A Czech company (the lessor) owned real estate and rented it to independent parties. An Austrian related company provided management and consulting services to the lessor
The service fees significantly increased each year, although the income of the Czech company and the number of lease contracts were constant in the examined years
The tax authorities required that the taxpayer prove the actual provision of the services and their relationship to taxable income. The tax authorities rejected this explanation and concluded that the taxpayer had not proven the real condition of the real estate in the examined period.
The legal question was: the scope of the burden of proof that rests with the taxpayer with respect to services received from related party
The court ruled that: the taxpayer was obliged to prove the relationship of the expensed service fees to its taxable income. Tangible evidence of the provided services, including reports, correspondence and confirmation of business trips should be provided by the tax payer in order to prove the actual provision of the services.
This case confirms the strong position of tax authorities when challenging the transfer prices of services. If the taxpayer does not meet the benefit test (proving that the services were actually rendered and incurred in relation to its taxable income), the entire service expense is non-deductible.