The Constitutional Court found No 145 / 2002 Coll.

On 11 October 2001, the Constitutional Court received a proposal from the Regional Court in Ostrava to repeal Article III (1) of Act No. 210 / 1997 Coll., amending and supplementing the Act of the Czech National Council No. 586 / 1992 Coll., on Income Tax, as amended, in the part of the figure and punctuation mark "48,"

The application states that the Regional Court in Ostrava, Chamber 22 Ca, hereinafter referred to as "the applicant ', is hearing the action of P. P. P. against the decision of the Finance Directorate in Ostrava, which rejected its appeal against the additional payment notice of the Financial Office in Český Těšín on the finalisation of the personal income tax for the tax period 1997. In May 1997, the claimant sold publicly non-marketable securities with a loss of about CZK 10 million and the tax administrator considered this case to be the conclusion of trade between other connected persons in order to reduce the tax base pursuant to § 23 paragraph 7 of Act No. 586 / 1992 Coll., on Income Tax, as amended by Act No. 210 / 1997 Coll. The appellant considers that part of Article III (1) of Law No 210 / 1997 Coll. expressed by the numeral and punctual sign" 48' is contrary to Article 1 of the Constitution of the Czech Republic (hereinafter referred to as the Constitution) as it has retroactive effects.

Article 48 Even Law No 210 / 1997 Coll. extended the range of specific business cases where the tax administrator examines agreed prices. If the taxpayer fails to demonstrate satisfactorily the difference between the price agreed in such a case and the price agreed in normal business relations between independent persons connected otherwise than economically or by personnel, the tax administrator shall adjust the taxable amount of the taxpayer by the difference found. The lack of a satisfactory explanation by the taxpayer here leads to a change in the tax base and thus to a change in the amount of the tax. Pursuant to Article III (1) of Act No 210 / 1997 Coll. entered into force on 1 January 1998, but Article III (1) of that Act provided that the provisions of Article I (33), (34), (48), (51), (52), (62) [relating only to Article 24 (2) (zf)], (69), (98) and (114) are already applicable for the 1997 tax period.

According to the appellant, the principle of protection of citizens' trust in law and the related principle of non-retroactivity is one of the fundamental principles defining the rule of law. Although the prohibition on the retroactivity of legal standards is expressly regulated in Article 40 (6) of the Charter of Fundamental Rights and Freedoms (hereinafter referred to as "the Charter ') only in the field of criminal law (according to that provision, the criminal offence is assessed and the sentence is imposed in accordance with the law effective at the time the offence was committed and later the law applies if more favourable to the perpetrators), Article 1 of the Constitution requires the application of that prohibition to other sectors of law. An accent imposed on the prohibition of retroactive legal standards as one of the fundamental elements of the rule of law stems from the requirement of legal certainty. The prohibition of retroactivity is that, according to the current legal standard, it is fundamentally impossible to assess human behaviour, legal facts or legal relations that took place before the legal standard came into force. The prohibition on the retroactive application of legal standards is based on the principle that everyone must be able to know which acts are prohibited in order to be held liable for the breach of the prohibition. This prohibition is also related to the function of the legal standards which impose on their addressees how they should behave after their effectiveness, and therefore applies in principle only to the future.

With reference to the Constitutional Court's legal conclusions expressed in its previous case-law on the retroactive application of the rule of law and the protection of acquired rights, the appellant points out that, by applying point 48 of Article I of Law No 210 / 1997 Coll. already for the 1997 tax period, although the law cited had become effective only on 1 January 1998, the tax body was in a position to be regarded more strictly by the tax administrator as it was subject to an examination of those commercial activities which were not subject to such an examination under the legislation. According to the new legal standard, legal relationships that took place before that standard came into effect are thus assessed, which may have a negative impact on the rights and obligations of the tax entity. At the time of the adoption of Act No 210 / 1997 Coll., the legal entity, when entering into business relations, could not predict which facts would be new in the nature of the legal facts applicable to its rights and obligations in the field of income tax and therefore had no choice as to whether it would take any risks associated with these consequences. The new legislation amending the consequences of legal relations that occurred before its effective date is therefore a case of genuine retroactive legislation. Since this change is in retroactive deterioration of the legal status of the tax entity, the principle of protection of acquired rights is infringed.

