In a recent case, the Supreme Administrative Court (SAC) dealt with the review of expense deductibility of the costs of improving property owned by another person. A company engaged in construction and sale of real estate financed, among other things, also the modification of a sewage water treatment plant nearby the completed building. Another, personally connected company, however, owned the treatment plant. The first company assigned the cost of this modification to the proceeds from the sale of dwelling units and claimed it as a tax-deductible expense. The tax office refused it and the Supreme Administrative Court (SAC) confirmed its conclusion, too.

The court stated that the modification of the treatment plant represented a technical improvement of the property. Such costs can only be claimed in the form of depreciation, and only if the tax subject is the owner of the property in question, or its tenant or user with the written consent of the owner. In this case, neither the company was the owner of the sewage treatment plant nor it documented its right to use the property, so it was not entitled to depreciation. It was also not proven that the modification of the sewage treatment plant was a formal requirement for the construction and sale of apartments.

The SAC thus reminded one of the basic tax principles: expenses for the technical improvement of another person’s property cannot be claimed without a legal relationship to such a property. The company did not meet the given conditions; therefore, it was not possible to recognize the expense as tax-deductible, even though, according to the company’s assertion, it was related to its business activities.