Insights
TAX & BUSINESS
Corporation tax surcharge due to failure to name recipients
If a taxpayer cannot provide the tax office with the recipients of his payments, the authority must disallow these business expenses.
The tax authority may require the taxpayer to disclose the recipients of payments that the taxpayer wishes to deduct as business expenses (so‑called recipient naming). The purpose of this rule is that the authority can check with the payment recipient whether the received payments have been taxed accordingly. If the taxpayer cannot or will not comply with the request to name the recipients, the payments are not deductible as business expenses and, in the case of corporations, a 25 % corporation tax (KöSt) surcharge is applied.
Documents in the construction sector
During a tax audit of a GmbH operating in the construction sector, business expenses were not recognised because of missing recipient naming and a 25 % corporation tax surcharge was additionally imposed. In the course of the appeal procedure, the Federal Fiscal Court (BFG) confirmed these measures, reasoning that the GmbH had in no way complied with the customary practices and standards of care applicable to commercial construction projects when assessing the contracted companies.
The GmbH was able to submit individual documents that are usually available to the client in commercial construction projects (extracts from the commercial register, trade register, invoices and transfer receipts), but not the documents that actually demonstrated the provision of services by the contractors, namely written work contracts, photographic ID cards of authorised signatories, site documentation consisting of construction diaries, usual correspondence or meeting minutes, as well as plans or documents that would have indicated a review of the technical capability of the contractors to be engaged. Consequently, the GmbH did not apply the usual standard of care, and a fault for the failure to name the recipients was attributed to it.
Non‑trivial breach of duty of care
The GmbH argued, however, that the failure to name the recipients was not due to its "minor" breaches of duty of care, but to the fact that the banks had not performed their duties. Furthermore, the corporation tax surcharge should only be imposed where the payment recipient has been deliberately concealed by the taxpayer.
The Administrative Court (VwGH) dismissed the appeal against the BFG judgment and held that the GmbH, among other things, by not concluding contracts with the contractors, by not submitting any documents or plans relating to the construction project, by not copying the IDs and by not visiting the contractors' registered offices, had committed a non‑trivial breach of duty of care. According to the VwGH, it is to the detriment of the taxpayer if he enters into business relationships in which he is unable to name the payment recipients. In addition, there is no requirement that the payment recipients be deliberately concealed by the taxpayer for the surcharge to be imposed.
Conclusion
A thorough assessment of contractors and appropriate documentation of this assessment protects against such disadvantages.
Documents in the construction sector
During a tax audit of a GmbH operating in the construction sector, business expenses were not recognised because of missing recipient naming and a 25 % corporation tax surcharge was additionally imposed. In the course of the appeal procedure, the Federal Fiscal Court (BFG) confirmed these measures, reasoning that the GmbH had in no way complied with the customary practices and standards of care applicable to commercial construction projects when assessing the contracted companies.
The GmbH was able to submit individual documents that are usually available to the client in commercial construction projects (extracts from the commercial register, trade register, invoices and transfer receipts), but not the documents that actually demonstrated the provision of services by the contractors, namely written work contracts, photographic ID cards of authorised signatories, site documentation consisting of construction diaries, usual correspondence or meeting minutes, as well as plans or documents that would have indicated a review of the technical capability of the contractors to be engaged. Consequently, the GmbH did not apply the usual standard of care, and a fault for the failure to name the recipients was attributed to it.
Non‑trivial breach of duty of care
The GmbH argued, however, that the failure to name the recipients was not due to its "minor" breaches of duty of care, but to the fact that the banks had not performed their duties. Furthermore, the corporation tax surcharge should only be imposed where the payment recipient has been deliberately concealed by the taxpayer.
The Administrative Court (VwGH) dismissed the appeal against the BFG judgment and held that the GmbH, among other things, by not concluding contracts with the contractors, by not submitting any documents or plans relating to the construction project, by not copying the IDs and by not visiting the contractors' registered offices, had committed a non‑trivial breach of duty of care. According to the VwGH, it is to the detriment of the taxpayer if he enters into business relationships in which he is unable to name the payment recipients. In addition, there is no requirement that the payment recipients be deliberately concealed by the taxpayer for the surcharge to be imposed.
Conclusion
A thorough assessment of contractors and appropriate documentation of this assessment protects against such disadvantages.