Proving services provided by parent company and principle of legitimate expectation
In recent judgment No. 30 Af 57/2021-76, the Regional Court in Brno reminded us how important robust documentation of services is in defending the tax deductibility of expenses. The core of the dispute involved a taxpayer claiming in their income tax return the costs of consulting services provided by the parent company consisting of management and advisory services, negotiations, and reporting. The court also expressed its view on an entity’s legitimate expectations from the outcomes of previous inspections.
The service contract at issue was designed as variable, with services being provided on demand for a fee set per person per day. After evaluating evidence provided by the taxpayer, the tax authority stated, among other things, that the services had been provided by the taxpayer’s executive director/statutory representative, which the tax authority perceived as the exercise of an office of a statutory body. The tax authority also argued that the submitted documentation was not formally perfect (as it did not contain orders and relevant delivery protocols, etc.) and that the documentation did not show the actual outcome of the services in question. Thus, the added value for the taxpayer had not been properly demonstrated. As part of its search activity, the tax authority did not hesitate to contact the foreign tax administrator via an international request for information to verify the actual provision of services in another member state (Austria).
The Regional Court dealt in detail with the taxpayer's position regarding the evidence, conceding that it was reasonable to expect that the documents in intra-group relationships would be less formal than between two unrelated persons. On the other hand, the court stated that an ordinary meeting or exchange of information between the owner and the entity owned does not usually give rise to a tax-deductible expense because it does not go beyond the normal relationship on the part of the owner. Above all, the court agreed with the tax authority in its assessment that in most of the presented cases it was not possible to link the invoiced activity to its specific outcome, nor was it clear how the plaintiff got hold of the documents and whether they did not create them themselves.
Based on the result of the international request for information, the court found that the meagre result of this administrative act also indicated that the actual delivery and acceptance of services had not taken place at all. Thus, in the court's view, the plaintiff failed to discharge their burden of proof and the costs incurred for the intra- group services were correctly assessed as tax non-deductible.
The court also ruled on the question of legitimate expectations. The plaintiff objected that in the tax inspection focusing on the previous taxable periods, the deductibility of expenses included in invoices received from the parent company had not been disputed. However, the Regional Court held that while in the previous tax inspection only invoices had been assessed, in the present case the complete documentation was being assessed. Therefore, there could be no legitimate expectation of an identical assessment, as these were two different matters.
It can be concluded that appropriately prepared and continuously maintained documentation remains a basic prerequisite for defending the tax deductibility of expenses, specifically documentation and record-keeping of outcomes proving the actual provision of services, and documentation of the benefit for the taxpayer together with an adequately set methodology for calculating remuneration, i.e., transfer pricing.