Dear readers,
We want to inform you about a judgment of the Supreme Administrative Court (10 Afs 113/2021 - 50; the “SAC”) that was recently deciding about distinguishing promotion costs (tax deductible expenses) from entertainment costs (tax non-deductible expenses).
A company applied advertising and promotion costs (among others) as tax deductible costs in taxation periods of 2013 through 2015. Referring to the submitted evidence, the tax administrator did not recognise the costs as tax deductible and assessed an additional corporate income tax to the company. The company filed an appeal against the payment assessments with the Regional Court, followed by an action, which was dismissed by the court. The company challenged the judgment of the Regional Court (the “RC”) stating that the tax administrator failed to properly consider the purpose and tax deductibility of expenses pursuant to Section 24 (1) of the Income Tax Act (the “ITA”).
What Was the Above-mentioned Judgment About?
The company held an event to celebrate the 20th anniversary of its incorporation. The company stated that a new logo had been introduced during the event and customers were provided with a training presenting the company’s history, achievements and visions for the future. In the company’s opinion, the associated advertising and promotion expenses meet the definition of advertising described in the SAC’s judgment dated 4 August 2005, Ref. No. 5 Afs 152/2004‑55. The company also sought to prove using the submitted evidence that the event was held to build the company’s brand’s and corporate name’s position and to promote its products.
The tax administrator found that various social activities were held during the event, the event had a presenter and included an artistic show, and accommodation was arranged for customers. In addition to this, the tax administrator identified in a video recording that no customer training was held. Based on the identified information, the tax administrator deduced that the costs involved entertainment costs pursuant to Section 25 (1) (t) of the ITA, i.e. tax non-deductible costs, in this case.
SAC’s Decision on Promotion Costs
In the SAC’s view, the company failed to sufficiently dispel the tax administrator’s reasonable doubts regarding the applied advertising and promotion costs. The evidence submitted by the company implied the event’s entertaining nature.
According to the SAC, tax deductibility of costs pursuant to Section 24 (1) of the ITA and examination of whether entertainment costs are involved need to be considered separately. As the ITA defines typical features of entertainment, rather than precisely specifying it, circumstances of expenditure’s spending are of key importance. In the SAC’s view, entertainment costs have the nature of a performance intended to be consumed or provided as a gift to a particular person, while advertising and promotion costs are intended to acquire new customers.
Based on the documented expenses and the submitted video recording, the SAC agreed with the financial bodies’ opinion and the RC’s decision that the entire event shows features of a social event for the company’s business partners rather than an event promoting the company.
Other Parts of the Judgment
Another part of the judgment examined costs of lighting of warehouses that were not approved as tax deductible by the tax administrator. It was deduced from the submitted evidence that the costs involved costs of technical improvements pursuant to Section 25 (1) (p) of the ITA rather than repair costs. In the SAC’s view, it was not necessary to consider in the concerned case whether the costs will meet the definition of a repair or a technical improvement, but what was critical in the case under consideration was the fact that the company failed to bear the burden of proof in relation to proving the warehouses’ condition prior to modifications.
In the final part, the SAC dealt with tax deductibility of costs of licence fees for the use of trademarks. The tax administrator identified many doubts during the tax procedure (implementation of a new trademark without a licence agreement, discrepancy between the company’s assertions and facts identified by the tax administrator, payments of fees to an account other than the agreed one), and, just as the case was in previous cases, the tax administrator considered the costs tax non-deductible. To the SAC, the business transaction was non-standard and the Court arrived at the same conclusions as the tax administrator and the RC.
Stela Bartošová Michaela Kozminská
bartosova@edmutilitas.cz kozminska@edmutilitas.cz