SAC on direct link between non-deductible expenses and taxable revenues
The Supreme Administrative Court (SAC) issued a ground-breaking ruling relating to problematic Section 24 (2)(zc) of the Income Tax Act effective until the end of 2014, giving the opportunity to reassess the treatment of non-deductible expenses with directly related revenue and possibly achieve additional tax savings.
The above Income Tax Act provision generally made it possible to treat expenses with directly related revenue as deductible even where such expenses would otherwise be regarded as non-deductible under the Income Tax Act. Although worded quite generally, the provision has been interpreted restrictively by the tax administration in the past years. As a result, taxable entities often adopted a conservative approach to the matter in line with the tax administration’s interpretations. However, the ruling now provides an opportunity to reassess such cases and, where appropriate, file additional returns claiming a tax liability reduction.
This particular ruling dealt with a write-off of insured receivables. The court examined, among other things, the question of a direct link between non-deductible expenses arising from the write-off of insured receivables and revenue generated from an insurance company. According to the court, a direct link is understood to be a sufficiently intensive and unmediated logical connection. In this specific case, receivables in question were justifiably written-off to expenses upon the receipt of a relevant insurance settlement, as it made no sense to report receivables from which, in accordance with relevant contractual terms and conditions, the insured could not be satisfied under any circumstances (even if the debt corresponding to these receivables was later settled). The SAC believes that there is a logical and unmediated connection between the payment of the insurance settlement and the write-off of receivables. As a result, expenses arising from the write-off of receivables originally treated as non-deductible could therefore be treated as deductible up to the amount of the received insurance settlement.
Despite the specifics of the case in question, the court’s reasoning could be extended to numerous other practical situations. However, as each case is unique, specific arguments for linking expenses and revenues must always be reviewed.
The ruling applies to the wording in effect until 2014, but some arguments can be applied analogously to later periods as well. Should you be interested in reviewing the potential benefits of the SAC ruling for your company, please do not hesitate to contact us.