Reserve for Repairs of Fixed Assets and Tax Deductibility: Judgment of the Supreme Administrative Court
Dear Readers,
We want to inform you about Judgment of the Supreme Administrative Court (the “SAC”) No. 7 Afs 79/2024-44 dated 28 March 2025, in which the SAC dealt with the moment of establishment of a reserve for repairs of fixed assets and conditions for the application of a tax expense.
Matter in Dispute
The plaintiff created three reserves for repairs of fixed assets, for which it obtained budgets and reserve cards assigned to stock-count cards of particular assets. However, the Tax Administrator found that the reserves were also created for other separately carried structures, rather than exclusively for individual assets.
As a result, the Tax Administrator arrived at a conclusion that conditions of Act No. 93/1992 Coll., on Reserves to Identify the Income Tax Base (the Act on Reserves), were not complied with, and refused to recognise the reserves as tax expense pursuant to Section 24 (2) (i) of the Income Tax Act.
Decision of the Regional Court and the Supreme Administrative Court
The Regional Court dismissed the action and agreed with the Financial Administration’s conclusions. The SAC subsequently confirmed that proper recognition in the accounting records and compliance with all statutory conditions, namely the requirement to create a reserve for each individual asset pursuant to Section 7 (5) of the Act on Reserves, was essential for the reserve to be tax deductible.
The SAC pointed out that the repair budget alone was only a preparatory step, which does not create a reserve. From the perspective of tax deductibility, the process of establishing a reserve on its own is not of key importance, as the proper recognition in the taxpayer’s accounting records is essential.
The Court also dismissed the plaintiff’s objections regarding the alleged formalism of the financial bodies’ procedure and vexatious assessment of additional tax at the end of the deadline.
If you need more information about this topic, please feel free to contact us. We will be happy to help you.
Lenka kolmanová
kolmanova@clarksonhyde.cz
