SAC: tax deductibility of advertising and promotion costs
Companies must be able to prove that their advertising and promotion costs were actually incurred in connection with generating, securing and maintaining taxable income. This basic rule for the tax deductibility of costs has yet again been confirmed by the Supreme Administrative Court in a case where a company was not the ultimate recipient of the advertising services.
Advertising and promotion are crucial for companies to remain competitive. With their importance comes the need for the correct tax treatment of their cost. The Income Tax Act does not contain any special provisions governing advertising and promotion costs. It is therefore necessary to follow the basic rule on the general tax deductibility of costs.
The Supreme Administrative Court (SAC) considered case No. 9 Afs 195/2024 - 36 where the heart of the dispute was proving the tax deductibility of an advertisement that a company had commissioned. The company subsequently sold the advertisement to another entity, and the related revenue was not disputed. The tax authorities, however, focused on whether the company had indeed received the advertising services from the supplier, and whether the related costs were tax deductible.
The tax administrator challenged the receipt of the services based on the following facts: the supply was supposedly provided by a supplier who did not hold marketing rights to provide the services and was thus not authorised to conclude advertising contracts on their own behalf, and the subject matter of the contract was vague. The tax administrator therefore demanded the company prove that they had actually received the advertising services and in what scope. The company, however, produced documentation that had apparently only been prepared ex post for the purposes of the tax inspection, which further increased the tax authority's suspicions. In fact, the company only proved a small part of the advertising services – but even these did not correspond to the already vague subject of the contract, let alone to the total paid amount of CZK 6.7 million.
The Supreme Administrative Court agreed with the tax administrator that the company had not proven the receipt of the advertising services and related costs in the tax inspection. Moreover, the SAC pointed out that property relations existed between the company and the places where the advertising was to take place, which further increased doubts as to whether it was at all necessary to incur any advertising and promotion costs. According to the court, the evidence showed that the true purpose of the contracts was to support the sports club rather than purchase advertising services.
The judgment underlines once again the importance of a thorough documentation of advertising and promotion costs. It is advisable to already gather it when receiving the services, as it is ideal to have all necessary evidence at hand and ready in the event of an inspection by tax authorities.
It is not sufficient to submit invoices alone but it is important to have other supporting documents such as photographs, email correspondence, contracts or other evidence to support that advertising and promotional services were actually provided. At the same time, individual pieces of evidence must not contradict each other.