The distinction between operating and non-operating expenses has long been one of the most frequent points of contention in tax audits. Although there is a regulatory framework and a wealth of interpretative guidance, in practice there is a lack of a uniform and binding methodology, which creates uncertainty for businesses and taxpayers. Inconsistency in interpretation leads to the phenomenon whereby the same expense is deemed acceptable in one audit and unacceptable in another, depending on the judgement of the individual auditor. This undermines tax predictability and the principle of equal treatment.

What is considered an operating expense?

An operating expense is defined as any expense incurred in the course of business activity and contributing directly or indirectly to the generation of income. The existence of a genuine business purpose and sufficient documentation is a fundamental requirement. The tax document alone is not enough. Evidence is required to prove the relevance of the expense to the operation of the business, such as contracts, technical reports, deliverables or other supporting data.

Business purpose as a key criterion

During an audit, the essential element is not the accounting classification of the expense, but the actual reason for which it was incurred. The business must prove what need is being served and how this is connected to its activity. Vague or general justifications, without objective documentation, render the expense vulnerable to challenge.

Proportionality as a review measure

Even when an expense is connected with a business purpose, it may be disallowed if it is considered excessive in relation to the size, turnover or usual practices of the sector. Comparison with proportionality indicators and similar businesses can serve as an objective tool, limiting subjective assessments.

Business versus personal benefit

Crucial is also the distinction between expenses that primarily benefit the business and those that serve the personal needs of shareholders or management. If the main benefit does not concern the business operation, the expense is not recognised for tax purposes, even if it has been recorded in the company’s books.

Need for clear and binding instructions

Effective handling of the issue requires the establishment of uniform, clear and binding rules. A detailed administrative directive, with specific criteria, examples, documentation requirements and a «safe harbour» framework, could reduce tax disputes and strengthen compliance.

Conclusion

The clear delimitation of operating expenses is a fundamental pillar of a reliable and predictable tax system. When the rules are transparent and applied in a uniform manner, the tax audit functions as a mechanism for safeguarding legality and not as a source of uncertainty. Documentation, proportionality and objectivity are the foundations of fair and effective tax practice.

Founder and CFO at Athens Financial Services