From the practice of the Supreme Administrative Court: R&D tax relief

The Supreme Administrative Court (“SAC”) issued two important rulings in relation to the tax-deductible items for research and development (“R&D”). In the first case, the SAC dealt with a possible bias of the Tax Administrator as a result of awarding target rewards for non-recognition of the R&D tax relief and in the second case the recognition of holiday allowances as part of the R&D tax relief.

Rewards for non-recognition of the R&D tax relief

The first dispute is specific for two reasons. For the first time, the specific parameters of the document entitled “Conditions for target reward promise, target reward promise” issued by General Financial Directorate (“GFD”) in 2016 to individual tax authorities were published. And probably for the first time in the history of tax disputes, the Supreme Administrative Court ruled on a cassation appeal during a public hearing, precisely in order to examine and clarify the reasonableness of the cassation objection regarding a possible bias of the Tax Administrator. According to the SAC, the document defined the conditions under which Tax Administrators were entitled to rewards for non-recognition of the R&D tax relief, especially when the deduction applied was reduced by CZK 2.5 million or more. This practice of the Financial Administration, which motivated tax inspectors with target rewards, was subsequently criticised by the SAC on its website in the press release section. A similar document to the one issued by the GFD should also exist for additional assessments as a result of transfer pricing audits.

Holiday as a work-related expense

The second dispute concerned the possibility to deduct holiday allowances as part of the deductible expenses of the R&D tax relief. Already in 2015, this area was discussed with the GFD as part of a contribution to the Coordination Committee of the Chamber of Tax Advisers. The conclusion of the submitters at the time defending the possibility to recognise holiday allowances in the tax relief was not accepted by the GFD. The practice of regional courts over nearly the past year has shown that two regional courts have opted for the option of including these allowances, whereas one regional court has not accepted holiday allowances in its ruling. It was precisely the case of the latter that was first discussed with at the SAC with a clear partial conclusion, which states that holiday allowances are part of staff costs and are therefore eligible for tax deduction as part of the R&D tax relief. The SAC justified its ruling by arguing, inter alia, that taking a holiday is necessary to maintain the basic physiological needs of a human being and that the entitlement to it is dependent on performing work, even when implementing R&D projects, thus becoming a “cost of labour” and not a cost of “absence from work”.

The amendment to the law has introduced new rules since April

In addition to the above-mentioned new facts, both SAC rulings dealt with the need to fulfil all formal requirements for project documentation and separate cost records and the obligation to approve project documentation before commencing a R&D project. The latter obligation was removed by an amendment to the Income Taxes Act, whereby, from 1 April 2019, taxpayers are obliged to send a notification of their intention to use the R&D tax deduction to their respective Tax Administrator instead of approving the project documentation. Read a summary of the amendment regarding R&D in the article New rules for tax deduction for research and development.

With our clients, we simplify the administration of tax relief and check compliance with all obligations arising from legislation and the development of case law through our R&D Calculation Tool, which you can read about on our website.

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