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Information of the General Financial Directorate (the “GFD”) on determining the level of tax deductible costs in selling a new piece of construction work carried as inventory where the net book value of a liquidated structure is included in the piece’s value, was published on the Financial Administration’s website. Developers who build a structure for the purpose of subsequently selling it are the ones to be exposed to such situation most frequently.

Due to the absence of a regulation in the Income Tax Act and uncertainty as to how to interpret the particular situation, the GFD published the information with a view of harmonising the applied administrative practices.

Description of the Considered Situation

An entity implementing a developer project, the purpose of which is to construct a new piece of construction work and to subsequently sell it, reports such structure as internally developed inventory in compliance with accounting regulations (carried at internal costs).

In case where an original structure is demolished (liquidated) in connection with the construction’s performance, the value of the new piece of construction work includes the accounting net book value of the liquidated structure.

However, the Income Tax Act does not contain a regulation reflecting such situation. As a consequence, there is no regulation applicable to the level of tax deductible costs that can be included in the corporate income tax base at the moment of selling the new piece of construction work, which includes the accounting net book value of the disposed of structure. The Income Tax Act only regulates the tax value of such construction work in case of fixed assets.

As a result, a question was arising in such situation whether a tax deductible cost will be determined in the level of the value of the new construction work under accounting regulations or if results of operations have to be adjusted, for the purposes of determining the tax base, by an amount that equals the difference between the tax carrying amount and the accounting net book value of structures disposed of as a result of liquidation.

Opinion of the GFD

In the General Financial Directorate’s opinion, the regime applied in disposing of a structure carried as inventory is the same one as in the case of tangible assets. According to the General Financial Directorate, the tax base has to be adjusted by an amount of the difference between the tax carrying amount and the accounting net book value of the structure liquidated for the purpose of acquiring a new structure. The tax base can be either increased or decreased as a result of this regulation.

The absence of legislation is therefore resolved by a GFD’s interpretation that can be first applied for the taxation period ending as of the Information’s publishing date (i.e. for the 2023 taxation period in most taxpayers). It will be interesting to see how the interpretation will be accepted in real life.

If you need more information about this topic, please feel free to contact us.

Michaela Kozminská
kozminska@edmutilitas.cz