Courts Put Taxpayers on Notice: Inflated Advertising Costs Will Not Stand

Introduction

The Czech Supreme Administrative Court has upheld additional corporate income tax assessments issued to Aufeer Design s.r.o. for the tax years 2015 and 2016. The dispute centred on substantial advertising fees paid to HERA s.r.o. for the placement of Aufeer banners at various events. The tax authorities classified the arrangement as akin to a related-party relationship, concluding that the remuneration for advertising services was excessive and did not reflect market value.

Key Legal Findings

The Court endorsed the tax administration’s position that Aufeer’s advertising expenses lacked commercial justification. The contracts with HERA were found to be vague, omitting basic specifications such as the scope, location and duration of advertising. There was also no evidence of market research or an assessment of the effectiveness of the services. The arrangement showed multiple red flags: Aufeer’s passive reliance on HERA despite unusually high expenditure, a break in VAT neutrality within the chain, and a pricing level that exceeded by more than sixfold the prices charged by independent event organisers.

The Court accepted the use of the CUP method as an appropriate valuation tool. Prices directly obtained from event organisers were treated as arm’s length benchmarks, subsequently increased by an average agency margin to simulate the price that independent parties would have agreed. The resulting reference price was properly substantiated. The Court emphasised that no special services or added value were demonstrated that could justify remuneration many times higher than the reference price. In consequence, advertising expenses above that threshold were correctly deemed non-deductible.

The Court also addressed expert evidence submitted by Aufeer. It noted that the valuation of the trademark capitalised the general growth of the automotive industry rather than measuring any direct effect of the disputed advertising. Similarly, the expert opinion on advertising prices was overly broad, relied on incomparable events and applied price ranges that were disconnected from Aufeer’s actual sponsorship position. The authorities had therefore acted within their discretion in assigning these opinions limited evidentiary weight.

Strategic Insight

This judgment highlights the need for taxpayers to substantiate advertising expenditures with precise contractual terms, demonstrable commercial rationale, and verifiable market data. Inflated service remuneration, particularly where no identifiable value-added activities are performed, is vulnerable to re-characterisation and deduction denial. Expert valuations must isolate transaction-specific effects and avoid reliance on general industry trends that may obscure the true economic impact of the services. For taxpayers engaged in promotional activities or intermediary-based marketing, the decision underscores the importance of defensible pricing, contemporaneous comparability analysis, and periodic outcome evaluation.

How MCORE Can Help?

MCORE supports organisations in designing defensible transfer pricing and valuation frameworks for marketing, advertising and promotional services. Its analytical tools help establish and document arm’s length pricing, benchmark agency margins, and test the economic coherence of service chains. By enabling rigorous comparability assessments and producing audit-ready documentation, MCORE strengthens compliance positions and mitigates the risk of disputes similar to those encountered by Aufeer.