Advertising services under scrutiny: recent case law
Reviewing the tax deductibility of advertising costs is still very popular with tax administrators during inspections. Below, we inform you about recent case law that could indicate what documents taxpayers should have on hand during an inspection by the tax administrator.
7 Afs 53/2020 – 30: tax non-deductible entertainment costs
The dispute concerned, among other things, the tax deductibility of expenses for renting a go-kart track for business partners. The taxpayer submitted contracts on the provision of advertising space but did not demonstrate that the renting of the go-kart track was the subject of the advertising. The tax administrator believed the supply was intended solely to benefit existing business partners (giving them the opportunity to race for free). Both the tax administrator and subsequently the Supreme Administrative Court thus treated the supply as tax non-deductible entertainment expenses.
8 Afs 42/2020 – 58 and 2 Afs 219/2021-54: advertising expenses
In an earlier judgment from 2020, the tax administrator considered non-deductible expenses for advertising broadcasted on screens at shopping malls. While acknowledging that an advertising campaign had in fact taken place, the administrator stated that its actual extent had not been supported. The taxpayer produced various means of evidence, such as screenshots of the screens at the shopping malls as well as expert opinions. However, the evidence submitted to the tax authorities was in some cases contradictory and did not fully prove that the advertising was provided in the contractually agreed-upon extent. According to both the tax administrator and the Supreme Administrative Court, the taxpayer did not fully refute the doubts as to the extent of the services actually provided; the taxpayer thus failed to bear the burden of proof, and the entire advertisement expenses were excluded as tax non-deductible.
In contrast, in a more recent decision from 2021 concerning the same taxpayer but a different taxable period, the Supreme Administrative Court sided with the taxpayer, emphasising that the taxpayer does not have to prove every single broadcast of a spot on the screens, and that whether a campaign had taken place can also be verified by random checks, employee testimonies, and photographs.
1 Afs 88/2022 – 54: change in the scope of services by oral agreement
The tax administrator excluded as non-deductible expenses incurred by the taxpayer on various advertising services (radio spots, logo and banner presentations at various events, websites, and tickets, etc.). In their opinion, the advertising services were provided in a different extent than originally agreed-upon in the contract. The taxpayer argued that the scope of services had been changed by oral agreement. According to the tax administrator and the Supreme Administrative Court, while not prohibited, such agreement is not suitable and if concluded, it becomes necessary to obtain other means of evidence credibly supporting the extent of the transaction.
7 Afs 13/2021 – 44: challenging the price of advertising
In the case in question, the tax administrator did not challenge the expenses for advertisements placed at football stadiums and golf courses as such but the price at which the advertisements were acquired, even though the transaction involved a supply of services between unrelated parties. The tax administrator believed that by entering into a contract with the advertising agency, a relationship was established between otherwise related parties who created a legal relationship for the primary purpose of reducing the tax base or increasing the tax loss. In the tax administrator’s opinion, the contracted price was many times higher than the usual (arm’s-length) price. The Supreme Administrative Court sided with the tax administrator and considered the reference price to be the amount negotiated directly with sports clubs plus the usual commission, rather than the price contracted between the advertiser and advertising agencies as declared by the taxpayer. The taxpayer's tax base was thus increased by the difference between the contracted price and the price set by the tax administrator based on the determined reference price.
It is clear from the above decisions that for advertising expenses to be tax-deductible, tax administrators place increasing emphasis on robust documentation that should prove not just that the services were actually provided but that they were provided to the extent declared in the contract or invoices, and incurred to generate, secure or maintain taxable income.
Taxpayers should therefore set up a control system that will make it possible to verify the provision of the service in the agreed-upon extent and support this by sufficient evidence that must not be contradictory. For specific types of advertisements (e.g., video spots), we recommend carrying out checks of their provision at random intervals. The outputs of these controls must be recorded and archived.