Case law
13 December 2017

Technical improvements and advertising services once again on the SAC’s agenda

The Supreme Administrative Court (SAC) in its recent judgement dealt yet again with the issue of repairs vs technical improvements and the application of related depreciation by a tax administrator during a tax inspection. The court also opined on the manner of proving the provision of advertising services, and on the reasonableness of their price. While this is by far not the first judgment in this area, it clearly shows some review approaches applied by the tax administrators, and the courts’ requirements for proving advertising as a tax deductible expense.

Veronika Červenková
Miroslav Zatloukal

The SAC dealt with a situation where a tax administrator challenged the deductibility of expenses for the repair of a chair lift, as, in its opinion, the case involved a technical improvement. The SAC held that the Income Tax Act’s provision defining non-deductible expenses (Section 25) prevails over Section 24 defining deductible expenses. Expenses listed in Section 25 can therefore not be accepted as tax deductible, even if expended to generate taxable income. It is thus clear that even bringing an asset into a condition to make it compliant with requirements of an applicable regulation may be a technical improvement and thus a non-deductible expense. If taxpayers want to apply the tax deprecation of a technical improvement within a tax inspection, they should actively request this during the tax inspection or file an additional tax return after the end of the tax inspection.

The court also dealt with proving that advertising in form of banners with the taxpayer’s logo placed at a football stadium during matches had actually taken place. Invoices produced by the taxpayer, the oral testimonies of third persons and written statements by the football club were found to be insufficient by the tax administrator. The court also reviewed photographs and video recordings obtained from the football club, as the tax administrator stated that he had seen the banners in only two of the sixteen matches he had watched. The arguments that some shots had been taken before the match and that some banners had been placed out of the cameras’ sight were not granted by the SAC. Despite the existence of perfect accounting documents and witness testimonies, the court did not accept the evidence as sufficient and held the expenses to be non-deductible. Apparently, the requirements in this area are stricter than ever, therefore it is crucial not to underestimate the necessity of adequate (photo) documentation.

The tax administrator also reviewed the price of the purchased advertising services, comparing it to prices of similar advertising services negotiated by the football club with other entities. Although such knowledge is often not available to the taxpayer, it is exactly this kind of information that the tax administrator often chooses to review. This approach was also approved by the SAC.

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