A recent litigation between Mr David Lafata (a footballer for AC Sparta Prague) and financial authorities regarding the taxation of professional sportspersons (specifically team game players) has attracted a lot of attention in the tax world. The question is whether professional sportspeople are tradespersons or freelancers.
The financial authorities and many sportspeople have differed in their viewpoints rather significantly. Regarding the financial aspects, the latter option is the more preferred one as the personal income of the person in question is taxed by means of a lump sum of 40%, whereas traders apply the 60% deduction.
In 2015, tax offices focused on personal income tax returns of sportspeople, particularly team game players (such as footballers, ice hockey or handball players etc.), who perform their duties for their employers (i.e. clubs) on a basis of a trade licence. The tax authorities, however, did not deem this kind of business activities to be "trade" but freelance professions (the same as e.g. lawyers, doctors and tax advisers). They based their arguments on the fact that whereas the main aspect of being a trader is the factor of independence, the players are, in fact dependent on their clubs. As a result, the financial authorities re-assessed the taxes of the sportspeople who applied the 60% lump sum costs while calculating their income tax. Mr Lafata being one of them with the additionally assessed tax of CZK 1 million appealed against it to the Appellate Financial Directorate and, later, to the Regional Court in České Budějovice. After having been rejected and the tax assessment having been confirmed, Mr Lafata proceeded with a cassation complaint to the Supreme Administrative Court of the Czech Republic with which he succeeded.
On 13 July, 2017, the Court settled the case in favour of the sportspeople ruling that, due to the vagueness of the wording of the law, the sportsperson's business activities may be performed either in accordance with Section 7 of the Income Tax Act, i.e. as a tradesperson, or as a freelancer, and since it is not acceptable to force a tax subject to opt for schemes financial more advantageous for the state, the sportspeople, provided that they have been issued with a trade licence for the tax period in question, are permitted to tax their incomes in the same fashions as other tradespersons do in accordance with Section 7 Article 1 b) of the Income Tax Act.
Physical persons who are concerned may make their claim for the 60%-lump-sum cost application by means of a corrective income tax return submitted within a period of three years after the respective tax returns were filed (unless this period has not been prolonged by any of the acts stipulated by Section 148 of the Tax Code).
