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Roman Burnus | November 21, 2023

From case law: tax deductibility of brokerage fees

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At the end of October, the Supreme Administrative Court (“SAC”) issued a judgment under No. 7 Afs 54/2022 - 36, which dealt with a dispute between the plaintiff POLCARBO s.r.o. and the defendant Appellate Financial Directorate regarding additional assessment of corporate income tax for the tax period 2012 - 2014 in the total amount of CZK 35,778,520 and related penalty.

The Polish company (“PUTiH”) had a framework agreement with the plaintiff for the provision of qualified miners. The provision of the service ended with entering into an employment contract with the mediated worker. However, the plaintiff paid PUTiH the remuneration for the service on a monthly basis, according to the number of shifts worked by all secured workers, not only in relation to newly secured workers. The plaintiff then claimed this remuneration as a tax-deductible expense within the meaning of Section 24(1) of Act No. 586/1992 Coll., on Income Taxes (“ITA”). The plaintiff stressed that the cooperation is very specific and that the agreed remuneration method contributes to the stability and efficiency of the work teams, as PUTiH has an interest in its proper functioning due to its design, which the plaintiff considers to be an integral part of the service of securing workers, which is crucial for it to achieve, secure and maintain its income. The Regional Court disregarded these objections.

The defendant disputed the deductibility of the expense because it considered the service of arrangement, as defined in the framework agreement, to be a one-off service linked only to the specific tax period, in which the employment contract was made. Furthermore, it stated that the plaintiff had failed to prove the receipt of other services (provided on an ongoing basis during the relevant tax periods) to which the “excess” part of the remuneration could be attributed and recognised as a tax expense. However, the plaintiff did not even claim the existence of other services; the services under the framework contract were provided to the applicant continuously in order to ensure the functionality and availability of the individual teams.

The plaintiff’s existing practice was subject to a tax audit in 2001 and a local inquiry in 2005. The plaintiff did not receive a proper explanation regarding the change in administrative practice in assessing the tax deductibility of the relevant costs, so he lodged an appeal in cassation and asked the SAC to cancel the judgment of the Regional Court and return the case for further proceedings (plaintiff thus hereinafter referred to as the “complainant”).

The SAC concludes

The SAC considers the basic reasoning of the administrative authorities, on which they based their conclusion that part of the remuneration was not deductible, to be incorrect. The SAC, in agreement with the complainant, sees nothing forbidden in the fact that the amount of remuneration for mediation of a worker depends on the length of his employment and is thus reflected in the employer’s tax costs. It accepts the complainant’s main objection that the conclusions of the administrative authorities and the Regional Court regarding the tax deductibility of the remuneration under Article 24(1) of the ITA cannot stand merely because of the mechanism of its calculation, which also takes into account the performance of Polish employees secured in previous tax periods. However, the SAC does not automatically deem the remuneration to be fully deductible; the tax authority may subject the amount of the costs to tests of market adequacy and arm’s length prices due to the existence of a related party relationship.

In view of the above, the SAC found the appeal to be well-founded, annulled the original judgments and returned the case to the defendant for further proceedings.

Author: Roman Burnus, Anna Beránková, Darya Korzun