Indirect shareholding expenses: burden of proof always on taxpayer

Under the Income Tax Act, a parent company's expenses incurred in holding a share in a subsidiary are not tax deductible. For indirect expenses, there is the rebuttable presumption that they amount to 5% of dividends received unless the taxpayer proves that their amount was lower.

This rule is based on the principle that income from dividends generated by the parent company is usually tax exempt and therefore the related expenses cannot be tax deductible.

In the present dispute, the tax administrator did not accept the amount of indirect expenses for holding shares in subsidiaries of CZK 96 million declared by the taxpayer, claiming that the calculations presented contained fundamental inconsistencies and errors. Among other things, the tax administrator pointed out that the company had incorrectly reduced its cost base by income from the provision of services to subsidiaries, income from invoicing guarantees, and tax depreciation charges and tax residual values. The tax administrator further held that the company had failed to include in the cost base the wage expenses of its members of management. According to the tax administrator, there was a lack of credibility as the company had submitted several differing calculations and kept changing them during the proceedings. Because of these shortcomings and the resulting doubts, the tax administrator set the indirect expenses as a percentage: 5% of the dividends received (CZK 286.5 million). 

In the course of the appeal proceedings, the company adjusted the amount of the originally declared calculation of indirect expenses from CZK 96 million to CZK 160.5 million and declared further expenses to avoid the setting of indirect expenses on a fixed-percentage basis resulting in an even higher amount of these expenses.
The Appellate Financial Directorate accepted this adjustment and assessed an additional tax based on this amount. The company, nevertheless, lodged a cassation complaint against this decision.

Within the cassation complaint proceedings, the Supreme Administrative Court stated that it was primarily the taxpayer's responsibility and in their own interest to assert and prove the actual amount of indirect expenses. Since they had not done so, the indirect expenses had been assessed on a fixed-percentage basis. Only then had the company offered its own calculations, and the resulting amount of those expenses was accepted by the Appellate Financial Directorate and subsequently confirmed by the municipal court. 

In view of the above, the Supreme Administrative Court thus dismissed the cassation complaint, fully agreeing with the procedure of the tax administrator and the first-instance court, pointing out that the company's argumentation had been inconsistent and illogical, as it paradoxically had questioned its own calculations during the proceedings. Accordingly, the amount of the indirect shareholding expenses was left in the adjusted amount of CZK 160,5 million.