Czech Republic: Tax treatment of disposal costs of assets

The Supreme Administrative Court issued a judgment in case No. 10 Afs 346/2020-43, that significantly clarifies when the costs of disposal of assets may be deducted from the tax base directly, and when the costs constitute investments and are to be included in the input price of new assets.

The Supreme Administrative Court addressed a cassation complaint filed by the Appellate Financial Directorate concerning costs related to the acquisition of new assets.

• The taxpayer (a company engaged in waste disposal) as part of an extensive project of reconstruction of a waste incineration plant in 2011 and 2012, demolished a K1 combustion boiler.
• As part of the same project, K2 and K3 boilers were demolished and replaced by new boilers that were put into operation in 2011.
• The K1 boiler remained in operation during the project implementation, to keep the incineration plant running.
• The subsequent costs of demolishing the K1 boiler were then deducted from the tax base, as an expense.

The tax administrator, however, concluded (among other things, on information about the company’s future plans as disclosed in its annual reports) that the demolition costs had not been operating expenses but were related to the next phase of the project—the construction of a new K1 combustion boiler—that would therefore form a part of the entry price of the new K1 boiler. Thus, the heart of the dispute was whether the costs for the demolition of a K1 combustion boiler within the overall reconstruction of the waste incineration plant were related to the acquisition of a new K1 boiler.

The court focused on whether the demolition costs were related to the construction of a new K1 boiler (meaning the acquisition of a new investment). The tax administrator’s position was that there was no doubt that the original K1 boiler was demolished to make way for a new one, within a continued investment project. The taxpayer, on the other hand, argued that the K1 boiler had been removed for safety and environmental reasons.

In a prior judgment, the Supreme Administrative Court held that when determining whether costs are related to an acquisition of assets, an unambiguous and direct causal link must exist between the costs incurred and the acquisition of the tangible assets—it is not relevant whether and when the taxpayer formally decided to acquire the assets, but when it actually started to acquire them.

In this case, the Supreme Administrative Court found that the original K1 boiler had been used during the project implementation to continue the taxpayer’s operation until the new boilers K2 and K3 could be put into operation. In the court’s opinion, the two new boilers (K2 and K3) then fully replaced the three old boilers in terms of output, and therefore, the construction of a third boiler was not necessary for the operation of the company. Thus, the court concluded that there was no clear direct causal link between the demolition of the K1 combustion boiler and the investment plans for a new K1 combustion boiler and agreed with the taxpayer’s claim of the costs as tax-deductible expenses.

The Supreme Administrative Court's conclusion shows that when assessing whether expenses or costs are to be treated as costs for the acquisition of assets, it is necessary to determine whether there is a clear direct causal link between the expenses or costs at issue and the acquisition of the new tangible assets.

Read an August 2021 report prepared by the KPMG member firm in the Czech Republic