Back to article list

SAC: vacation compensation to be included in R&D allowance

In recent judgement 1 Afs 429/2018, the Supreme Administrative Court (SAC) expressed its opinion on a widely discussed question: whether wage compensation paid to employees on vacation may be included in expenses claimed within a research and development allowance. The court concluded that such compensation may indeed be included in the allowance.

In a tax inspection, a tax administrator refused to accept the inclusion of wage compensation paid to vacationing employees participating in a development project in a research and development (R&D) allowance. The tax administrator thus followed the approach so far generally applied by the financial administration, arguing that wage compensation for vacation does not meet the condition of being directly connected with project solutions: in the financial administration’s opinion, employees do not work while on vacation, therefore they do not carry out any research and development activity; the wage compensation paid to them during their vacation therefore does not constitute an employer’s expense incurred in direct connection with a R&D project. In this specific case, the regional court sided with the tax administrator.

The issue was brought up by tax advisors at the Coordination Committee of the General Financial Directorate and the Chamber of Tax Advisors. The submitters were of an opposing opinion and the matter was closed without reaching consensus. The Chamber of Tax Advisors’ opinion was also supported by other regional courts’ decisions –  about one of them we informed you in March 2019.  Now the issue appeared before the SAC, which unequivocally concluded that that the expenses may be claimed within a R&D allowance.

The SAC considered the financial administration’s arguments artificially separating work performance from vacations unconvincing and biased. In the court’s opinion, the precondition for claiming the allowance is not that expenses must be incurred directly for the R&D project implementation, but rather in its implementation, meaning in connection with the project solution. Wage compensation for vacation is stipulated by the Labour Code and comprises an obligatory labour expense. The SAC pointed out that employees are entitled to vacation for having worked hours on a research and development project, therefore their wage compensation must be viewed as a remuneration for work, rather than a remuneration for absence from work or for recuperation. In the court’s opinion, it is in fact a matter of a payment for work being spread over time.

The SAC also noted that the aim of supporting research and development is to promote the hiring of highly qualified staff and the carrying out of research and development by one’s own employees, which naturally involves also the provision of all benefits stipulated by law. The impossibility to claim wage compensation for vacation within a R&D allowance would be contrary to the purpose of R&D support.

The SAC therefore found no reasonable grounds why these expenses should be treated differently than other labour expenses stipulated by law, such as obligatory social security and health insurance premiums, which are standardly included in R&D allowances.