Royalties or hidden wages? Czech courts have drawn a clear line

However, if the copyright regime is not based on the actual creation of a copyright work but serves merely to ‘spread’ wages across formally distinct contracts, this practice comes up against the limits of both tax and employment law. Czech case law, including the judgement on which this text is based, highlights the limits of this approach: it is the reality that matters, not the name of the contract. If the work is, in fact, dependent employment, it cannot be regarded as independent creative work, regardless of the name of the contract or the advantages of the tax regime.

The following analysis sets out the characteristics of dependent work identified by the Czech courts and how these criteria might be applied within the Slovak legal framework.

The nature of the dispute

A conservatoire in Moravia reduced its employees’ working hours and, consequently, their wages. At the same time, it began to enter into contracts for specific work and to pay so-called ‘royalties’. Formally, these were supposed to be payments for creative works (the production of teaching materials or other resources); in reality, however, these payments merely made up the shortfall on their original wages.

The Tax Administration, the Regional Court and the Supreme Administrative Court of the Czech Republic all reached the same conclusion, namely that:

• this does not constitute self-employment under the ‘royalty’ income regime,
• it constitutes disguised income from employment, which should be taxed as a salary.

Key findings of the court:

• the content of the ‘copyright’ work was in fact the normal duties of teachers (preparing lessons, creating materials, organising concerts, communicating with parents, administrative tasks),
• the ‘honoraria’ were paid regularly, without any link to specific, demonstrable creative outputs,
• the amount of the ‘honoraria’ was set to compensate for the reduced salary,
• the staff carried out the same work as before the contracts were amended; only the method of remuneration had changed – only part of the remuneration was formalised through copyright contracts,
• the conclusion of contracts for specific work was not genuinely voluntary; it constituted economic pressure in the context of the school’s cost-cutting measures.

Characteristics of dependent employment according to the judgement

The court emphasised the fundamental principle that, for income to be classified as ‘from dependent activity’, what is decisive is not how the relationship is formally designated (employment contract versus contract for work), but whether the activity bears the material characteristics of dependent activity:

A relationship of superordination and subordination
The employer (the school) organises the work, allocates tasks, issues instructions and monitors their fulfilment. The employee (the teacher) carries out tasks in a subordinate capacity within the internal organisational structure.

Personal nature of the work
The work is tied to a specific individual and cannot be freely delegated. It involves the performance of professional teaching duties, which must be carried out personally.

Work on behalf of and for the benefit of the client
The outputs of the work (lesson preparation, materials, concerts) form part of the school’s day-to-day activities; they are not independent projects carried out ‘on the employee’s own account’.

The employee’s financial dependence
Employees are financially dependent on a single entity; in practice, they have no real possibility of negotiating a different arrangement without risking the loss of their job. The combination of reduced working hours and ‘royalty’ payments is imposed on them.

Method of remuneration
Royalties are paid regularly, at monthly intervals, without being linked to the delivery of specific works, and their amount is set so that, together with the salary, they maintain the original level of remuneration.

Long-term nature and integration into the organisation’s activities
Copyright contracts cover the ongoing creation of resources and materials that are an essential part of the school’s operations. This does not involve a one-off copyright work (such as a textbook or publication).

The court also emphasised that, in the case of activities which can be carried out either as an employee or as an independent author, it is crucial to assess whether the choice of status was genuinely voluntary. If an employee is faced with a ‘sign or leave’ ultimatum, this does not constitute genuine independence.

Practical implications and recommendations for the Slovak context

The judgment of the Supreme Administrative Court of the Czech Republic provides several practical lessons that are also relevant for Slovak entities:

1. Substance always takes precedence over the title of the contract
If a person performs the same work as before under an employment contract, to the same extent, at the same place and for the same employer, a change in the title of the contract will not alter the classification of the income. Both the tax authorities and the courts will ask what has actually changed, not just what is written in the contract.

2. Royalties must relate to genuine works of authorship
The copyright regime is justifiable only if there are specific, identifiable, final works of creative activity (textbooks, teaching materials, databases, software) that meet the definition of a copyright work.
Regular monthly ‘royalties’ with no clear link to a specific output and without proof of the work being produced are a strong indication that this is, in fact, a salary.

3. Voluntary nature and economic dominance are essential
If an employee is faced with the choice ‘sign the copyright contract, or else you will lose part of your working hours/job’, this constitutes the employer exercising their economic dominance. Such a ‘choice’ is not truly free and supports the conclusion that this does not constitute independent entrepreneurial or creative activity.

4. The burden of proof lies with the payer
If an organisation claims that it is remunerating copyright works or independent projects, it must be able to:

• demonstrate the existence of specific works (texts, materials, databases, code, audiovisual outputs),
• explain why their creation does not form part of normal job duties,
• justify the method of remuneration so that it corresponds to the nature of the creative work (e.g. a one-off payment for a work, not a ‘monthly salary’).

Tax optimisation has its limits

The desire to take advantage of a more favourable tax regime for authors’ royalties, particularly in relation to flat-rate expenses and low tax rates for micro-taxpayers, is understandable from the perspective of tax optimisation. Czech case law serves as a valuable ‘cautionary example’, illustrating the arguments used by tax authorities and courts when they reclassify authors’ fees as income from employment, and provides a useful framework against which it is also worth assessing Slovak models combining employment contracts and authors’ contracts.

For Slovak employers and authors alike, the key message of the ruling is therefore a simple rule: a tax advantage can only be justified if it is reflected in the actual substance of the relationship.