The Company won two legal disputes with the AFD pursuant to judgments 31 Af 53/2016 – 52 and 31 Af 52/2016 – 60. The Company sought the cancellation of the ruling whereby the AFD rejected the Company’s appeal against additional corporate income tax payment assessments for the taxation periods of 2011, 2012, 2013 and 2014 whereby the assessments were confirmed. The subject matter of the dispute included the AFD’s ruling stating that the Company did not carry out research and development in line with Section 34 (4) of the Income Taxes Act.

The Company is a registered medical facility conducting clinical studies predominantly of phase III, ie systematic testing of medicaments on patients to demonstrate and verify the healing powers of the medicament and identify side effects. This includes the testing of already-developed medicaments following the completion of clinical testing phases I and II, according to the assignments of the Company’s clients.

The AFD concluded that the Company had been engaged in an activity classified as the provision of services to a third party without own research as it only recorded the results of individual patients included in the project in relation to the administered medicaments. Moreover, the AFD believes that the administered medicaments did not represent an outcome of the Company’s research and development activities and, as a result, this service did not include the element of own research. The AFD thus concluded that the Company’s activities in the respective projects did not include an appreciable element of novelty and the Company was not exposed to the risk and uncertainty arising from research and development.

Nevertheless, the Regional Court did not agree with this conclusion and confirmed the Company’s opinion that the activity in an R&D project consisted of seeking new findings regarding the effectiveness of medication and was performed by qualified professionals, which brought new findings on the healing powers of the respective medicament. What is more, the Regional Court also agreed with the Company’s opinion that as such, the Company’s performance of medical research entails the risk of failure of such research. This risk lies in the fact that it may come out during the clinical study that the testing practitioner incorrectly assessed the effects of administered medicaments and, as a consequence, failed to identify the danger for human health.
Therefore, the Company is not engaged in a mere routine activity solely including the record-taking of the results. The Regional Court believes that the Company’s activities met the definition of research and development.

The Regional Court observed an unlawful assessment of the matter by the AFD in terms of substantive law and returned the case for further proceedings. The AFD subsequently filed a cassation complaint against the judgment at the Supreme Administrative Court. This judgment is one of the few judgments at the level of regional courts which agreed with the taxable entity, observing that the definition of R&D activities and costs reported in a tax return was met.

The article is part of dReport – May 2018, Tax news; Grants and investment Incentives