The Czech Supreme Administrative Court (SAC), in its judgment Case No. 5 Afs 153/2025, addressed the tax treatment of the reversal of an accounting provision that had originally been recognised as a non-tax-deductible expense. The judgment serves as a reminder that even non-tax-deductible provisions require proper record-keeping, inventory verification and retention of supporting documentation, including over extended periods of time.

General Rules

If the creation of an accounting provision was not treated as a tax-deductible expense in the past, the subsequent accounting income arising from the utilisation or reversal of that provision should not increase the tax base.

However, this treatment is conditional upon the taxpayer being able to sufficiently demonstrate the connection between the specific provision originally created and the amount subsequently utilised or reversed.

In this context, the SAC emphasised that the mere existence of a provision in the accounting records does not establish that its creation was actually excluded from tax-deductible expenses in the past.

What Happened in This Case?

In the case under review, a company reversed an accounting provision in 2020 and excluded the related income from its tax base on line 162 of its corporate income tax return.

Between 2011 and 2019, the company had reported an almost unchanged balance of provisions corresponding to the amount subsequently reversed. However, the company was unable to provide sufficient evidence that the creation of this particular provision had actually been treated as non-tax-deductible in the past, meaning that the corresponding expenses had been excluded when calculating the tax base.

Some historical tax returns were no longer available, and the company's attempt to substantiate the non-tax-deductible nature of provisions created in 2004 and 2005 was also considered insufficient by the tax authority.

The SAC upheld the tax authority's conclusion. According to the Court, the origin, amount and identity of the provision must be established with a sufficient degree of probability, together with evidence demonstrating the connection between its initial creation and subsequent reversal.

It is therefore not sufficient merely to demonstrate that a similar amount had previously been recorded in the provisions account.

For provisions recorded on an aggregated basis, detailed analytical accounting records documenting their composition and development over time are particularly important. Inventory records, internal supporting documents, accounting documentation and other evidence enabling the identification of a specific provision and its tax treatment may also play a significant role.

The company also argued that information concerning historical tax adjustments should have been available to the tax authority in its official records.

However, according to the SAC, even a complete set of historical tax returns might not have been sufficient on its own. For example, line 40 of the Czech corporate income tax return includes various types of non-tax-deductible expenses. Without supporting accounting records, it is therefore not possible to determine which portion relates to a particular provision.

Another important conclusion of the SAC concerns the passage of time.

The Court acknowledged that, after many years, it may not always be reasonable to require the submission of all original accounting documents and that indirect evidence may also be used.

Nevertheless, the mere age of the case does not relieve the taxpayer of the burden of proof.

Practical Implications

The judgment provides an important practical reminder, particularly in relation to long-term provisions.

Companies should retain not only accounting documents but also detailed analytical records of provisions, inventory records, documentation supporting their creation and records of the related tax adjustments.

For items that may affect the tax base many years after their initial recognition, such documentation may prove decisive in demonstrating the correct tax treatment.

Are you dealing with the utilisation or reversal of an accounting or non-tax-deductible provision, or would you like to ensure that all your supporting documentation is in order?

Contact our tax specialists. We can help you review the connection between the creation and reversal of provisions, assess the available accounting and tax documentation, and identify potential risks during a tax audit.

Contact us