NSS k nákladům v souvislosti s předčasně ukončenou zakázkou

The Supreme Administrative Court on the costs related to a prematurely terminated contract 

In a recent judgment 10 Afs 400/2020-37, the Supreme Administrative Court ("SAC") rejected a taxpayer's claim concerning the tax efficiency of costs arising from a prematurely terminated  contract.

The taxpayer entered into a contract with a customer in 2010 to provide a service (replenishment of alcohol measurements). The taxpayer subsequently ordered the necessary goods (instruments) from its supplier. However, the customer entered into the insolvency proceedings in the same period and its assets were declared bankrupt. As a result, the contract was not carried out. In the following period (2011), the taxpayer and the supplier of the goods agreed that the taxpayer would reimburse the supplier for the costs incurred in order to prepare the order. The taxpayer claimed these expenses as a tax-deductible in 2011.

The tax authority challenged the tax deductibility of this expense as the goods remained with the supplier and therefore neither the taxpayer nor the customer received any supply.  According to the tax administrator, receiving of the supply was not apparent from any of the documents submitted during the tax audit.

The SAC also challenged the relationship of the expense to 2011, as according to the taxpayer the order related to 2010 and no further link to the following period was apparent from the submitted documents. 

In view of the above, the SAC rejected the taxpayer's claim.

It is questionable whether the dispute would have turned out differently if the taxpayer had argued better and focused more on proving the rationality of its actions (instead of using procedural objections). From an economic point of view, it seems unrealistic that the taxpayer would have succeeded in withdrawing from the contract without having to reimburse its supplier for the costs that it had legitimately incurred.

It is therefore advisable to proceed with extra caution and not to underestimate the importance of supporting documentation in similar cases, for example, where there are non-standard terminations of contractual relationships, settlements with business partners or write-offs of wasted investment.

We would be happy to discuss this case law and its application to specific practical situations with you. If you have any questions, please contact the authors of the article or the EY tax team you are working with.

Authors:

Ladislava Zamazalová

Barbora Ptošková