The appellant submits that the new regulation is clearly formulated in the present case and cannot be interpreted in a constitutional way in order to ensure its compliance with the constitutional order. It therefore proposes that the Constitutional Court annul the provision of Article III (1) of Law No 210 / 1997 Coll. in the part of the figure and the punctuation mark "48, '.

The Chamber of Deputies of the Parliament of the Czech Republic, in its observations of 14 November 2001, signed by the President of the Chamber by Prof. Ing. Václav Klaus, CSc. Even Law No 210 / 1997 Coll. is set out in the explanatory note to paragraph 39 of the draft amendment to the Income Tax Act, which states that the purpose of the adjustment is to allow the tax administrator to avoid tax evasion in trade at prices which deviate significantly from the prices negotiated in normal trade relations, even in cases where the merger of business partners is established otherwise than by capital or personnel, or where transactions between capital or personnel connected with the company are made through a third party whose involvement in the business chain has no other essential economic purpose than to reduce the tax liability. For example, domestic sales at very low prices of a profitable taxpayer to a loss-making taxpayer or at very high prices of a loss-making taxpayer to a profitable taxpayer. Since there were considerable tax evasion, the Chamber of Deputies decided, when discussing, that point 48 of the amendment would be included in Article III Final provisions among the points which are already applicable for the 1997 tax period.

According to the Chamber of Deputies, however, the possibility for the taxpayer to demonstrate satisfactorily, even after the effectiveness of Act No 210 / 1997 Coll., the tax administrator of the contract prices and, in the present case, the tax administrator will certainly consider the case in accordance with all the provisions of the Income Tax Act, namely § 23 (10), and will not rely solely on the term "or otherwise ', which merely extended the already defined link between persons in Article 23 (7) of the Income Tax Act. At the same time, it is not possible to exclude from the newly inserted sentence" Otherwise connected persons are persons who have established a commercial relationship mainly for the purpose of reducing the tax base or increasing the tax loss', which has a significant relation to the already mentioned Paragraph 23 (10), which also applied before the Act No. 210 / 1997 Coll.

The Chamber of Deputies considers that the appellant has made a mistake by interpreting the new legislation in isolation and therefore does not share its view that a constitutional interpretation cannot be achieved in accordance with Article 1 of the Constitution. Finally, it states that Law No 210 / 1997 Coll. was approved by the necessary majority of Members of the Chamber of Deputies and then also by the Senate, signed by the relevant constitutional authorities and duly declared in the Collection of Laws.

The Senate of the Parliament of the Czech Republic also commented on the proposal, which, in its observations of 9 November 2001, signed by the President of the Senate, by Dr. Petr Pithart, stated that the draft law No 210 / 1997 Coll. was ordered to be discussed in the Committee on Economic, Agriculture and Transport, which, after discussing the possible retroactivity of the legislation, recommended that the draft law be returned to the Chamber of Deputies with amendments, one of which concerned the amendment to the wording of Article 1 (III) referring to point 48 (2) of the Act. Even so, the retroactive effect would remain only for the sentence inserted in Section 23 (7) after the second sentence. In the debate in plenary of the Senate, Minister of Industry and Trade Karel Kühnl spoke for the Government of the Czech Republic, who, among other things, expressed himself in favour of excluding any retroactivity against the taxpayer. However, in the subsequent vote, the majority of the Senators took the view that the alleged deficiencies could be resolved within the framework of the future amendment to the Act under discussion, and approved the bill as referred to by the Chamber of Deputies. The observations state that in favour of the adoption of Law No 210 / 1997 Coll. the 75 senators present voted 49 and 6 were opposed.

