A multidisciplinary team, made of lawyers specialized in tax litigation from Reff & Associates | Deloitte Legal and tax advisors from Deloitte Romania, has obtained a final favorable decision from the High Court of Cassation and Justice (HCCJ) to cancel EUR 5.5 million tax assessment decisions issued by the tax authority for a support services company, member of a group operating in the energy field. The victory, obtained after more than five years, was recorded in a complex litigation which involved the analysis of a large number of legal and tax issues regarding the deductibility rules for both corporate income tax and VAT.

Bogdan Marculet, Elena Rosculet, Ioana Nastase, Stefan MihartescuFoto: Deloitte Romania

The solution is all the more important because, during tax inspections, tax audit bodies tend to interpret the deductibility rules in a broad manner, sometimes going as far as challenging the taxpayer's business decisions. Thus, when analyzing the deductibility of the expenses incurred in order to carry out the activity, the tax authorities also take into account the financial results obtained by the taxpayer as a result of the commitment of those expenses. If they have not generated the expected benefits, they are considered as non-deductible expenses.

The decision obtained by the Reff & Associates | Deloitte Legal team confirms that the tax authorities can analyze the deductibility of expenses strictly considering the conditions provided by the legislation, without having the possibility to issue opinions on business decisions.

On the other hand, the solution confirms that the deductibility for the expenses incurred as a result of the change of the business model cannot be granted proportionally, depending on the result obtained after such an operation. In this case, the tax authorities rejected the deductibility for part of the expenses, as they considered those expenses not necessary for the client's activity, since they did not lead to a cost efficiency result. The authority came to this conclusion after applying a mechanism that assumes that the average of the expenses made after the business model change must not exceed the share of expenses in the year prior to the change, and the amount exceeding this share is not tax deductible.

The tax litigation team that obtained this solution for the client was led by Bogdan Marculet, Senior Managing Associate, with the support of Stefan Mihartescu, Senior Associate, Reff & | Associates | Deloitte Legal, with the involvement of Deloitte Romania's tax practice, through the team made of Elena Rosculet and Ioana Nastase, Senior Managers within the consulting firm.

"The decision obtained in courts ensures an adequate protection of the interests and legitimate business decisions of our client, but it also represents a very important gain in case law, as it reconfirms that the tax inspection authorities do not have the right to establish the tax regime of certain expenses according to the taxpayer's business decisions, but must assess the deductibility strictly by reference to the provisions of the tax legislation and to the court decisions issued over time," stated Bogdan Marculet, Senior Managing Associate, Reff & Associates | Deloitte Legal.

"We are proud that our team has obtained a new landmark solution which can be used in the future by any taxpayer, both in tax inspections and in court, and which we hope will also give confidence to our clients that the business decisions they make cannot be censored by the tax authorities", added Mihnea Galgotiu-Sararu, Partner Reff & Associates | Deloitte Legal, and head of the litigation practice.

Reff & Associates | Deloitte Legal’s litigation practice, which consists of over 20 lawyers, covers all types of business disputes, from fiscal, to commercial and administrative litigation.

Deloitte provides worldwide audit, consulting, legal, financial advisory, risk advisory, tax and related services to public and private clients spanning multiple industries. Deloitte serves four out of five Fortune Global 500 companies through a globally connected network of member firms in more than 150 countries and territories, bringing world-class capabilities, insights, and high-quality service to address clients' most complex business challenges. Deloitte's goal is to make an impact that matters through its more than 345,000 professionals.

Deloitte Romania is one of the leading professional services organizations in the country providing, in cooperation with Reff & Associates | Deloitte Legal, services in audit, tax, legal, consulting, financial advisory, risk advisory, business processes as well as technology services and other related services, through over 2,600 professionals.

Please see www.deloitte.com/ro/about to learn more about the global network of member firms.

Reff & Associates | Deloitte Legal is recognized as a leading law firm in Romania for the quality of services and ability to deliver solutions on complex legal matters. The areas of practice include banking and finance, competition law, employment law, energy and environment law, insolvency law, legal management consulting, litigation, mergers and acquisitions, public sector, real estate. The firm represents in Romania Deloitte Legal, a global network with more than 2,500 lawyers in 80 countries.

For more information about Reff & Associates, please visit www.reff-associates.ro. For more information about the global Deloitte Legal network, please visit www.deloittelegal.com.