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When do structures come into existence or cease to exist in the legal sense? What are the tax implications?

In its recent judgment, the Supreme Administrative Court dealt with the question of when a structure comes into existence or ceases to exist as a thing in the legal sense (7 Afs 132/2022-22), which impacts the deductibility of tax expenses.

In the case at issue, the company's hayloft burned down and had to be demolished for structural reasons. The reconstruction of the hayloft was financed using compensation received from the insurance company and related costs were treated as tax deductible as costs of repair of tangible fixed assets. However, this treatment was disputed by the tax administrator during a subsequent tax inspection and subsequently also by the SAC, to which the case had been forwarded. 

According to the SAC, a structure (as a thing in the legal sense) comes into existence at the moment it is erected at least to a stage from which all further construction work is directed towards the completion of the thing thus determined, in generic and individual terms. For above-ground structures, this occurs when at least the layout of the first floor is already clearly and unmistakably visible. Similarly, an above-ground structure as a thing ceases to exist when the layout of the first floor of the original structure is no longer visible (i.e., usually by destroying the perimeter masonry below the level of the ceiling above the first floor, usually with the simultaneous removal of the masonry of the partitions). Therefore, the decisive factor for assessing the demise of the original structure is what has been removed and not what has been newly built. According to the SAC, there is no doubt that the original structure ceased to exist when the perimeter walls were completely destroyed. Where walls are partially demolished, it is necessary to assess the extent of the interventions made.

In the case in question, the perimeter walls were completely destroyed and, therefore, the SAC upheld the tax administrator's view that the hayloft as a thing in the legal sense had ceased to exist. To make this assessment, the SAC made use of an expert's opinion.

According to the SAC, the company should have treated the tax residual value of the disposed demolished hayloft as a tax-deductible expense and charged the compensation from the insurance company to taxable revenues while charging the amounts incurred for the construction of the new hayloft to expenses gradually through depreciation (i.e., not as one-off repair costs). The SAC considers it irrelevant that the costs in question were incurred by the company in connection with the fire and were covered by the insurance settlement.