SAC: new judgments on substantive and temporal connection
In recent months, the Supreme Administrative Court (SAC) has issued several noteworthy rulings, all of which underline the importance of establishing a clear substantive and temporal connection between claimed expenses and the relevant taxable period. In its reasoning, the SAC further reiterates the taxpayer’s burden of proof with respect to demonstrating that the underlying supplies were actually provided.
In the first case (21 Afs 107/2025), the court assessed a situation where a taxpayer recorded and included in their tax base the costs of an audit of the 2010 and 2011 financial statements only in 2013 when the audit was actually performed and invoiced. However, both the SAC and the tax administrator agreed that these costs were not deductible for income tax purposes in 2013, as the costs incurred for an audit of the financial statements for previous periods were not – in terms of substance and timing - connected with this period.
A mere assertion that the audit was carried out during this period cannot, in the SAC’s view, establish a sufficient connection to the 2013 taxable period. The court also noted that the audit of the 2010 financial statements was conducted only after those statements had already been filed in the Collection of Deeds, and the subsequently audited financial statements were not resubmitted to the Collection of Deeds. The taxpayer therefore failed to demonstrate a legitimate reason for conducting an audit with a delay of several years.
The second judgment (8 Afs 253/2024) dealt, among other things, with stabilisation bonuses. The taxpayer accounted for the costs of stabilisation bonuses and claimed them as tax deductible in the given period, arguing that the bonuses represented wage components to which their employees are entitled to. However, the SAC confirmed the tax administrator's conclusion that the company's management had the option to decide in the following year to whom and in what amount the bonuses would be paid, or not to pay them at all (e.g. upon termination of an employee's employment). Therefore, there was no entitlement to these bonuses. The judgment confirms that the cost of stabilisation bonuses can only be deductible for income tax purposes if the stabilisation bonus is actually granted to a specific employee and its granting is duly documented.
The third judgement (4 Afs 214/2024-87) dealt with the claiming of costs of building materials that were purchased and delivered after the completion and invoicing of several orders. Despite this fact, the taxpayer included them in costs related to projects that had already been invoiced. The tax administrator therefore questioned whether the costs of material were in fact connected to the specific taxable income of the period at issue, i.e., to projects that had already been invoiced.
The SAC agreed with the tax administrator and concluded that the taxpayer had failed to provide a credible explanation as to why to invoice orders before the necessary materials were purchased and delivered, nor how other purchases were related to the projects in question.
The current case law of the Supreme Administrative Court therefore emphasises the need to provide demonstrable evidence not only of the actual provision of services, but also of a clear temporal and substantive connection with a specific taxable period.