Corporate income tax in recent judgments of the supreme administrative court

The first quarter of 2024 brought yet another series of judgments from the Supreme Administrative Court ("SAC") that negatively impacted corporate income tax payers ("CIT"). Selected judgments with a short description of the situation under consideration (possibly with reference to the relevant section of Act No. 596/1992 Coll., on Income Taxes, as amended, the "ITA") and the SAC's conclusion are presented in the following article.
 

• Correctness of accounting for work in progress

2 Afs 37/2023 > In this case, the taxpayer in the shipbuilding business did not bear the burden of proof as to the correctness of the accounting for work in progress at the time of the sale of the completed orders, i.e. it did not prove the legitimacy of the reduction in revenue in the amount claimed. Furthermore, he did not substantiate some of the costs included, and at the same time he did not substantiate the inventory balances (by documentary or physical inventory) at the dates of derecognition. The tax authorities reduced the taxpayer's originally assessed tax loss by EUR 63 million. CZK 63.
 

• Tax deductibility of demolition expenses

9 Afs 43/2022 > The tax administrator assessed income tax in the amount of CZK 1.7 million against the taxpayer. CZK + penalties, on the grounds that the taxpayer had not sufficiently proved that the costs for demolition work on various buildings, which were deducted from the tax base, were incurred in accordance with Section 24(1) of the Income Tax Act and that they were actually provided to the extent and on the dates according to the submitted documents. In the present case, the conditions for the application of the case-law on 'essential expenditure' were not met.
 

• Direct link between income and expenditure according to Section 23(4)(e) of the ITA

10 Afs 221/2022 > The issue in dispute was whether the interest earned on the loan was directly related to the interest expense on the bonds not recognised as an expense for earning, securing and maintaining income and thus could not be included in the tax base. The Supreme Administrative Court upheld the conclusions of the tax authorities and the Regional Court and confirmed that the link between the bonds and the loan agreements created by the set-off of the receivables did not indicate a direct link between the interest. In assessing the direct link, it is important to examine whether the taxpayer would have received the income without incurring the disallowable expense. It is not correct to define a direct link simply by reference to whether the income and expenditure arise from the same legal title, without assessing the other circumstances of the case.
 

• Advertising costs and scope of performance declaration

3 Afs 399/2021 > The Supreme Administrative Court concluded that the evidence submitted to prove the tax costs for advertising services (advertising prints of a racing motorcycle, a truck, advertising spots on large light screens) did not provide a clear and credible picture that the tax entity received advertising services from the declared supplier and to the declared extent; when assessing the tax deductibility of advertising costs, the simplistic optics of 'some advertising was carried out and the supplier provided it' cannot be applied.
 

• Determination of the tax according to the aids to the VATPO

7 Afs 308/2022 > In the present dispute, due to the lack of cooperation of the tax subject with the tax administrator and the lack of evidence that would provide the possibility of a reliable determination of the tax, the tax administrator proceeded to the assessment of the VAT according to aids. This procedure resulted in a tax assessment of EUR 57.9 million. CZK + penalty of CZK 11.6 million. CZK 11.6.
 

• Failure to prove tax depreciation of tangible assets

4 Afs 283/2024 > The tax administrator had doubts about the correctness of the amount of the applied tax depreciation of tangible assets, i.e. whether the depreciation was calculated on the basis of the correct purchase price (the purchase price of the technology in the range of CZK 3 million) and whether the performance in the form of sale of the assets was provided by the declared supplier. In this case, the Supreme Administrative Court upheld the Regional Court's conclusions, summarizing that the taxpayer did not prove that the tangible property acquired for consideration was depreciated in the 2014 tax year as a deductible expense under Section 24(1) of the ITA in conjunction with Section 24(2)(A) of the ITA.
 

• Proof of beneficial ownership of royalties received

4 Afs 63/2022 > The tax administrator rejected the tax subject's request for exemption of income from royalties pursuant to Section 38nb of the ITA because the tax subject did not sufficiently prove that it was the actual owner of the royalties. The recipient of the (sub)royalties is the beneficial owner of the royalties only if he can use and enjoy them without restriction and is not obliged by law or contract to pass the payments on to another person, or if he derives a real economic benefit from them and is free to determine how they are used. In this case, however, the taxpayer was contractually obliged to pass on most of the royalties (just under 95 %) to the owners of the underlying asset. Thus, it was in the role of a trustee or intermediary and did not meet the conditions to qualify for the exemption of royalty income under section 19(1)(zj) of the ITA.
 

• Incorrect period of recognition of employee remuneration, accounting for work in progress

2 Afs 79/2023 > The reason for the assessment of the final amount of VAT of CZK 8 million was the taxpayer. The following findings in the tax audit were the reasons for the 8.8 million CZK and the related penalty:

• non-cash employee remuneration accounted for in the wrong tax year
• incorrect accounting treatment of work in progress in the form of construction work, which showed CZK 0 as at the balance sheet date (due to the fact that the tax entity is a large construction company which carries out a large number of construction contracts across periods, it is highly unlikely that all costs booked in the period would have been invoiced as at the balance sheet date)
• Failure to take into account the interest earned on the outstanding loan.

 

• Eligibility of accounting for passive balances

7 Afs 317/2022 > The Supreme Administrative Court upheld the conclusions of the tax administrator and ruled that the tax entity had not sufficiently proved the legitimacy of the creation of an estimated item for supplies of materials and works in the total amount of CZK 17.1 million. The taxpayer did not provide any specific evidence and documents. A prerequisite for the accounting for the passive item is the proof of the existence of a liability for a transaction that has already been actually carried out and that is materially attributable to a specific accounting period, but the exact amount cannot be determined at the end of the balance sheet date and will only be supported by relevant documents in the following accounting period.
 

• Non-recognition of additional interest costs

4 Afs 119/2022 > The Supreme Administrative Court concluded this case with the result of the assessment of VAT including penalties in the amount of CZK 790 thousand. According to the amendments to the contracts, the originally agreed interest rate of 6% was increased to 9% or 19%, without, however, bringing additional funds to the taxpayer.
 

• Tax deductibility of promotional costs at golf tournaments

10 Afs 153/2022 > According to the Supreme Administrative Court, the taxpayer was in need of proof when it failed to prove that it had received advertising services in the scope (placement of banners, advertising panels, leaflets and promotion on LED screens at the golf course at the tournament venue) and price agreed in the contract (CZK 8 million), that the declared supplier had provided the agreed services in the declared scope and who had produced the advertising materials. Thus, the costs of promotion at golf tournaments were not certified as costs incurred for achieving, securing and maintaining taxable income within the meaning of Section 24(1) of the ITA and the taxpayer was assessed tax and related penalties.
The mere existence of an advertising spot does not prove that the advertisement was broadcast in those locations. Evidence of the actual extent to which the advertising spots were screened can be provided, for example, by the testimony of employees who would have checked the provision of advertising on an ongoing basis and at random intervals, or by the ongoing records kept by the employees.

Practice shows that in the context of the process conducted with the tax administration authorities, it is an essential prerequisite for the success of the tax entity to prove the alleged condition with sufficient strength and credibility. Thanks to our expert knowledge of potential risks, we provide our clients with support not only in the process of preparing tax claims so that the tax entity is not in need of evidence in the event of a tax audit, but also in the form of representation before the tax authorities during tax audits.

Author: Lenka Froschová