Disposal costs of part of new assets’ input price?
With judgment No. 10 Afs 346/2020-43, the Supreme Administrative Court (SAC) has significantly contributed to clarifying when the costs of disposal of assets may be deducted from the tax base directly, and when they constitute investments and shall be included in the input price of new assets.
The SAC dealt with a cassation complaint filed by the Appellate Financial Directorate (AFD) concerning costs related to the acquisition of new assets. The plaintiff was a company engaged in waste disposal. The heart of the dispute was whether the costs for the demolition of a K1 combustion boiler within the overall reconstruction of a waste incineration plant were related to the acquisition of a new K1 boiler.
As part of an extensive project taking place in 2011 and 2012, the company demolished a K1 combustion boiler. Within the same project, K2 and K3 boilers were demolished and replaced by new boilers that were put into operation in 2011. The K1 boiler remained in operation during the project implementation, to keep the incineration plant running. The subsequent costs of demolishing the K1 boiler were then deducted from the tax base, as an expense. However, based, among other things, on information about the company’s future plans as disclosed in its annual reports, the tax administrator concluded that the demolition costs had not been operating expenses but rather related to the next phase of a project – the construction of a new K1 combustion boiler – and should therefore form a part of the entry price of the new K1 boiler.
Foremost, the SAC emphasised the initial necessity to clarify the nature of the demolition costs, i.e. whether they were related to the construction of a new K1 boiler (meaning the acquisition of a new investment). In the AFD’s opinion, there was no doubt that the original K1 boiler was demolished to make way for a new one, within a continued investment project. The company, on the other hand, argued that the K1 boiler had been removed for safety and environmental reasons.
Previously, in judgement No. 7 Afs 365/2018-66, the SAC had held that when determining whether costs are related to an acquisition of assets, an unambiguous and direct causal link must exist between the costs incurred and the acquisition of the tangible assets. It is not relevant whether and when the taxpayer formally decided to acquire the assets, but when they actually started to acquire them.
From the evidence available, the SAC deduced that the original K1 boiler had been used during the project implementation to ensure the company’s operation until the new boilers K2 and K3 could be put into operation. In the court’s opinion, the two new boilers (K2 and K3) then fully replaced the three old boilers in terms of output, therefore the construction of a third boiler was not necessary for the operation of the company.
The SAC therefore concluded that there was no clear direct causal link between the demolition of the K1 combustion boiler and the investment plans for a new K1 combustion boiler; the court thus agreed with the company which claimed the costs as tax-deductible expenses.
The SAC's conclusion thus shows that when assessing whether expenses/costs are to be treated as costs for the acquisition of assets, it is necessary to determine whether there is a clear direct causal link between the expenses/costs in question and the acquisition of the new tangible assets.