The Income Tax Act stipulates that R&D tax-deductible expenses must not include expenses for which, even in part, support from public resources was used. The most common public resource is a subsidy (a grant), or a tax relief relating to an investment incentive.
Apart from this, the Income Tax Act obliges taxpayers benefiting from investment incentives to meet certain specific conditions: among other things, to maximize the tax-deductible items including the R&D tax deductibles.
Last but not least, subsidy programmes have their own rules for granting subsidies, which often put a limit on combining various forms of support, such as a subsidy and an R&D tax deductible or an investment incentive.
Despite the complexity of the issue, the relevant legislation only deals with it on a general level. The court rulings on this matter do not shed much light on the topic, either. The tax authorities, however, monitor this field very carefully and it is often subject to inspections. Taxpayers therefore need to keep track of the individual rules and the links between them, not omitting any other relevant resources dealing with this topic, such as court rulings, contributions to the Coordination Committees of the Chamber of Tax Advisors, instructions issued by the Ministry of Finance, etc.
The view of the Regional Court in Prague
The most recent ruling of the Regional Court in Prague dealt with combining a subsidy (designated, in this case, for creating new jobs) with an R&D tax deductible. According to the tax administrator, the subsidy and the presented R&D projects concerned the development of the same system as the description of the production corresponded, in part, with the R&D projects’ aims, and the period of drawing the subsidy matched the periods for which the tax deductions were utilised.
In its ruling, the court did not agree that the subsidies supported all the costs proportionally and therefore that all the labour costs were related to the R&D project which was supported through the subsidy. Although the taxpayer provided records of the labour costs, the tax administrator did not assess them as such (led by the erroneous conclusion that all the labour costs were supported proportionally through the subsidy). According to the court, the principal conclusions of the ruling were not based on the evidence that had been provided (and which was to be completed by the court’s order) and the court retuned the whole matter to the tax administrator for further proceedings. It is to be expected that this dispute and other similar ones will in fact set up the framework for the tax administrator’s control activities and particularise certain legislative regulations that are not specific enough.
What are our recommendations in this field?
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