Effective from 1 January 2024, Section 34c of the Income Taxes Act has been amended by adding a new provision stating that in case of doubts by the Tax Administrator, the content of the project documentation can be supported by other means of evidence. It will apply to tax proceedings initiated from the date of entry into force of the amended Act, i.e. from the beginning of 2024.
Taxpayers in the Czech Republic have been able to use the R&D tax deduction since 2005. Throughout its existence, there has been only one major amendment to this policy, effective from 1 April 2019. This amendment partially changed the rules for applying the deduction. Primarily, it introduced the obligation to prepare project documentation (i.e. a written document with an exhaustive list of details) by the date of filing the regular tax return for the tax period in which the taxpayer first claims the deduction. This change was aimed at enabling taxpayers to use more precise information concerning research and development activities when compiling project documentation. Previously, taxpayers were required to prepare documentation before starting a project, which in practice raised a number of questions and complications.
Project documentation includes, for example, the project objectives that are achievable during the project and evaluable after its completion, the method of controlling and evaluating project progress, expected project expenditure and the names of those professionally responsible for the project. Monitoring court decisions in recent years reveals that Tax Authorities do not only verify the existence of content in project documentation but also comment on its sufficiency or level of detail. Consequently, it falls on taxpayers to prove that, for instance, the project objectives are defined such that they are achievable and evaluable. Meeting the Tax Administrator’s standards for content sufficiency can be challenging for taxpayers.
Changes brought by the new amendment
The amendment practically introduces the possibility for taxpayers to prove the project documentation’s content requirements through other evidence if the Tax Administrator finds, for example in a tax audit, that these requirements are not stated in the project documentation in a sufficiently specific manner. However, it is important to note that the amendment does not abolish the obligation to prepare project documentation, including all its exhaustively listed content requirements. Instead, it creates an opportunity for taxpayers to provide more detailed information and evidence during a tax audit or in other tax proceedings.
The authors of this article believe this is a significant step towards increasing legal certainty. They anticipate that the amendment will clarify doubts in tax audits and thus motivate eligible taxpayers to use the R&D tax deduction.
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