Rozšířený senát NSS k tzv. esenciálním nákladům

Grand Chamber of the SAC on the so-called essential costs

The Eighth Chamber of the Supreme Administrative Court dealt with a case in which the tax authorities treated tax-non-deductible costs of auxiliary construction services during a corporate income tax audit because the taxpayer did not prove that it had received the services from the declared suppliers and did not prove their scope or price. The excluded costs represented 6,75 % and 1,62 % of the taxpayer's total costs in the tax periods audited.

However, the actual provision of the services, including the impossibility of their performance by the taxpayer's own employees, was not questioned by the tax authorities. The taxpayer therefore requested that the tax authorities determine and recognise as tax-effective at least the minimum costs that had to be objectively incurred to obtain taxable income (the so-called essential costs).

The tax authorities rejected this procedure, as in its view the conditions for switching to an alternative method of tax assessment, i.e. according to other means, were not fulfilled. It would have done so if a substantial part of the taxpayer's accounts had been called into question and it had not been possible to determine the tax by means of evidence.

The Eighth Chamber referred the case to the GrandChamber for consideration due to inconsistent case law.

In our view, the decision[1] of the Grand Chamber essentially struck a balance between the free recognition of essential costs and the requirements for proof of costs, while respecting the main objective of tax administration, i.e. to assess the tax at correct amount.

The Grand Chamber concluded that "if the taxpayer fails to prove the circumstances indicating the tax deductibility of a particular expense (group of expenses) pursuant to Section 24(1) of the Income Tax Act, the tax authorities are under no further obligation to switch from evidence to the determination of tax according to the other means and to determine the relevant part of the expenses objectively minimally necessary for the acquisition of the existing service or goods."

At the same time, the court admitted that "if the taxpayer proves that the expense (cost) claimed by him actually occurred (had to be actually incurred), even if in different circumstances (including a different amount) than indicated on the invoice, it may be recognized as a tax-effective expense, provided that other statutory conditions are met."

The Court therefore emphasised the importance of evidence as the primary means of determining tax. At the same time, it emphasised the taxpayer's burden of proof with regard to the facts necessary for the correct assessment of tax - in this context, the rule of deductibility of costs in the amount proved by the taxpayer (see Section 24(1) of the Income Tax Act). The possibility of recognising so-called essential costs is not generally excluded, but the mere reference to the objective necessity of their incurrence is, according to the Grand Chamber, insufficient.

The topic of essential costs will be discussed in more detail in an article in the March issue of our Tax and Legal News. If you have any questions, please contact the authors of this article or the EY team you are working with.

Authors:

Jakub Tměj

Petr Sedláček

[1] Resolution of the Grand Chamber of 13 February 2024, No 8 Afs 296/2020 - 133.