The Constitutional Court has sided with the financial administration and approved an additional tax assessment and penalty imposed on an issuer in connection with CZK bonds.
Due to a loophole in the Income Tax Act, so-called koruna bonds (CZK bonds) were at one point widely issued for tax optimization purposes, and particularly in 2012, when most of these bond issues went through. The payment of interest on koruna bonds was often subject to additional tax assessments and is still the subject of ongoing court disputes between issuers and the tax authorities. The Constitutional Court did not find any constitutional dimension in the constitutional complaints filed to date, which resulted in the rejection of these constitutional complaints as manifestly unfounded. However, in case I. ÚS 2693/23, the Constitutional Court proceeded to hear the case on its merits and issued a ruling on 30 April 2025.
In principle, the issuance of bonds with a nominal value of CZK 1 was advantageous for both the bondholders and the issuer. Bondholders were paid interest that was not subject to withholding tax at the time of payment. Although interest recipients were required to report interest income in their tax returns, they often failed to do so, especially in the case of natural persons. Bond issuers then often claimed the interest paid as a tax-deductible expense, which was the subject of proceedings before the Constitutional Court in case I. ÚS 2693/23.
In 2012, the complainant (a legal entity) issued koruna bonds with a nominal value of CZK 1 and 12% interest p.a. These bonds were subscribed by its sole shareholder, who subsequently paid himself untaxed interest. At the same time, the complainant claimed the interest as tax-deductible expenses, thereby reducing its corporate income tax base. The tax office classified this practice as an abuse of rights and imposed additional tax and penalties on the complainant. The complainant subsequently unsuccessfully challenged the additional tax assessment before the administrative courts and then lodged a constitutional complaint.
The Constitutional Court dismissed the complaint, stating that the contested decisions of the administrative courts did not violate Article 11(5) of the Charter or any other constitutionally guaranteed fundamental rights of the complainant. The Constitutional Court stated that the complainant could not have had sufficiently strong confidence in the legality of the tax optimization in question.
Although the concept of abuse of rights was only expressly enshrined in the Tax Code by a 2019 amendment (Section 8(4) of Act No. 280/2009 Coll.), the Constitutional Court pointed out that the prohibition of an abuse of rights is also a general principle that has previously been regularly applied in tax-law matters and was confirmed by case law. The Constitutional Court also emphasized that the prohibition of abuse of property rights is enshrined directly at the constitutional level – namely, in Article 11(3) of the Charter. The Constitutional Court thus did not agree with the complainant’s argument regarding its legitimate expectation. On the contrary, it agreed with the argument of the general courts that the issue of koruna bonds could not have been a source of external financing or a transaction with economic justification (except for reducing one’s tax liability).
The Constitutional Court did not apply its conclusions a priori to all issues of koruna bonds at the time. However, it clearly stated that it does not intend to provide constitutional protection to transactions involving koruna bonds which, although formally legal in terms of the tax burden, lacked rational economic justification.
Source: Constitutional Court ruling of 30 April 2025, Ref. No. I. ÚS 2693/23
