Substance-over-form rule not applicable to research and development allowances
In its judgement No. 3Afs 304/2016 – 37, the Supreme Administrative Court (SAC) confirmed once again that compliance with formal essentials stipulated by the Income Tax Act is a prerequisite for claiming research and development allowances. If taxpayers fail to meet these conditions, their claims may be challenged by the tax administrator.
According to the tax administrator, taxpayers should treat the formal requirements as an essential element without which the research and development project cannot be implemented. In the given case, the taxpayer objected that the tax administrator’s assessment of the project was purely formalistic and did not at all deal with its substance. The SAC, however, confirmed the tax administrator’s conclusions and held that compliance with the statutory requirements stipulated for research and development projects was indeed a prerequisite for claiming the allowance. If formal requirements are not met, the tax administrator is not obligated to proceed in assessing whether a project in fact involved research or development activities.
The SAC also agreed with the regional court’s criticism of further project deficiencies: inaccurate identification data of the taxpayer such as the trade name, registered office and identification number, or the missing name and surname of the authorised person who had approved the project before starting its implementation. The project in question had only been signed with an illegible signature with no identification, which was also considered insufficient. According to the SAC, another deficiency was the manner of project review and assessment: the taxpayer supported these by separate documents, which were, however, only prepared after the project implementation had started. In this respect, the SAC emphasised another crucial prerequisite: the research and development project has to have been written before any research and development activity can be initiated.
Last but not least, the SAC stressed the need for a project’s completeness. In the case in question, the taxpayer first submitted the project to the tax administrator only in electronic form that did not contain the necessary underlying materials. Only upon the tax administrator’s request were further underlying materials produced. According to the taxpayer, the tax administrator should have been able to deduce that all formal requirements had in fact been met. Instead, the SAC emphasised that the burden of proof is with the taxpayer, and it is not the task of the tax administrator or administrative courts to actively and subsequently combine unrelated documents to deduce from them the project’s compliance with requirements stipulated as to its form and content.