SAC on conditions for depreciation of technical improvements to real estate
The Supreme Administrative Court (SAC) has addressed under what conditions building alterations to real estate can be considered technical improvements eligible for tax-deductible depreciation. The court concluded that depreciation can only be applied to technical improvements where the taxpayer can prove that the improvements have been put into a condition suitable for normal use and can document when the construction work was carried out.
The judgment (6 Afs 18/2025) concerned depreciation charges related to the conversion of a former warehouse and garages into a sauna with whirlpools used for business purposes. While the original proceedings were quite complex, after the regional court dismissed the action, the taxpayer appealed to the SAC with a cassation complaint focusing on only one cassation objection.
In the cassation complaint, they contested the regional court's conclusion that they had not proven that the property had been brought into a condition suitable for normal use, which prevents the application of tax depreciation of technical improvements. One of the conditions for applying tax depreciation is the fulfilment of obligations laid down by special legal regulations, in this case, the Building Act. According to the regional court, the taxpayer failed to fulfil these obligations, as they had not provided a final occupancy permit or consent to a change in the purpose of use. Moreover, it was not clear from the evidence when the reconstruction took place.
In their complaint, the taxpayer claimed that the compliance of the use of the building in question with legal regulations could also be proven by documents other than the occupancy permit (which, according to the taxpayer, had not been preserved). Instead, they submitted a decision not to order the removal of the building, which, in their opinion, proved that it was not an unauthorised building. They also argued that the tax administrator had not proven the original purpose of use of the property and therefore should not have required proof of the change of its use.
Proper documentation is key
In its ruling, the SAC emphasised the purpose of the legal regulation of tax depreciation, which is to ensure that the taxpayer only depreciates assets that were actually acquired and used for the purpose of securing, generating and maintaining taxable income. According to the court, the taxpayer should have proven to the tax administrator that the conditions for applying the depreciation of technical improvements had been met (substance) and that it was related to the taxable period in question (timing).
Given that the taxpayer failed to prove that they could apply the depreciation of technical improvements already in the 2014 taxable period, their cassation complaint could not be successful in the court's view, as they did not even challenge this conclusion of the regional court in their complaint. In addition, the SAC stated that the taxpayer had not submitted any documents proving that the reconstruction of the property in question and its use were compliant with the provisions of the Building Act.
The judgment highlights the importance of proper and careful documentation and archiving of construction alterations. When the tax administrator inspects the applied tax depreciation charges, the taxpayer must provide evidence of the completion of the alterations, their legality, and their exact timing.