2011] ECHR 288 (1 February 2011)

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The European Court of Human Rights (Fifth Section), sitting on 1 February 2011 as a Chamber composed of:

Dean Spielmann, President,
Elisabet Fura,
Karel Jungwiert,
Boštjan M. Zupančič,
Ann Power,
Ganna Yudkivska,
Angelika Nußberger, judges,
and Claudia Westerdiek, Section Registrar,

Having regard to the observations submitted by the respondent Government and the observations in reply submitted by the applicant company,

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 stíZnost) 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^¹, 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.

Inheritance Tax, Gift and Real Estate Transfer Tax Act (Act no. 357/1992) in force at the relevant time (“Taxation Act”)

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.

Act no. 357/1992 on Inheritance Tax, Gift Tax and Real Estate Transfer Tax, as amended by Act no. 117/2001, which entered into force on 1 June 2001

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.

C. Relevant domestic practice (concerning the transfers of estate before the entry into force of the amendment to the Taxation Act)

Judgment of the Ústí nad Labem Regional Court no. 15 Ca 671/97 of 4 April 1998

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.

Judgments of the Brno Regional Court no. 29 Ca 522/2000 of 30 April 2002 and nos. 30 Ca 197/2000 and 30 Ca 217/2000 of 31 July 2002; judgments of the Ostrava Regional Court no. 22 Ca 230/2001 of 13 December 2001 and no. Rd 22 Ca 362/2003 of 14 April 2005; judgments of the Ústí nad Labem Regional Court no. 59 Ca 91/2002 of 31 January 2003, no. 15 Ca 234/2002 of 19 February 2003 and no. Rd 15 Ca 25/2003 of 18 February 2005

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.

“Every natural or legal person is entitled to the peaceful enjoyment of his possessions. No one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by law and by the general principles of international law.

The preceding provisions shall not, however, in any way impair the right of a State to enforce such laws as it deems necessary to control the use of property in accordance with the general interest or to secure the payment of taxes or other contributions or penalties. ”The Government maintained that the interference complained of by the applicant company had a statutory basis in the Czech law, which was duly published in the Official Gazette and was accessible to the applicant company. According to them, the foreseeability did not mean absolute certainty and that the interpretation reached by the domestic courts in the present case was easily foreseeable by using the standard methods of interpretation, especially systematic and teleological, and that it was in line with the case-law up to that date and with published views of commentators. They maintained that the legal provision in question had been consistently applied for seven years before the present case had come up.

The applicant company maintained that the legal provision in question had been unclear and open to different interpretations. They disputed the accessibility of the judgment of the Ústí nad Labem Regional Court of 4 April 1998 and the judgment of the Prague Municipal Court of 11 November 1998 which had not been published before 25 January 2000.

The Court recalls that taxation, as an interference with the rights guaranteed in Article 1 of Protocol No. 1, is justified under the second paragraph of Article 1. This provision expressly reserves the right of Contracting States to enforce such laws as they may deem necessary to secure the payment of taxes (see the Gasus Dosier- und Fördertechnik GmbH v. the Netherlands judgment of 23 February 1995, Series A no. 306-B, p. 48, § 59).

The Court notes that in the present case, only the question of the lawfulness of the interference with the applicant company’s rights, within the meaning of the second paragraph of Article 1 of Protocol No. 1, is at issue.

When speaking of “law”, Article 1 of Protocol No. 1 alludes to the same concept to be found elsewhere in the Convention. This concept comprises statutory law as well as case-law, implying qualitative requirements, notably those of accessibility and foreseeability (see Beyeler v. Italy [GC], no. 33202/96, § 109, ECHR 2000-I, and CBC-Union, s.r.o. v. the Czech Republic (dec.), no. 68741/01, 20 September 2005).

The Court notes that the scope of the notion of foreseeability depends to a considerable degree on the content of the text at issue, the field it is designed to cover and the number and status of those to whom it is addressed. A law may still satisfy the requirement of foreseeability even if the addressee has to take appropriate legal advice to assess, to a degree that is reasonable in the circumstances, the consequences which a given action may entail (CBC-Union, s.r.o. v. the Czech Republic, mentioned above). Foreseeability does not mean absolute certainty and the Court has recognised that many laws are couched in terms which, to a greater or lesser extent, are vague and whose interpretation and application are questions of practice (see Rekvényi v. Hungary [GC], no. 25390/94, § 34, ECHR 1999-III). Moreover when the applicant is a company, it is expected to obtain specialist legal advice (see Špaček, s.r.o., v. the Czech Republic, no. 26449/95, § 59, 9 November 1999).

