In July, the Supreme Administrative Court of the Czech Republic issued an important ruling (judgement 9 Afs 231/2016 – 50) regarding rather a problematic clause concerning the taxability of certain costs (Section 24 Article 2 zc of the Income Tax Act). The provision technically allows to perceive the costs which would be deemed non-taxable in normal circumstances that are linked to directly related revenues as taxable ones.
In real life, however, a question of how to interpret the term „directly related revenues“ arises with the tax offices being rather strict in their understanding and tax advisors providing possibilities of tax optimisation for their clients by broader explanations.
The above ruling favours the tax advisors‘ view. The case in question dealt with a connection between depreciated receivables and claimed receivables insurance benefits. The tax subject included a receivable, which does not meet the criteria of being a taxable one, in their costs; however, as the receivable was an insured one and the tax subject had received the related benefits from the insurance company, the tax return contained the depreciated receivable in the amount of the benefits as a taxable cost.
The financial authority, supported by the Appellate Financial Directorate, disagreed with the above and argued that no direct connection between costs incurred by depreciation of a receivable and revenues gained from the insurance benefits may be seen and based their logic on the fact that the benefits may/will be paid regardless of the fact whether the receivable has been depreciated, and the depreciation of a receivable does not automatically lead to an insurance benefit claim.
The Supreme Administrative Court, however, ruled otherwise: the contract between the tax subject and the insurance company states that should the debtor pay their debt, the tax subject would be obliged to repay the claimed benefits to the insurance company to the full extent. This practice does not defy the economic reality and is a common one, and, in the opinion of the Supreme Administrative Court, it is this contractual conclusion which establishes the direct connection between the cost and the revenue and, therefore, the Court agreed with the tax subject’s decision.
Although the ruling relates to the Income Tax Act amendment valid as of 2014, some of the arguments are possible to apply analogically in later cases.
In the view of the above, we recommend that you revise your previous periods and consider the possibility of filing corrective tax returns. Of course, we are ready to assist you with evaluations of specific cases and validity of arguments regarding the direct connection between costs and revenues; should you, then, need help, do not hesitate to contact us.
