Back to article list

Proving management services and legitimate expectations

In August, the Supreme Administrative Court closed a case concerning the tax deductibility of management services. It explained in detail the taxpayer's obligations when proving services and what the taxpayer can reasonably expect with respect to their previous successful defence of expenses in a previous corporate income tax inspection.

At the heart of the dispute was the provision of management services by a parent company to a subsidiary. The tax administrator was not satisfied with the merely formal orders for the services, many of which lacked a specific output. The same scope of services was invoiced on a quarterly basis, and the outputs of the services were not linked to the times stated in the invoices. The lack of evidence was also compounded by the taxpayer not proving how they had obtained the documents supporting the provision of the services: a small portion of them was part of submitted email communication, but for most of them, there seemed to be no record.

The taxpayer raised (in vain) the objection of a breach of their legitimate expectations, stating that in a tax inspection for 2009, the tax administrator had assessed the cost of management services as tax deductible. As this was the taxpayer’s main line of argumentation, the Supreme Administrative Court explained at length that "an administrative practice that establishes a legitimate expectation is a stable, uniform and long-term activity (or inactivity) of public administration bodies that repeatedly confirms a certain interpretation and application of legal regulations. Such practice is then binding upon an administrative authority. It may be changed if the change is prospective, the parties concerned have had the opportunity to become acquainted with it, and it is duly justified by serious circumstances" (resolution of the extended panel dated 21 July 2009, file No. 6 Ads 88/2006132, no. 1915/2009 Coll. SAC). The court also referred to the Court of Justice of the EU, according to which a legitimate expectation may also arise from the provision of specific assurance by the competent authority.

The SAC concluded that the complainant had not received any specific assurance from the tax administrator within the meaning of the CJEU's case law. In the tax inspection of the 2009 taxable period, the tax administrator did not inspect the same extent of documents as in the present case, as it did not involve ‘identical services' as the complainant had consistently claimed, but services of an 'identical or similar nature'. It can hardly be said that by this single tax inspection the tax administrator had established a stable administrative practice vis-à-vis the complainant, giving rise to their legitimate expectation that in subsequent taxable periods, the costs of services would be accepted as tax deductible solely based on invoices submitted. 

The judgment confirmed that if taxpayers want to deduct the costs of management services from their corporate income tax base, they must be able to prove that they factually received the services, that they were beneficial to them, and that their price corresponded to the arm’s length price. Related records must be continuous, and it is not possible to rely on documentation or experience from tax inspections in previous years.