Blog

Dear readers,

This article is intended to inform you about a Czech decision of the Supreme Administrative Court^[1], which was to determine whether expenses spent on construction work constituted a repair (one-off cost), or whether they were spent to acquire new tangible assets (costs in the form of depreciation charges).

What Was the Decision About?

A taxpayer included a one-off expense in the form of construction work on repairing a hayloft (destroyed by fire) in tax deductible expenses in the 2014 taxation period. The Czech Tax Office challenged such procedure explaining that the expense involved expenses to acquire a new tangible asset (a new hayloft) rather than a one-off expense, and assessed additional corporate income tax and related tax penalty to be paid by the taxpayer.

The taxpayer did not agree with the tax administrator’s decision stating that the structure did not cease to exist and, as a result, an acquisition of a new tangible asset could not be involved. To support his opinion and to provide evidence, the taxpayer submitted an approval of a building authority of a partial removal of the structure and renovation thereof (among other things).

Determination of the structure ceasing to exist is of key importance in this particular case.

Decision of the Supreme Administrative Court

Both the regional court and the Supreme Administrative Court (SAC) shared the tax administrator’s opinion that the expenses concerned involved expenses on acquiring a new tangible asset and referred to the existing decision-making practice of the Supreme Court.

According to the SAC, an aboveground structure ceases to exist and to be a thing in the legal sense if the layout of the original building’s first floor above ground as a minimum is no longer noticeable. In the SAC’s opinion, the removed part rather than the newly built part is material in considering the original building’s cessation. When perimeter walls were completely destroyed, there is no doubt that the original structure ceased to exist; the scope of interventions must be considered in the event of a partial demolition of such walls.

It may be very difficult in the real life to determine whether a repair or acquisition of a tangible asset is involved. If you are unsure with regard to a particular situation, please feel free to contact us. We will be happy to assist you.

Michaela Kozminská
kozminska@edmutilitas.cz