In its judgment of 26 April 2024 No. 2 Afs 333/2021 – 60, the Supreme Administrative Court (“SAC”) dealt with an interesting dispute between an individual (“the plaintiff”) and the Appellate Tax Directorate (“the defendant”), where the main role was played by flat-rate expenses and their legal use.

The tax administrator questioned the claimed expenses in the amount of approximately CZK 14 million during a tax audit. The plaintiff allegedly did not sufficiently defend their tax deductibility in accordance with Section 24(1) of the Income Tax Act (“ITA”). He reduced the expenses claimed by the taxpayer from the original CZK 15 million to about CZK 1 million. This increased the partial tax base under Section 7 of the ITA to CZK 14 million. However, the plaintiff appealed against the payment assessment, so the tax administrator proceeded to determine the tax by means of aids and applied a flat-rate expenditure rate of 60 %, since, in view of the specific group of goods, it did not identify a comparable entity whose economic indicators could be used as an aid for determining the plaintiff’s tax.

The plaintiff, same as the Regional Court later on, took the view that the use of flat-rate expenses as an aid was not sufficiently reliable in his situation. Moreover, the tax administrator limited its search for comparable tax entities to those within its local jurisdiction. Even if such an entity did not exist in the Czech Republic, the tax administrator could find out the general business margins of wholesalers and proceed based on them, for example. If there are other unexhausted possibilities to determine tax by means of aids, e.g. to broaden the search criteria for comparison with similar entities, the tax flat rate cannot be recognised as a legally eligible aid in this case.

The flat-rate expenses do not take into account the specificities of the plaintiff’s business as a wholesaler and, moreover, are limited to a maximum amount which was significantly exceeded by the plaintiff. The use of aids must be rational in nature and must, to the maximum extent practicable, strive for the accuracy of the facts to be determined. It is quite understandable that the tax flat rate does not reflect a qualified estimate of the taxpayer’s economic reality, which is why it is usually used mainly by those taxpayers who find this method more advantageous than proving tax-efficient expenses.

The defendant (“the complainant”) lodged a cassation appeal against the judgment of the Regional Court, as it considered the tax to be reliably assessed after the application of the flat-rate expenses. The SAC did not uphold the complainant’s objections and dismissed the cassation complaint. Although the application of a flat-rate expenditure as a determination of an aid is generally permissible, it was not appropriate in the applicant’s case.