To the question of the Constitutional Court, the parties agreed to waive the oral hearing in the present case (Section 44 (2) of Act No. 182 / 1993 Coll., on the Constitutional Court).

The Constitutional Court considers it necessary, first of all, to recall its resolution of 15.8.2000 sp. zn. Act No. 210 / 1997 Coll., amending and supplementing Act No. 586 / 1992 Coll., on Income Taxes, as amended, contains, on the one hand, the provisions amending that Act (Article I), and, on the other hand, the transitional provisions (Article II), the final provisions (Article III), the provisions authorising the publication of the full text of the Income Tax Act (Article IV) and, on the other hand, the provisions on the effectiveness of the amending Act (Article V). The petit of the appellant is not directed against the addition of the Income Tax Act, but against a provision which, from a legislative point of view, does not become part of the amended Act, because it does not involve amendment or addition. This part of the amending Act has a separate legislative existence, and therefore the Constitutional Court, pursuant to Article 68 (2) of Law No 182 / 1993 Coll. has acted to examine whether Law No 210 / 1997 Coll. has been adopted within the limits of the Constitution laid down by competence and in a constitutional manner, and to review the contested provision itself.

It is clear from the short-term reports on the 12th meeting of the Chamber of Deputies, II. Elections, held on 8.7.1997, and 7. Senate, 1. Elections, held on 31.7.1997, that the Government's draft amendment to the Income Tax Act was adopted by the Chamber of Deputies on 8.7.1997, when 139 Members voted in favour and 13 opposed. On 31 July 1997, 75 Senators and Senators 49 voted in favour of the proposal referred to by the Chamber of Deputies, against which 6 were opposed. The Act was signed by the relevant constitutional authorities, published under No. 210 / 1997 Coll. in the amount of 74 / 1997 Coll., circulated on 31.7.1997, and became effective on 1.1.1998.

The Constitutional Court notes that the law has been adopted and issued within the limits of the constitutional competence and the constitutional procedure.

Paragraph 23 (7) of Law No 586 / 1992 Coll. was amended by Law No 259 / 1994 Coll. and Law No 316 / 1996 Coll. and before the adoption of the amendment made by Law No 210 / 1997 Coll. was worded as follows: "If prices negotiated between economically or staffed persons were amended from prices agreed between independent persons in normal business relations under the same or similar conditions, and if this difference is not satisfactorily substantiated, the tax administrator shall adjust the taxable amount of the taxpayer by the difference found. For the purposes of this provision, interest of 140% of the discount interest rate of the Czech National Bank in force at the time of conclusion of the contract shall be considered to be the price that would be agreed between independent persons in normal business relations. Economic or personal persons shall be understood as being directly or indirectly involved in the management, control or property of the other person or in the same legal or natural person directly or indirectly involved in the management, control or capital of both persons or natural persons close to them. Participation in control or capital shall mean ownership of more than 25% of shares in the capital or voting rights. This provision shall not apply when providing a room with the necessary equipment by the employer to the trade union organisation for the necessary operation. ';

Point 48 of Article I of Law No 210 / 1997 Coll. of 31 July 1997, Paragraph 23 (7) of the Income Tax Act was supplemented as follows: In the first sentence of Article 23 (7), the following words are inserted after the words "Staff ':" or otherwise'. After the second sentence, the following sentence is inserted: "This does not apply to cases where the creditor is a resident or resident abroad and the agreed amount of interest on the loan is less than 140% of the interest rate of the Czech National Bank applicable at the time of conclusion of the contract." The following sentence shall be inserted after the words "close persons':" otherwise connected persons shall mean persons who have established a business relationship mainly with a view to reducing the tax base or increasing the tax loss. '; The subsequent amendments to the Income Tax Act did not affect Article 23 (7).

