The research and development (“R&D”) allowance is a tax allowance that can reduce an organization’s corporate income tax base. R&D activity differs from other common business activities by the presence of an appreciable element of novelty as well as research and technical uncertainty. But the fact that the element of novelty and research and technical uncertainties are not sufficiently defined in Czech legislation was confirmed by the Supreme Administrative Court back in 2015 (decision no. 10 Afs 24/2014-119 dated 11 June 2015). The Supreme Administrative Court also stipulated that correct application of these concepts may change depending on circumstances.
A new decision of the Regional Court in Plzeň (no. 77 Afs 18/2020-64 dated 22 November 2021) deals with the eligibility for R&D tax allowance in the case of production of concrete building elements. The subject of the dispute was proving the R&D activity was carried out and that the element of novelty and research and technical uncertainties mentioned above were present. After several rounds of proving that the R&D costs were justified, including preparation of expert opinions, the Regional Court decided that the tax administrator had erred. Indeed, the tax administrator had erred in a fundamental way as it did not prove nor justify its doubts about whether the taxpayer’s R&D activities were an innovation, thus calling into question the legitimacy of the R&D tax allowance applied. The latest decision relating to the legitimacy of the R&D tax allowance was that of the Supreme Administrative Court no. 7 Afs 231/2021-31 dated 1 March 2022, which decided in favor of the taxpayer. The tax audit was considered illegal due to its recurrence.
All these decisions confirm that Tax Authorities still intensively focus on auditing R&D tax allowances, so we recommend reviewing your entitlement to R&D tax allowance. It’s very important that you check all the boxes when it comes to the fulfilling all requirements and completing all necessary documentation set by the law in case the Tax Authorities initiate an audit. That way you can ensure that any doubts are dispelled right from the start.***
Petr Mašek, Lenka Holoubková
PwC | Daňové a právní služby