Costs of consultancy from related parties in a group
On 16 May 2023, the Supreme Administrative Court ruled on the tax deductibility of consultancy costs provided to a company by companies that are part of an international group. The tax authority refused to recognise the costs of the services received as tax deductible because, in its view, the company had not provided sufficient evidence to prove the specific content and scope of the services.
The group provided the company with consulting services regarding production, loan refinancing services and support services (mainly in IT and HR, management services, legal advice and other sales and marketing consultancy).
The SAC upheld the company’s objections regarding the cost of production consulting services. It stated that it was unreasonable to require the company to specifically identify each individual “piece of production advice” and quantify its economic benefit in terms of the achieved production savings. The recognition of costs is conditional on the fact that the costs incurred are directly attributable to the business activity, are reasonable and there is a direct relationship between the costs incurred and the expected revenue. The SAC stated that there does not necessarily need to be a relationship of direct proportionality between expenditure and income, but it must be expenditure incurred for that purpose.
Conversely, the SAC did not uphold the company’s objections relating to the bank loan refinancing services re-invoiced by the parent company. Group-wide advisory services were provided by external consultants in relation to the necessary need for new financing. The cost of the consultant was then allocated to the individual companies in the group that drew down the loan according to the amount of funds drawn down. The SAC upheld the view of the tax authority that the company did not plausibly prove the specific scope and content of the consultancy services received. It also did not demonstrate the terms of the loans and the individual amounts of the loans taken out by the other companies in the group. This raised doubts as to whether or not the costs incurred for consultancy services in connection with the refinancing of the bank loan were allocated among the group companies according to a correct allocation key.
Similarly, the SAC disagreed with the company’s objections regarding the cost of support services provided by the parent company. The documents submitted, including witness statements and documented email communications, were insufficient in this case. The company lacked sufficient evidence to prove the specific content and scope of the services, and there was no evidence of how the remuneration for the services received was determined.
The judgment reiterates and accentuates the importance of sufficient evidence to prove the receipt of services, their extent and benefit to the taxpayer. It also highlights the role of the taxpayer to credibly explain the amount of remuneration paid for the services received, which becomes particularly important in cases, where the total amount of remuneration is allocated among several recipients in a group.
The tax authorities are becoming increasingly interested in the nature of intra-group services and, as this judgment indicates, may request detailed documentation from companies in such cases, while no longer being satisfied with a general specification.
Author: Jiří Jakoubek, Veronika Hohnová