Article III Final provisions point 1 of Law No 210 / 1997 Coll. reads: "Article I (33), (34), (48), (51), (52), (62) [relating only to Article 24 (2) (zf)], (69), (98) and (114) shall apply for the 1997 tax period. '

As mentioned above, the appellant's proposal and arguments do not go against the amendment of the law, but counter the retroactivity of the final provision, which makes legal relations arising before the date of validity and the effectiveness of the law subject to the legal consequences enshrined in the new legislation.

According to Article 23 (7) of the Income Tax Act, as amended by Act No 210 / 1997 Coll., the tax administrator was able to adjust the taxable person's tax base by the difference found if the prices agreed between the economically or staffed persons were different from those agreed between independent persons in normal business relationships under the same or similar conditions and if this difference was not satisfactorily substantiated. Under the new legislation, the tax administrator may also investigate the difference found in addition to prices that have been agreed not only between economic or personnel related persons, but also persons associated otherwise, and persons who have established a business relationship mainly in order to reduce the tax base or increase the tax loss shall be considered otherwise. In order to avoid the artificial reduction of taxes as a result of assigned business relationships, the right of the tax administrator to re-examine, investigate and penalise this form of "business' behaviour of the taxpayer.

In its case-law, the Court of First Instance of the Czech Republic ("CSFR '), in its judgment, touched on the prohibition of retroactivity in the case-law of the Constitutional Court in Case C-78 / 92 Pl. ÚS 78 / 92 (Collection of Resolutions and Finances of the Constitutional Court of the Czech Republic, 1992, No 15), in which it found that the principles of the rule of law required his express expression in the Constitution or in the law in order to exclude the possibility of retroactive interpretation of the law and, at the same time, to deal with retroactivity related consequences in order to protect the rights acquired properly. The Constitutional Court of the Czech Republic stated in its finding of 8 June 1995, sp. zn. IV. ÚS 215 / 94 (Collection of Decisions, Volume 3, Found No 30) that the rule of law is inseparably the principle of legal certainty and the protection of the citizen's trust in law and that this procedure includes the prohibition of retroactivity of legal standards or their retroactive interpretation. The inadmissibility of retroactive legal standards in the field of criminal law is expressly provided for in Article 40 (6) of the Charter and Article 7 of the Convention on the Protection of Human Rights and Fundamental Freedoms (hereinafter referred to as the Convention), its activities for other sectors of the law being imported from Article 1 of the Constitution.

Legal theory and practice distinguish between true and false retroactivity. The true retroactivity is that, according to a certain current legal standard, legal facts or legal relationships that have taken place before the legal standard became effective, or that the new legal standard may change the legal consequences that have occurred under the law before its effective date. For false retroactivity, legal relationships arising under the law of the old shall be governed by this law until the effective date of the new law, but thereafter by this new law. The creation of legal relationships existing before the entry into force of the new legislation and the legal claims arising therefrom are governed by the original, repealed legal standard. In general, false retroactivity is used in cases of time conflict between the old and new legal standards.

