SAC on tax deductibility of provisions for repairs of tangible assets

The tax administrator held that the taxpayer had breached the condition for the creation of provisions for repairs of tangible assets by not creating them individually for each asset but cumulatively for several assets. Specifically, the taxpayer created three provisions, each linked to repairs of several asset items recorded separately (e.g. roads, fences, and tennis courts). When inspecting the budgets, the tax administrator also found that provisions had also been created for repairs of assets recorded on other inventory cards other than those to which the individual provisions had been allocated.

The taxpayer argued that the tax administrator was too formalistic in demanding that one provision be allocated to one asset item, and that the regional court wrongly confused the legal condition for the creation of provisions with their recording in documents, which only took place after the creation of the provisions in question. However, the Supreme Administrative Court (SAC), before whom the case (7 Afs 79/2024 - 44) eventually appeared, held that provision inventory cards were not documents which are only created after the creation of provisions. In fact, it is the proper recording of the provision in the accounting, including the inventory cards, whereby the provisions are actually created.

The Supreme Administrative Court therefore upheld the regional court's decision that provisions must be properly recorded in a company’s accounting and created for each asset separately. The SAC thus rejected the taxpayer's argument of formalism as well as other arguments, such as the tax administrator's failure to take evidence and witness testimonies. Indeed, such evidence could not have changed the fact that the provisions had not been properly and lawfully created. The SAC also found no fault with the tax administrator's procedure in assessing additional tax.

The judgment yet again underlines the importance of proper accounting and compliance with statutory requirements in the creation of provisions. It is essential that companies pay attention to detail and ensure that their accounting procedures are in line with applicable regulations.