We are bringing the conclusions of the court case of the Supreme Administrative Court (hereinafter referred to as the “SAC”) in the area of the application the Section 24 (2) (zc) of Act No. 586/1992 Coll., on Income Taxes (hereinafter referred to as "ITA"), as amended by the end of 2014. In the considered case, the tax administrator assessed an additional tax and a penalty for the tax periods of 2013 and 2014 to the taxpayer. The reason for this was that the taxpayer included representation expenses in the tax deductible expenses pursuant to the aforementioned provisions of ITA.
The taxpayer submitted contracts with customers to the tax administrator, some contracts included general provisions for the payment of the expenses of goods’ acceptance by the taxpayer. These were representation costs (specifically accommodation, meals, hospitality, air tickets, car rental, rental of movable assets, services during the conclusion of contracts, travel allowances, taxis, entrance fees to museums, cosmetics, etc.) paid by the taxpayer on behalf of the customer. The representation expenses were included by the taxpayer in the final price of the sold goods and considered with reference to Section 24 (2) (zc) to be tax deductible.
The tax administrator stated that the condition of a direct connection between the expenses and taxable revenues was not fulfilled. He pointed out that the close link between the acquisition of goods and the fact that the customer’s representatives had their trip to accept the goods paid for along with other related expenses was not sufficiently demonstrated. It was not demonstrated whether such expenditures had to be incurred in order to conclude the transaction at all. According to the tax administrator, the inclusion of the expenses in the price calculation does not automatically lead to their transformation into tax deductible expenses, i.e., the method of pricing is not decisive for assessing tax deductibility.
The SAC ruled in favour of the tax administrator. In order for representation expenses paid for the customers’ representatives to be considered tax deductible, the taxpayer would not only need to demonstrate the contexts in which the transactions were incurred, but also that without them, the customer would either not have purchased the goods or not under such conditions. However, this was not demonstrated for the transactions being assessed.
Court case 2 Afs 139/2021 - 51
Author: Eliška Košťáková, Tax Senior