Corporate Income Tax in Recent SAC Judgments

 

What practical conclusions do the new SAC judgments bring for the assessment of tax-deductible costs and cross-border payments 

Why invoices and contracts may not be enough during a tax audit and what a company must actually be able to prove about a transaction 

What role does the continuous preservation of high-quality documentation play and why can it be difficult to supplement missing evidence retrospectively 

In June and July 2026, the case law of the Supreme Administrative Court in the field of corporate income tax brought several decisions that are also worth paying attention to from the perspective of common tax practice. The Court dealt not only with the traditional issues of proving tax-deductible costs, but also with the timing of their tax treatment, the distinction between repairs and technical improvements, the conditions for exemption of cross-border payments, etc.

We have selected SAC decisions that, in our opinion, bring interesting practical conclusions for taxpayers.

Repair or technical improvement of property

10 Afs 184/2025: The taxpayer claimed expenses for materials and construction works as one-off costs for the repair of a property, but the tax administrator assessed them as technical improvements. In particular, the condition of the property before and after the works, the considerable extent of the works (the construction modifications were twice the value of the property according to an expert valuation) and the new use of the building as a social services facility played an important role in the assessment. The SAC confirmed that the burden of proof regarding the nature of the work performed lies with the taxpayer. The amount of the costs itself is not decisive; in order for them to qualify as repairs, it is necessary to demonstrate that the works merely restored the original condition or functionality of the property and did not result in technical improvement.

Timing of revenue recognition following an arbitration award and proof of advertising costs

5 Afs 5/2025: In 2008, a taxpayer taxed revenues from contractual penalties whose legal basis was subsequently challenged. It was not until a final arbitration award in 2015 that the original contracts were declared invalid and the obligation to settle the resulting unjust enrichment was established. The SAC rejected the conclusion that the tax consequences had to be reflected retrospectively in 2008 and considered 2015, when the effects of the arbitration award arose, to be the decisive point in time. However, only the amount corresponding to the actual economic settlement could be taken into account for tax purposes.

In the part concerning advertising services, the SAC, on the other hand, confirmed that merely proving the existence of advertising is not sufficient. The taxpayer must also demonstrate the link between the service and the declared supplier, or prove that the supplier arranged for the service to be provided through a subcontractor.

Abuse of law in dividend exemption

10 Afs 57/2026: The dispute concerned dividends paid by a Czech company to a Cypriot parent company, which were subsequently contributed as a contribution outside registered capital to a sister company. Although the formal conditions for the exemption were met, the SAC upheld the conclusion that there had been an abuse of law. According to the Court, the taxpayer did not sufficiently explain the economic rationale of the chosen structure or the need for external financing for the construction of commercial premises, while the tax advantage consisting in the non-taxation of dividends was evident. The SAC also pointed out that the assessment of the beneficial owner of income and abuse of law are separate issues that should not be confused.

Beneficial owner of royalties

21 Afs 45/2025: The SAC confirmed the non-application of reduced withholding tax rates under double taxation treaties because the taxpayer failed to prove the beneficial owners of royalties paid for rights to distribute and reproduce television programmes. Some distributors acted merely as “flow-through” entities. The SAC acknowledged that the absence of a direct contractual relationship between the payer and the final recipient does not in itself exclude the application of the treaty.

The application of a preferential rate or exemption is conditional on the recipient of the royalty being its beneficial owner, who is entitled to use and enjoy the income for their own economic benefit.

Retroactive granting of royalty exemption

2 Afs 140/2022: Following the judgment of the Court of Justice of the European Union in Case C-828/24, the SAC significantly changed its existing case law concerning applications for exemption of interest and royalties under Section 38nb of the Income Tax Act. According to the Court, neither Czech nor EU legislation sets a deadline for filing such an application or a general time limit for the period for which the exemption may be granted retroactively by decision. The previously inferred two-year limit therefore no longer applies.

A decision under Section 38nb of the Income Tax Act is declaratory in nature with respect to confirming that the conditions for exemption have been met and may therefore have retroactive effect. However, the decision remains binding on the payer and is a necessary condition for the actual application of the exemption.

Proving the supply of intangible data

7 Afs 230/2025: A taxpayer claimed automated data supplies (an intangible asset) from a foreign supplier as tax-deductible costs. Although it was undisputed that the company needed the input data for its system, according to the SAC it was not proven that the data had actually been obtained from the declared supplier. The taxpayer was subsequently required to demonstrate the actual provision of the service to the tax administrator with a sufficient degree of probability.

This requirement also applies to intangible and automated supplies – their digital nature alone does not reduce the requirements for proving a tax-deductible expense. The SAC also reiterated that deficiencies in evidence cannot be remedied by submitting new evidence only before an administrative court.

Unproven costs for machinery rental and ancillary work

4 Afs 259/2025: The SAC confirmed the non-recognition of expenses for the rental of construction machinery and auxiliary and cleaning work as tax-deductible costs under Section 24(1) of the Income Tax Act. The tax administrator questioned whether the services had actually been provided by the declared suppliers – they had no employees of their own, the origin of some of the machinery had not been proven, and the evidence and witness statements contained significant inconsistencies.

The SAC concluded that if the tax administrator raises specific and reasonable doubts, the taxpayer must prove that the declared supply actually took place to the extent and in the manner claimed. Invoices, contracts or general witness confirmations alone are not sufficient if other findings call their credibility into question.

Tax reserve for repairs of assets and reserve account

21 Afs 271/2025: The taxpayer used accounts intended for the deposit of reserve funds also for transfers and payments unrelated to the creation or use of reserves for repairs of assets, i.e. also for so-called operational purposes. The SAC confirmed that it is not sufficient merely to maintain a balance exceeding the amount of the reserves created.

The account must be used exclusively for reserve funds and these funds may only be drawn for the purpose for which the reserve was created. A breach of this condition resulted in the reserves not being recognised as a tax-deductible expense.

What to take away from the judgments

The current case law of the Supreme Administrative Court once again shows that, when assessing the tax treatment of transactions, it is not enough to merely record them correctly from a formal perspective. The key issue is the ability to prove their actual economic substance and how they were carried out. Invoices and contracts may not be sufficient on their own if reasonable doubts arise as to whether the declared supply was actually provided and by whom.

At the same time, the judgments highlight the importance of maintaining high-quality documentation on an ongoing basis. Evidence should ideally be created and retained at the time the transaction takes place – any deficiencies may be difficult to remedy retrospectively.

From a practical perspective, we therefore recommend paying attention not only to the tax assessment of the transaction itself, but also to whether the company is able, even after a significant period of time, to convincingly document how the transaction was carried out and its economic substance.