SAC on tax treatment of sale of unfinished real estate and related project
The Supreme Administrative Court (SAC) dealt with the tax deductibility of costs related to a development project upon the sale of unfinished real property. The tax administrator did not recognise most of the costs as tax relevant, and the Supreme Administrative Court confirmed this.
A development company purchased land with real property to implement a new development project. In this context, the developer incurred costs for the implementation of the project, which included demolition work, legal services, interest on loans, and, last but not least, penalty costs.
Also involved in the project was an affiliated company, which was to obtain an architectural study, documentation for the zoning permit, and other related requirements, through a subcontractor. The rights arising from the pending proceedings and from the project were to be transferred to the developer only once the zoning permit was issued, which happened in 2016.
Sale prior to the issuance of a zoning permit
However, in 2015 the developer decided to sell the formally prepared project to an external investor. In its corporate income tax return, they claimed as tax-deductible all expenses related to the disposal of the project, including amounts related to its preparation that was to be supplied by the related party.
The tax administrator did not accept most of the claimed expenses due to their insufficient link to the generated income in terms of substance and timing. Within the proceedings, the tax administrator did not dispute the individual types of the costs but focused on the substance of the transaction and the related contractual documentation.
In the tax administrator’s opinion, which was subsequently confirmed by the Supreme Administrative Court (SAC), in 2015 the developer in fact sold only the land and real property, not the development project with the issued zoning permit as a whole, as at the time of the sale, the developer was not yet the owner of the rights to build the project; these were only acquired in 2016. Therefore, since the developer did not own all rights to the project in 2015, they could not, according to the tax administrator, have sold the project in that year and included the related costs of the project in the tax-deductible expenses for that period. Only the costs directly related to the disposal of the land and related real property were recognised by the tax administrator as tax-deductible expenses in 2015.
Principle of substantive and temporal link
In the implementation of development projects, multiple entities with different rights and duties may be involved throughout the process. A thorough analysis of the specific situation is therefore always necessary. In the present case, no precedent was established seeking to define tax-deductible expenses upon the transfer of an unfinished project; the judgement has merely highlighted the importance of the principle of substantive and temporal link.
Although the judgment does not further elaborate on the structure of costs of acquisition of assets, it would certainly be interesting to see how the court would deal with the inclusion and subsequent tax deductibility of penalty costs, which in the present case constituted the most significant portion of the claimed expenses.