KöSt surcharge due to failure to name the recipient

The tax authority may require taxpayers to disclose the recipients of payments that they wish to deduct as business expenses for tax purposes (so-called recipient designation). The purpose of this regulation is to enable the authority to verify with the payment recipients whether they are paying tax on the payments received. If taxpayers cannot or do not wish to comply with the request to name the recipient, the payments are not deductible as business expenses and, in the case of corporations, a 25% corporate tax surcharge is applied.

Documents in the construction industry

As part of an external audit of a limited liability company operating in the construction industry, operating expenses were disallowed due to the lack of recipient designation, and the 25% corporate tax surcharge was imposed. In the appeal proceedings, the Federal Fiscal Court (BFG) confirmed these measures on the grounds that the GmbH had not complied with the usual practices and due diligence standards applicable to commercial construction projects when auditing contracted companies.

Although the GmbH was able to present some documents usually available to clients in commercial construction projects (such as excerpts from the commercial register, trade register, invoices, and transfer receipts), it failed to provide documents actually documenting the services provided by the contractors: internally, no written contracts for work, photo IDs of authorized signatories, construction site documentation including construction diaries, usual correspondence or minutes of meetings, nor plans or documents indicating a review of the contractors’ technical capabilities. Therefore, the GmbH had not exercised the usual standard of care, and was held liable for failing to name the recipient.

Not a minor breach of duty of care

The GmbH argued that the failure to name recipients was not due to its own “minor” breaches of due diligence but rather because the banking institutions had failed to perform their duties. Furthermore, the corporate tax surcharge may only be imposed if the payees are deliberately concealed by the taxpayers.
The Administrative Court (VwGH) dismissed the appeal against the BFG ruling and held that the GmbH had committed a significant breach of due diligence by, among other things, not concluding contracts with contractors, not submitting relevant documents or plans, not copying ID cards, and not visiting the contractors’ registered offices.
According to the VwGH, it is detrimental to taxpayers if they enter into business relationships where they cannot name the payees. Moreover, it is not necessary for payees to be deliberately concealed by taxpayers in order for the corporate tax surcharge to be imposed.

Conclusion

Careful verification of contractors and appropriate documentation of such verification protects against such disadvantages.