SAC on proving indirect shareholding expenses
The Supreme Administrative Court (SAC) has recognised that it is not easy to prove the exact amount of overhead (indirect) expenses related to holding a share in a subsidiary. However, this practical pitfall does not change the fact that if a taxpayer wishes to avoid excluding 5% of dividend received as tax non-deductible expenses, they must prove the actual amount of the overheads. The calculation algorithm applied must be reasonable and reflect all related expenses.
The SAC noted that Section 25(1)(zk) of the Income Tax Act offers two possible approaches: either proving the actual amount of shareholding expenses, or determining them as a percentage – 5% of dividends received. The same percentage amount shall also be applied if the taxpayer claims lower overheads but is unable to prove their actual amount.
In the present case, the taxpayer calculated overhead expenses at CZK 365, using a table. The expenses comprised four hours spent by the company’s employee exercising the powers of the subsidiary’s general meeting. The tax administrator rejected this quantification and, using the percentage rate, excluded CZK 160,000 as tax non-deductible expense. When the case appeared before the Supreme Administrative Court, the court confirmed that the evidence presented did not give any economic reasons supporting or explaining the amount claimed by the taxpayer: the table presented by the taxpayer showed the result of the calculation, but not the individual steps to arrive at such result.
The SAC emphasised that taxpayers must identify and quantify the expenses in a plausible manner, and support them with relevant evidence. Although a certain calculation of the amount of overheads was submitted, no evidence was produced to support the logic behind the calculation or the economic criteria used as a basis, not even after the tax administrator had challenged the calculation and called upon the taxpayer to explain the approach applied.
The SAC agreed that while it can be complicated in practice to support overhead expenses and quantify their exact amount, is necessary that a reasonable calculation algorithm is designed, taking into account all expenses as regards supporting organisational processes related to holding a share in a subsidiary. If a taxpayer wishes to avoid tax non-deductible expenses determined as 5% of the dividend received, it is their responsibility to properly quantify and prove actual expenses. In practice, the amount calculated as a percentage may be many times higher than the actual expenses.
In the present case, the taxpayer failed to bear the burden of proof and, according to the SAC, suffered the consequences of their passivity in the tax proceedings rather than the objective complexity of proving the actual expenses. The judgment thus confirmed, yet again, that increased attention must be paid to calculating and supporting indirect shareholding expenses.