Interest on loans past their due dates

During the inspected taxation period, the loan provided by a company to a debtor abroad fell due. However, the debtor did not settle the loan as of that date. For this reason, the creditor stopped recognising the interest on the loan in taxable income starting from the due date of the loan. Other interest to which the creditor was entitled was not recognised by the company in line with the interpretation I-10 of the National Accounting Board as the receivable itself arising from the loan was a bad receivable and therefore it was not realistic to expect that the debtor could make other payments.

The taxation authority however believed, and the regional court confirmed that opinion, that it was necessary to continue recognising the agreed interest on from the so far unsettled loan and include the interest in the tax base, including in the period past its due date. The regional court concluded, based on the relevant case law, that the creditor was entitled to the agreed interest even after the expiry of the maturity date of the provided loan, and therefore it was obliged to recognise it in the accounting records and assess it as taxable income.

Bonuses to employees

In this case, the dispute regarded the fact in what period it was possible to utilise the costs of bonuses to employees. A Chief Executive Officer approved bonuses to employees in the current period, but their actual payment depended on other conditions, such as audit of the accounting results for the fiscal year, that were met only in the following period. According to the taxation authority, the CFO made preliminary strategic decisions at the most in the current period on what funds the company should earmark for the anticipated bonuses, however, these were not entitlements of individual employees to annual bonuses, and it therefore ruled out the recognised expenses as an accounting reserve.

The court has confirmed the conclusion applicable in the long-term that the bonus to employees will become a tax deductible expense only when the employees become legally entitled to the bonus. In this specific case, the court granted legal entitlement in the year when all conditions for the payment of relevant bonuses were met rather than in the period when the CFO made the decision.

Accrual accounting principal for expenses and income

Accrual accounting principal for expenses and income has been a widely discussed topic recently, primarily in response to the state aid provided in the fight against negative impacts of the COVID-19 pandemic. In this case, this was, however, an issue involving work in progress.

The substance of the dispute consisted in the fact that the entity was the general contractor of buildings and reported works on construction orders in its accounting records in the form of estimated payables (tax deductible expenses); these works were performed by its sub-contractors in the inspected period, however, they were not confirmed by handover protocols. At the same time, the firm billed these works to its investors as part of partial invoicing of orders. In the opinion of the taxation authority, it is not possible for an entity to invoice to the investors such supplies that it has not formally received from its sub-supplier yet, and concurrently utilise them as an expense in the tax base. The taxation authority treated the signing of the handover protocol, or the issuance of the invoice by the sub-supplier, as the date of provision of sub-supplier works.

The financial administration based its reasoning on the assumption that tax deductible expenses must be related on an accrual basis only to the period in which they are applied rather than to the income to which they relate. This was not, however, confirmed by the court which stated that the income and expenses must be accrued/deferred, and the accrual/deferral must take place in a specific taxation period under the Income Taxes Act. The regional court thus decided that the entity’s treatment was legitimate, and it was possible to include the income and relating costs to the investor in the tax base, although partial sub-supplies were not formally received.

The ruling of the Regional Court in Brno ref. no. 30 Af 83/2018 – 227 is a available on the website of the Supreme Administrative Court.

Marie Velflová

mvelflova@deloittece.com

Emma Laurenčíková

elaurencikova@deloittece.com