Judgement on proving services provided by the parent company

The case concerned a taxpayer that had claimed on its income tax return the cost of consultancy services from its parent company, consisting mainly of management, advisory services, dealings and reporting.

The service contract was structured on a variable basis, and services were to be provided on an on-demand basis with a fee set per person per day. The tax authority considered that although the services were provided by the managing director of the tax entity, the managing direct was in fact exercising the functions of a statutory body. Furthermore, the tax authority stated that the documentation provided was not formally sufficient (it did not contain the order for the services, handover report, etc.), and that the documentation provided did not show what output the subsidiary actually received from the services in question. The added value for the audited entity was therefore not demonstrated. As part of its investigation, the tax administrator also approached the foreign tax administrator by way of an international request in order to verify the actual provision of services. The Regional Court acknowledged that it could be expected that documentation concerning intra-group relations would be less formal than that between independent persons. On the other hand, the court noted that a routine meeting or exchange of information between an owner and an owned person will not generally give rise to a deductible expense because it will not go beyond the normal relationship on the part of the business owner. Moreover, the material received as a result of the international request showed that there was probably no actual transfer and receipt of services at all. Thus, the taxpayer did not meet the burden of proof and the costs incurred for group services were considered to be non-tax deductible.

It was therefore confirmed once again that properly prepared and continuously updated documentation is essential to justify the tax deductibility of costs - in this case specifically, documentation and records of outputs showing the actual provision of services by the parent company, as well as documentation regarding the receipt of those services and the benefit to the subsidiary as the recipient of the intercompany services, together with an adequately presented methodology for calculating the remuneration for the services (with an emphasis on the application of transfer pricing).