SAC on tax deductibility of expenses for lawyer’s lump-sum fee
The lump-sum nature of a lawyer’s fee does not in itself give rise to a different or less stringent standard of proof in tax proceedings, the Supreme Administrative Court (SAC) found in its judgment 3 Afs 262/2024–41. It also pointed out that protecting the confidentiality of the attorney-client relationship does not relieve the taxpayer of the burden of proof, nor does it mean that expenses for legal services are automatically deductible for income tax purposes.
The taxpayer provided administrative, legal and PR services to a group of enforcement officers (bailiffs) and managed and enforced claims on behalf of law firms. As part of this business activity, the taxpayer claimed to have used the legal services of a law firm which, for a sump-sum fee, carried out monitoring and legal research into current legislation, drafted legislative proposals and provided other services. During a tax inspection, the tax administrator questioned the tax deductibility of this expense and requested that the taxpayer provide further evidence of the services received.
During the inspection, the taxpayer provided a contract and accounting records. However, they did not provide the actual outputs, arguing that doing so would violate attorney-client privilege and that the standard of proof for general legal services should be more lenient and commensurate with their nature. Both the tax authority and the regional court held that where the tax authority has specific and substantiated doubts as to the scope and purpose of the services (such as inconsistencies in the invoiced amounts or overly generic descriptions of the services rendered), the mere submission of contracts and accounting documentation is insufficient to demonstrate that the services were in fact provided. The specific nature of legal or public relations services does not, in itself, justify a relaxation of the evidentiary requirements. Consequently, the costs of the legal services in question cannot be treated as deductible expenses for income tax purposes.
The taxpayer filed a cassation complaint against the judgment. The Czech Bar Association (ČAK) also joined the cassation proceedings as an interested party, arguing that the outcome of the dispute would affect the entire legal profession. However, the SAC ruled that ČAK could not be an interested party in the proceedings, as it was not directly affected by the decision in this case and its interest was merely general and professional, rather than individual and immediate.
On the merits of the case, the SAC reiterated that the taxpayer must provide evidence of what services were actually received (including legal services) and how they relate to their business activities. Neither a lump-sum fee nor attorney-client privilege relieves the taxpayer of the obligation to bear the burden of proof. The SAC therefore denied the taxpayer’s argument that a lump-sum fee for legal services should be subject to a less stringent standard of proof, particularly where the tax authority had raised specific doubts regarding the scope of the services provided.
The SAC further emphasised that the tax authority’s requirement for at least a general substantiation of the content of the legal services and their connection to the taxpayer’s income does not (also in view of the non-public nature of tax proceedings) negate the essence of the confidential relationship between client and attorney. This is particularly true for services which, according to the SAC, could not have been of a highly sensitive nature for the taxpayer.
The SAC concluded that, for a lump-sum fee for legal services to be tax deductible, the taxpayer must provide at least a basic description of the services provided and demonstrate their connection to their business activities in terms of both substance and timing.