In the present case, the applicant company attempted to apply a tax exemption under section 20(6)(e) of the Taxation Act, which was not accepted by the national authorities which interpreted it as applying only to investments that increase a company’s registered capital and, consequently, levied on the applicant company the requisite real estate transfer tax.

The Court observes that the tax had a statutory basis in the Taxation Act which was duly published in the Official Gazette and thus accessible to the applicant company. Admittedly, the textual interpretation of section 20(6)(e) of this Act was not entirely unambiguous which is also evidenced by the subsequent 2001 amendment put forward to the Parliament with the aim of “clearing up any ambiguity” surrounding this provision. However, there are other means of interpretation of statutes that must be used, especially systematic and teleological. Moreover while the role of the legislator is crucial in building the national legal system, the role of national tribunals and courts to interpret and apply that law is fundamental for its functioning (see CBC-Union, s.r.o. v. the Czech Republic, cited above).

The Court considers that it cannot be said that the provisions of the Taxation Act concerning the tax exemptions were, at the relevant time, too vaguely formulated not to enable the applicant company to interpret them, if necessary with legal advice and applying the standard means of interpretation, as meaning that it would be liable to pay the transfer tax. Moreover, when making its investment, the applicant company should have been aware of the way in which the Taxation Act was applied by the administrative and judicial authorities.

In this context the Court notes that the applicant company did not point to any decision or judgment given by a court prior to 25 January 2000 in which section 20(6)(e) had been interpreted in the way proposed by the applicant company. On the contrary, the Government referred to the consistent application of the law by the domestic authorities in the way as in the applicant company’s case and to concurring doctrinal views that were accessible to the public. Thus, there was no inconsistency in the domestic case-law that could put into question the foreseeability of this legal provision (see, a contrario, Baklanov v. Russia, no. 68443/01, § 46, 9 June 2005).

The Court considers that the issue in the present case is in essence a disagreement of the applicant company with the decisions of the domestic authorities. It reiterates that it has only limited power to deal with alleged errors of fact or law committed by the national courts, to which it falls in the first place to interpret and apply the domestic law (Kopecký v. Slovakia [GC], no. 44912/98, § 56, ECHR 2004 IX). The domestic decisions in the present case are not manifestly unreasonable or arbitrary.

The above considerations are sufficient for the Court to be able to conclude that the interference complained of had a sufficient legal basis in Czech law to comply with the requirements of the second paragraph of Article 1 of Protocol No. 1.

The Court also does not consider the imposed tax as disproportionate especially in view of the wide margin of appreciation of States in devising their taxation scheme (see Svenska Managementgruppen AB v. Sweden (dec.), no. 11036/84, D.R. 45, p. 211).

This complaint is therefore manifestly ill-founded within the meaning of Article 35 § 3 (a) of the Convention and must be rejected pursuant to Article 35 § 4.

“In the determination of his civil rights and obligations ... everyone is entitled to a fair ... hearing ... by [a] ... tribunal.”

The Court reiterates that disputes over liability to pay tax do not fall under Article 6 § 1 of the Convention, as such proceedings are not decisive for the determination of civil rights and obligations, despite the pecuniary effects which they necessarily produce for the taxpayer (see Ferrazzini v. Italy [GC], no. 44759/98, § 29, ECHR 2001-VII).

Moreover, the present case has no criminal connotations and therefore does not fall under the criminal head of Article 6 of the Convention either.

It follows that this part of the application is incompatible ratione materiae with the provisions of the Convention within the meaning of Article 35 § 3 (a), and must be rejected pursuant to Article 35 § 4.

“Everyone whose rights and freedoms as set forth in [the] Convention are violated shall have an effective remedy before a national authority notwithstanding that the violation has been committed by persons acting in an official capacity.”

According to the Court’s case-law, Article 13 applies only where an individual has an “arguable claim” to be the victim of a violation of a Convention right (see Boyle and Rice v. the United Kingdom, 27 April 1988, § 52, Series A no. 131).

The Court has found above that the applicant company’s remaining complaints under Article 6 of the Convention and Article 1 of Protocol No. 1 were inadmissible for being incompatible ratione materiae with the provisions of the Convention or because they were manifestly ill founded. Therefore, the applicant company did not have an “arguable claim” and Article 13 is not applicable in the present case.

It follows that this complaint is manifestly ill founded within the meaning of Article 35 § 3 (a) of the Convention and must be rejected pursuant to Article 35 § 4.

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You are here: BAILII >> Databases >> European Court of Human Rights >> AGRO-B SPOL. S R.O. v the Czech Republic - 740/05 [2011] ECHR 288 (1 February 2011) URL: http://www.bailii.org/eu/cases/ECHR/2011/288.html Cite as: [2011] ECHR 288