The analysis of the principle of retroactivity is also contained in the finding of the Constitutional Court of 4 February 1997 sp. zn. The finding states that while false retroactivity is generally permissible and there are only exceptions to its inadmissibility, the true retroactivity is generally unacceptable, but there are strictly limited exceptions to its admissibility. To clarify the question where these exceptions to the principle of prohibition of genuine retroactivity can be accepted, the Constitutional Court, with the support of citation of former and current legal theory, stated: True retroactivity "can be justified at most where the legal obligation for the past laid down previously as a moral obligation has been felt" (A. Walk, Retroactivity of laws. In: Dictionary of public law. St. III, Brno 1934, p. 800). Moreover, Article 7 of the Convention, which states in paragraph 2 that the retroactive application of criminal law standards... "does not prevent a person from being tried and punished for acts or omissions committed at the time when they were committed from being punishable under the general legal principles recognised by civilised nations." It is further stated in the cited finding that we find a similar view in the current legal theory: "In general, it is possible to derogate from the principle of non-retroactivity in an exceptional way, by explicit positive provisions. As can be seen from history, the reason for such procedures was a situation where legal certainty would be in direct conflict with social security and legal awareness, as was the case in the case of retrieval decrees. The retroactive application of the Act to civil law conditions could also be justified by public policy (ordre public), in particular if it would be affected by absolutely mandatory provisions that were issued as a result of a certain marginal situation of the transformation of values in society." (L. Silent, To the temporal scope of the amendment of the Civil Code, Lawyer, No 12, 1984, p. 1102). The criterion of the admissibility of exceptions to the principle of prohibition of genuine retroactivity is the legislative principle "protecting legitimate trust in the stability of the rule of law '(A. Walk, Basics of Intertemporal Law, Brno 1928, p. 111). A legitimate trust cannot be considered if a legal entity with retroactive regulation must or must have counted. An example of such a situation is the application of a legal standard which is in direct conflict with the fundamental, generally recognised principles of humanity and morality:" In our legal system, we can justify by reference to previous ruling moral beliefs such as the retroactive validity of odd laws (see § 13 of Act No. 47 / 1881), § 10 of the Act No. 275 / 1914, § 105 of the Act). "In: Dictionary of public law. St. III, Brno 1934, p. 800).

As mentioned above, the Constitutional Court for Complexity adds that the "principles recognised by civilised nations' cannot be understood in summary and complexity as anything other than established values. Values are essential in society and perform an irreplaceable function in society, because it is thanks to them that human society can not only exist, but also communicate historically and socially. Without them, social development would fall apart in a mosaic of unrelated social phenomena and social structures into non-communicating social units. Thus, in the sum of all their individual shapes, they express the values of the" rule of the game, "which, although always has been, and probably will also be violated, but the respect of which is always shown by human society in the form of the basic conditions of its existence and social development.

Only this value order is followed by a normative order covering ethical and legal standards. Where values can be defined in such a way as to mean models of social thinking and behaviour, characteristics, social conditions and phenomena, institutional forms whose common feature is their consensual availability to a particular objective and purpose, the standards may be defined as rules, regulations, rules for certain penalties conditional on and secured by a method of social action which is recognised or determined to achieve such an objective or purpose. Values share with the standards a common basis as long as they create the company's value and normative order as its constitutive, established and organisational principle. However, within this value and normative order, the values and standards fulfil specific, often closely related, but irreplaceable functions. Both values and standards are related to a particular objective or purpose, but they are only values that indicate a general historical and social direction, they establish a target and a basic way of implementing it, while immediate updating of value shapes is a matter of standards. However, despite their executive nature and dependence on the value system, the social function of standards cannot be underestimated and only associated with the technical aspect of social affairs. It is the standards that constitute an instrument that allows not only the update of values but also their verification; the standards help to bring the value system into life and success, or, on the contrary, the failure of this effort also suggests its social utility and availability. Since values contain, above all, models of social behaviour and as such present themselves to ideally typical dimensions, they can hardly be standardised in the full width of their composition. A society that would seek to "normalize everything" would eventually create an extensive vacuum between a pretentious negotiation and its possibilities, which would eventually be filled with rather simulative and fictitious elements.

The above-mentioned excursion on the value and normative order allows perhaps a better understanding of issues related to genuine retroactivity, the admissibility of which is reflected in all areas of social relations, in particular legal relations, given the width of the value forms. Thus, if, in the order of value and the consciousness of society, a particular pattern and manner of social thought and behaviour were established by consensus, which for various reasons, for example as a result of the pressure of a particular political system, could not receive a standard expression, then the regulation of this act, containing retroactivity, remains entirely in line with the principles of a legal and democratic state. In other words, it would be contrary to the principles of justice if, in such cases, the true retroactivity did not come to the floor. All this, however, should indicate more significantly that the real retroactivity does not have a place in the rule of law where the legislator could "get to the floor" before, but did not.

