The Supreme Administrative Court (“SAC”) recently issued a decision on the impossibility of transferring a technical improvement. The case under the SAC’s scrutiny concerned a technical improvement made by a tenant on the landlord's property. The lease agreement was then assigned to a new tenant and the former tenant invoiced the value of the technical improvement to the new tenant. The value added tax (“VAT”) and tax depreciation consequences of this transaction were examined by the SAC.
Historically, a transfer of a technical improvement for a consideration was used and even viewed in academic circles as a generally accepted practice. After the transfer, the new tenant depreciated the technical improvement for tax purposes and there were no immediate consequences for the landlord.
However, in the SAC’s opinion, because a technical improvement is always part of the asset it is made on, it cannot be transferred separately and the transaction is therefore invalid. As a result, a payment for a technical improvement between the former and the new tenant does not constitute a taxable payment for VAT purposes. As VAT is then applied incorrectly, the new tenant does not have the right to claim the VAT deduction on this transaction.
Furthermore, tax depreciation of such a technical improvement may not be applied by the new tenant (even if the lease agreement is not terminated, only assigned), as the conditions for tax depreciation of a technical improvement made by a tenant include a requirement that it was the tenant who made expenditures on the technical improvement.
The SAC concluded that the new tenant does not meet this requirement and cannot therefore depreciate the technical improvement. In the SAC's opinion, it should be the landlord who has the right to depreciate the technical improvement made by the former tenant in such a case. A non-monetary taxable income arises to the landlord as well at this point.
It is also important to mention that the case in question took place before the new Civil Code (effective as of the year 2014) came into effect. On the other hand, the argumentation of the SAC does not seem to be primarily based on the legal regulation of lease assignments and rather focuses on tax provisions. Therefore, application of this ruling may be expected under the new Civil Code as well.
At this point it remains unclear whether the SAC’s opinion will be adopted by the tax authority and whether it will become a generally-accepted approach in future decisions of Czech courts. Nevertheless, the transfer of a technical improvement should be certainly viewed as risky as it may become a subject of interest in future tax audits or due diligence processes.