Calculated Expenses Cannot Be Used in the Calculation of Deductions on Research and Development

The regional court in Hradec Králové reviewed the legitimacy of calculating the amount of deductions for research and development (“R&D”) by means of ‘calculated expenses’. The court ruled that the Income Taxes Act requires the use of expenses actually incurred and for the purpose of calculating R&D deductions it does not allow valuing internal R&D project costs on the basis of production calculation, which is common for valuating internally produced inventory.

In the inspected period, for the purposes of valuating personnel costs, the taxable entity stipulated a calculated valuation amount of each individual hour worked on an R&D project in the form of an average hourly rate of wage costs. In practice, the personnel costs were calculated as a sum of hours worked by workers in construction, technology and production, which was subsequently multiplied by an average hourly rate in the given year, including insurance contributions. The taxable entity therefore used the opportunity stated in the Regulation on Accounting for the calculation of internal costs based on the production calculation.

During tax inspection, the tax administrator did not accept this way of calculation. The taxable entity defended itself in the legal proceedings with the fact that if it had calculated the average hourly rate based on actual wages of only those workers who participated in the R&D project, the final amount would have been higher, and therefore the used method was not to the fiscal detriment of the state.

However, the regional court ruled in favour of the tax administrator, justifying its ruling by stating that the Income Taxes Act requires the amount of R&D deductions to be calculated based on the actual amount of wage costs for individual workers in individual months, and calculated expenses therefore cannot be considered as expenses actually incurred.

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