Based on these theoretical bases when assessing the case The Constitutional Court concluded that the provisions of point 1 of Article III referred to in point 48 of Article 3 (1) of the Treaty on the Functioning of the European Union (TFEU) are not applicable. Even Law No 210 / 1997 Coll. has the effects of true retroactivity.

Since, from a constitutional point of view, the legislature's decision on how to resolve a time conflict cannot be an old and new legislation of random or arbitrary nature, but it is a matter of considering a conflict of constitutional principles, the Constitutional Court considered whether the conditions for granting an exemption from the principle of prohibiting genuine retroactivity would allow the constitutional acceptability of this rule. The concept of tax policy is a matter for the State to determine the tax burden on the taxpayer of a particular tax and to adjust its obligations in the context of verifying the correct assessment of the tax. The Income Tax Act in its original 1992 version established the use of normal market prices where prices negotiated differ from them and the difference is not satisfactorily substantiated, with this practice always being applied when it comes to the personnel or economic interconnection of the same legal or natural persons. By Act No. 259 / 1994 Coll., effective as of 1 January 1995, the Income Tax Act laid down an obligation to demonstrate satisfactorily the difference in prices negotiated between economic or personnel related persons, from those agreed between independent persons in normal business relationships under the same or similar conditions. By this amendment, the taxpayer's obligations were narrowed, which in the future was to ensure satisfactory proof of the price difference only in certain legally foreseen legal relations, and for any failure to comply with that obligation it had consequences in the form of a tax base adjustment by the tax administrator. Act No 316 / 1996 Coll., effective as of 1 January 1997, established what was considered to be a price negotiated between independent persons in normal business relations when determining interest rates for loans, thus not extending the scope of the law of the subject legal relations. Thus, until the amendment introduced by Act No 210 / 1997 Coll. was adopted, the taxpayer could reasonably rely on the fact that, when creating legal relations, only some of them would have to prove the price difference and bear the consequences if they did not, while other legal relations would not be prosecuted. The Constitutional Court therefore considers that the case in question is a case of legitimate trust of the taxpayer in law, since, according to the legal situation at the time covered by the retroactive standard, the taxpayer could not have assumed the seriousness of his behaviour and could not expect retroactive change. Although social relations started to show signs suggesting the need for new legislation, which is the subject of the present case, the legislator did nothing in the conditions of a democratic state to prevent the adverse effects of the earlier, that is, the futuro regulation. In the present case, therefore, the conditions for accepting an exemption from the prohibition of genuine retroactivity are not laid down and the constitutional contradiction cannot be bridged by interpretation. The argument of the Chamber of Deputies that the tax administrator, in the present case, was also based on Article 23 (10) of the Income Tax Act, does not alter the above conclusion. According to that provision, "For the determination of the taxable amount, accounting shall be based on accounting according to a special provision, 20) unless otherwise provided by a special provision or by that law, or where the tax liability is reduced otherwise. 'A special provision is, according to the footnote, Law No. 563 / 1991 Coll., on Accounting, Directive on the Accounting Schedule and Simple Accounting Principles published in the Collection of Laws. Paragraph 23 (10) of the Income Tax Act considers the Constitutional Court to be ineligible to justify a derogation from the prohibition on the correct retroactive effect of the provisions of Article 1 (III) referring to point 48 of Article 48 of the Law. Even Law No 210 / 1997 Coll. and did not find any other reason to do so.

For the reasons set out above, the Constitutional Court has complied with the application of the Regional Court in Ostrava and the provision of Article III (1) of Act No. 210 / 1997 Coll., amending and supplementing the Act of the Czech National Council No. 586 / 1992 Coll., on Income Taxes, as amended, in the part of the figure and punctuation mark "48," pursuant to § 70 (1) of Act No. 182 / 1993 Coll. repealed the date of the declaration of findings in the Collection of Laws.