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Dear Readers,

We want to inform you about Decision No. 6 Afs 273/2022 – 43 of the Czech Supreme Administrative Court (the “SAC”) dated 13 December 2023. This judgment deals with concurrency of repairs and technical improvement in a single accounting period.

What Was the Litigation About?

A company carried out extensive construction modifications (refurbishment) of a hotel facility recognised as technical improvement. In addition to the refurbishment, the company repaired a CCTV system, a heating system and carpets (not recognised as technical improvement).

The tax administrator arrived at a conclusion that all performed activities should have been considered technical improvements, and, as a result, required recovery of the unpaid tax from the company (in connection with duties in relation to VAT, specifically in relation to adjustment of the VAT deduction pursuant to Section 78 (4) (a) et seq. because tax exemption was applied to the hotel facility’s sale).

The company believed that the supply involving repairs of the heating system, carpets and the CCTV system did not relate to the construction modifications (refurbishment) in factual or timely terms. Moreover, the performed repairs only resulted in elimination of physical wear and tear.

The Regional Court upheld the company’s action and rejected generalised application of the Supreme Administrative Court’s decision-making practice that any expenses spent within a single investment project have to always be considered, under any circumstances, technical improvement. In addition to this, the Regional Court disagreed with the tax administrator’s conclusion that expenses on other work that preceded the investment project also have to be considered technical improvement.

The SAC’s Statement

In the Supreme Administrative Court’s view, it is a general rule that where construction modifications are carried out as part of a single construction project (i.e. as part of comprehensive construction work that constitutes one unit in factual and timely terms as well as in accounting terms) and where such modifications are leading to a change in technical parameters and the way of using the property, it is not necessary to examine the nature of each separate modification.

However, the SAC highlighted that such judicial decision practice (which is based for example on case no. 10 Afs 104/2018-40) cannot be generalised and interpreted mechanically. It is of key importance to have supplies constitute a logical unit from the perspective of the factual and timely scope and from the perspective of the purpose. As a consequence, each case has to be considered on a case-by-case basis and with the use of sufficiently conclusive evidence.

In the concerned case, the SAC leant toward the Regional Court’s opinion and satisfied the company. The SAC agreed that the considered work (repairs) was not connected with the refurbishment in timely or factual terms. Moreover, the Supreme Administrative Court stated that the property’s emergency condition was not a key factor in assessing whether the action involved is a repair or technical improvement; in the SAC’s view, the taxpayer should be able to prove the property’s condition prior to the modifications and against the new condition.

The judgment, in fact, confirms that it is always necessary to adopt a case-by-case approach to every case in considering construction modifications, and that any performed pieces of work cannot be automatically classified as technical improvement.

Michaela Kozminská
kozminska@clarksonhyde.cz