Aufeer Design s.r.o. is a Czech company that provides design and engineering services, primarily to the automotive industry. The taxable event was the deduction of substantial advertising expenditure incurred in 2015 and 2016 and paid to the advertising agency HERA s.r.o. for displaying Aufeer’s banners at sporting, cultural and social events.
Following an audit, the tax authorities questioned the commercial rationale and pricing of these services, treating the relationship with HERA as that between ‘related parties’ under section 23(7)(b)(5) of the Income Tax Act. This was primarily aimed at reducing Aufeer’s corporate income tax base. Additional corporate income tax assessments were issued for 2015 and 2016 after it was determined that the prices agreed with HERA for advertising were many times higher than those charged by event organisers to independent customers. Using prices obtained directly from the organisers and adding what it considered to be a reasonable agency margin, the administration set a reference price and adjusted Aufeer’s tax base by disallowing the excess. Upon appeal, the Appeal Financial Directorate partially reduced the additional tax and cancelled the penalty. However, it confirmed that Aufeer and HERA had primarily entered into a legal relationship to obtain a tax advantage, and that advertising costs above the reference price were not tax deductible.
Aufeer challenged the decision before the District Court in Prague, which rejected the appeal and upheld the tax authority’s assessment. An appeal was then filed with the Supreme Administrative Court.
Judgment of the Court
The Supreme Administrative Court dismissed the complaint and confirmed the additional corporate income tax assessments.
The Court agreed that the combination of vague advertising contracts with no clear specification of location, duration or scope, a lack of market research or subsequent evaluation of effectiveness, Aufeer’s passive reliance on HERA despite the very high costs involved, the breach of VAT neutrality in the chain, and the multiple increase in prices above the usual level all supported the conclusion that the arrangement’s predominant purpose was to obtain a tax advantage.
Regarding method and pricing, the Court endorsed the use of the CUP method, which is based on the prices charged by event organisers acting as independent first links. These prices are then increased by an average agency margin derived from statistics for comparable intermediaries. The Court considered this to be a reliable way to simulate the price that would have been agreed between independent parties. The Court held that the resulting reference price was adequately justified, but that the observed increase of more than six times that price was not justified by any real added value or special services.
Regarding the expert evidence, the Court found that the authorities had not disregarded the opinions, but had correctly determined that they lacked probative value. The trademark valuation primarily reflected the general growth of the automotive sector, rather than the effect of the disputed advertising. Additionally, the advertising price opinion was overly general, used incomparable events, and employed an extremely broad price range that did not align with Aufeer’s actual sponsorship position. Therefore, there was no obligation to obtain a review opinion or to hear the expert.
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