Can holiday compensation be used as part of the R&D deduction claim?

Holiday compensation and its utilisation as a research and development (“R&D”) deduction has been a widely debated issue in recent years. The General Financial Directorate refused for such compensation to be utilised as part of the R&D deduction; on the other hand, a strong opinion of legal experts existed upholding the legitimacy of the deduction. Therefore, it was evident that the matter had to be decided in court.

In February, the Regional Court in Hradec Králové has published a decision in favour of the plaintiff (ZVU Engineering a.s.) against an additional corporate income tax assessment for the 2011, 2012 and 2013 taxation periods. The tax was additionally assessed based on the non-recognition of the legitimacy of personnel expenses relating to employees’ holiday compensation as part of the R&D deduction.

The plaintiff argued that compensation for the holiday entitlement used is, pursuant to the Labour Code, an integral and obligatory part of personnel expenses, which is why it may be considered as equal to a wage for performed work, which is generally accepted.

The tax administrator opined that a deductible item may only include expenses that have been incurred in direct relation to implementing an R&D project. This condition is not met in the event of holiday compensation and relating social security and health insurance contributions as employees are not involved in implementing R&D projects during holidays. Simultaneously, the tax authorities consider it possible, pursuant to Decree D-288, to include only employees’ wages in personnel expenses.

However, the Regional Court did not agree with this argumentation, confirming that not only the costs of wages or salaries need to be incurred in respect of development employees but also other relating expenses, which also cover holiday compensation. The Court opined that the time spent by employees on holiday is necessary for employees to implement R&D projects. The costs of holiday compensation are thus considered as “costs incurred in direct relation to implementing an R&D project”. What is more, the existing legal regulation of utilising R&D deduction is also rather unclear in that holiday compensation is not to be included in the deduction. For the sake of completeness, attention was also given to the fact that Decree D-288 cannot restrict taxable entities’ rights beyond statutory limitations.

The authors of this article would like to note that owing to the financial implications of the respective decision, a cassation complaint is expected to be filed. Consequently, it looks likely that the question as to whether it is legitimate to utilise holiday compensation as part of the R&D deduction will only be decided by the Supreme Administrative Court.

The article is part of dReport – March 2019, Tax news; Grants and investment Incentives.

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