SAC: tax provisions for assets repairs have to be sufficiently supported with documentation

In 2012, a taxpayer replaced the windows of their real property. In preceding years, the taxpayer had created a provision for repairs of fixed assets for this purpose and claimed additions to this provision as a tax-deductible expense. 

The tax administrator opposed this approach. In its opinion, the taxpayer had not documented the additions to the provision sufficiently, as it was not clear from the documents presented how exactly the repair was to be carried out and how the amount of the provision had been determined. The tax administrator also concluded that the mentioned window replacement should have been treated as a technical improvement rather than a repair, as double-glazed windows were replaced with triple-glazed ones. This was also obvious from the submitted minutes of the general meeting during which the creation of the provision had been approved. The tax administrator thus challenged the deductibility of the created provision and assessed additional corporate income tax.

The taxpayer tried to reverse the tax administrator’s decision by filing an action with the Regional Court in Ostrava and, after its dismissal, a cassation complaint with the Supreme Administrative Court (SAC). The SAC, however, confirmed the tax administrator’s conclusion: it agreed that the replacement of double-glazed windows with triple-glazed ones is generally a technical improvement; triple-glazed windows usually have better heat and sound permeability parameters than double-glazed windows. The SAC also stated that despite having produced the supporting documents (e.g., the provision records), the taxpayer had not sufficiently proved their assertion that a repair (not an improvement) was to be carried out. While an expert statement could have been used as evidence, in this concrete case, the expert was unable to ascertain the original and the planned condition of the windows from the documentation. 

Technical improvement is an undefined legal term. The difference between repair and technical improvement is that the latter is repair of a higher quality. This opinion – previously confirmed by case law – is in line with GFD Instruction D-22, which views a higher number of window glass layers as a change in the technical parameters of an asset. The SAC stated that when claiming a tax deductible provision for tangible asset repair, the taxpayer must be able to support (with appropriate documents) the original and the planned condition of the asset to be repaired, as well as the process of carrying out the repair. A detailed budget of the project also has to be available, based on which the amount of the provision is to be determined.