How to prove the indirect costs of holding shares? Key decisions of the SAC

The Supreme Administrative Court (SAC), in its recent judgment (Case No. 10 Afs 175/2024), reaffirmed that if taxpayers wish to claim lower indirect costs associated with holding shares in subsidiaries, they must clearly prove the amount of such costs. If they fail to do so, a flat limit of 5% of the dividends received applies.

In the case at hand, the Supreme Administrative Court (SAC) dismissed the appeal of a taxpayer who sought recognition of lower overhead costs for holding shares in subsidiaries for the 2013 tax year. The judgment confirms the established practice that if a taxpayer fails to sufficiently prove the actual amount of such costs, it will be assessed a flat rate of 5% of dividends, as provided for in Section 25(1)(zk) of the Income Tax Act.

Burden of proof on the taxpayer

It was the application of this provision and the interpretation of tax costs that was at the heart of the dispute. The SAC emphasised that the burden of proof lies with the taxpayer himself. If he fails to prove that his actual overheads are less than 5 %, the tax authorities will apply a flat-rate assessment.

In this case, the taxpayer originally declared costs of approximately CZK 96 million. The tax authority found his calculation to be incorrect and assessed a lump sum of approximately CZK 286 million. Subsequently, in the appeal proceedings, the taxpayer submitted a new calculation of CZK 160 million, which was accepted by the Appellate Tax Directorate. Paradoxically, however, the taxpayer later challenged this calculation itself, which the Supreme Administrative Court found illogical.

One of the taxpayer's (complainant's) arguments was that the personal costs of the members of the parent company's board of directors should not be included in the cost of holding shares in subsidiaries because those members were primarily engaged in the management of the parent company. However, the Supreme Administrative Court agreed with the Appellate Tax Directorate and held that the exercise of shareholders' rights includes the ordinary activities of the company relating to the management of assets, including shares in subsidiaries.

Consequences of the decision

The SAC judgment confirms that taxpayers must carefully document and justify the actual amount of indirect costs related to holding shares in subsidiaries. If they are unable to prove this amount, the tax authorities may assess the costs on a flat-rate basis, which may be financially disadvantageous for the taxpayer.

Therefore, taxpayers should provide evidence of the proportion of costs that is actually devoted to the administration of subsidiaries. This judgment may also have an impact on future tax audits and the assessment of similar costs in Czech tax practice.

Are you unsure how to properly document indirect holding costs? Contact our tax team and avoid unnecessary penalties!