Are management services tax deductible?
It is not easy to determine which costs a company can deduct from its taxes. This is proved by the current opinion of the Regional Court in Brno. It recently considered a dispute about the tax deductibility of management services costs - and ruled against the plaintiff company.
What rules apply to management services?
Management services are used by many companies. Typically, they are invoiced services such as consultancy, management or reporting that the business is unable to provide itself - and therefore uses the skills of another business's employees. The latter is often linked to the client by property or is a sister company within a group of companies.
The Income Tax Act generally provides (in Section 24(1)) that costs incurred in "securing, achieving and maintaining taxable income" may be tax deductible. Management services may meet this criterion, but you must be able to prove this to the tax authorities if necessary. It is therefore not surprising that the tax deductibility of management services can be questionable in a number of situations. This issue was last addressed by the Regional Court in Brno in its Judgment 30 Af 57/2021.
How does the judiciary assess the situation?
In that case, the court considered the tax treatment of services received by a Czech subsidiary from its parent company in Germany. The services provided included, in particular, reporting, financial accounting, management and various consultancy services.
The court ultimately ruled that the billed services were not tax deductible because it could not be shown that the services were actually provided or that they had any added value for the client.
When can you deduct management services from your taxes?
The court's findings therefore show that invoices for similar services are tax deductible under the law only if they meet the following criteria:
- The provider must actually participate in the services (in the case at hand, all indications were that the taxpayer prepared many of the outputs himself).
- The invoiced amounts must be linked to the specific outputs provided (submission of various documents in the form of tables, summaries and presentations may not be sufficient).
- If invoicing occurs regularly and in the same amount, this increases the risk of routine invoicing without economic justification.
- A distinction should always be made between management services that have real content and added value for the recipient and activities that the parent company normally performs as a shareholder or partner (e.g. ongoing supervision).
Want to get your taxes right?
You can make one or two mistakes when calculating tax. There are a number of questionable costs - another example is advertising costs. We therefore recommend that you fill in your tax return really carefully.
And if you do make a mistake, you can correct it by filing an amended or additional tax return. Or you can leave it to the experts. Leave us a message and we'll discuss everything together.