Reserve accounts for repairs of tangible assets under SAC scrutiny
In a recent judgment, the Supreme Administrative Court (SAC) commented on the conditions for the tax deductibility of provisions for repairs of tangible assets. In its decision, it followed existing case law and confirmed a strict approach to assessing compliance with the statutory conditions, where even a partial failure may result in the provision not being recognised as a tax-deductible expense.
In the dispute at hand (21 Afs 271/2025), the tax administrator assessed additional corporate income tax on the grounds that the company had breached the conditions under the Reserves Act, because they had split a single provision across several accounts and used funds from those accounts also for other purposes that the provisions, such as ordinary operations.
The conditions apply cumulatively
Under the Act, a provision is tax-deductible if
- no later than by the date of filing the tax return, the funds, in the full amount of the provision for the relevant period, are transferred to a separate account; and
- that account is used exclusively for depositing the funds of the provision; and
- the funds are drawn from the account only for the purpose for which the provision was created, i.e. for the relevant repair.
The company argued that, as at the date of filing the tax return, the balance in the accounts was at least equal to the amount of the provision. The SAC, however, emphasised that the mere existence of a sufficient balance is not enough. The statutory conditions must be met cumulatively – in addition to the amount of the funds, they must also be kept separately from other funds, in a separate account designated exclusively for that purpose.
The SAC also rejected the argument that the company had not drawn on the provision itself, but only on amounts generated in excess of the provision, such as credited interest. According to the SAC, the law does not allow such a distinction. All funds in the separate account designated for the provision should be used exclusively for the purpose for which the provision was created.
Multiple accounts for a single provision? Case law leaves little room
As for the possibility of maintaining several separate accounts, the SAC stated that this issue was not decisive in the case at hand. However, both the Appellate Financial Directorate and the Regional Court took the view that the provision must be concentrated, in full amount, in a single separate account and that splitting one provision across several accounts does not meet the condition that the funds be deposited “in the full amount”.
The judgment provides a clear conclusion that it is essential for taxpayers creating provisions for repairs of tangible assets to set up processes so that the account where the provision is kept is fully separated from common operating finance, and the conditions under the Reserves Act are met cumulatively. Otherwise, there is a risk of additional tax assessment and related penalties.