Last December, the Regional Court in Brno delivered a very interesting judgment which, contrary to the standard practice, admitted that the recipient of an investment incentive in the form of tax relief is not obliged to apply the “increased depreciation” in the first year of depreciation.
Under the Income Taxes Act, the recipient of investment incentives is obliged to apply depreciation to the maximum extent possible. According to the interpretation of the Coordination Committee of the Chamber of Tax Advisors of the Czech Republic (KDP ČR) and the tax administration, meeting the condition of maximum application of tax depreciation is dependent on the application of, inter alia, the rates for increased depreciation in the first year of depreciation.
In the dispute concerned, the tax administrator, in accordance with the standard practice, required the application of increased depreciation in the first year of depreciation and thus reduced the tax relief claim for the recipient of the investment incentive because the straight-line depreciation method using standard depreciation rates was applied.
Statement of the Regional Court in Brno
The Regional Court in Brno stated that at the beginning of the acquisition of certain tangible assets, the taxpayer might choose from two basic depreciation methods: straight-line and accelerated. Other choices made by other taxpayers in the course of depreciation (i.e. opting for lower depreciation charges in the case of the straight-line method and extending the depreciation period or discontinuing depreciation) are not possible for recipients of investment incentives because this would lead to an impermissible reduction of their tax base. The law, therefore, allows the taxpayer in the investment incentive scheme to choose the depreciation method, but in principle, they must apply the maximum depreciation charge. However, this requirement does not apply to the choice of the straight-line depreciation method. The different options of the straight-line depreciation method do not differ either in the length of depreciation or in the total amount depreciated. The amount is only distributed differently over the individual years. In the first year, the depreciation charge during increased depreciation is higher than the regular depreciation charge, but it decreases in subsequent years. The legislation does not require the increased depreciation to be claimed in the nearest tax period. In other words, by choosing a particular option of straight-line depreciation, the taxpayer cannot, in the final effect, impermissibly affect their tax base. There is, therefore, no need to standardise the taxpayer by making them apply increased tax depreciation in the first year of depreciation.
According to the Regional Court in Brno, the options of straight-line depreciation thus represent “sub-manners” of straight-line depreciation and, after selecting the individual sub-manner and applying the maximum charge, the taxpayer fulfils the obligation of the investment incentive provider to apply depreciation “to the maximum extent possible”. This is a conclusion that is therefore contrary to the conclusions of the above-mentioned Coordination Committee and to the standard practice of the tax administration.
The Regional Court annulled the decision of the Appellate Financial Directorate and returned the case to it for further proceedings. We can therefore expect that the case of the obligation to apply increased tax depreciation to recipients of investment incentives will be further discussed. We will keep you informed about its further progress.