Court explains the treatment of tax (non-) deductible expenses before 2015
The Municipal Court in Prague recently (10Af 60/2018 - 46-53) dealt with the applicability of Section 24(2)(zc) of the Income Tax Act as amended effective 1 January 2015 to taxable periods before 2015.
The Municipal Court in Prague rejected the approach of a tax administrator who in a tax inspection of the 2010 taxable period challenged the application of Section 24(2)(zc), arguing that the expenses in question that mainly involved refreshments of a tax non-deductible nature, should not have been treated as tax deductible under Section 24 (2)(zc) of ITA, as the taxpayer had not re-charged them but only included them in the base for calculation of the price for services rendered. However, the condition stipulating explicitly that the provision should only apply to expenses that are subsequently re-charged was only introduced by the mentioned amendment (and is noted in its explanatory report).
The court concluded that the failure to meet the condition of re-charging the expenses cannot be invoked when assessing a situation dated 2010. According to the court and in line with the Supreme Administrative Court’s previous case law, when assessing cases dated before 2015, tax administrators must consider solely the following conditions for applying the provision:
- The expense is not an expense (cost) incurred to generate, assure and maintain income under Section 25 of the Income Tax Act.
- An income (revenue) must be directly related to the expense.
- The expense shall be tax deductible only to the extent of the directly related income (revenues).
- The income (revenues) affected the profit/loss (tax base) in the same or preceding taxable periods.