The distinction between operating and non-operating expenses has long been one of the most frequently disputed issues in tax audits. Although a legal framework and numerous interpretative guidelines exist, in practice there is a lack of a unified and binding methodology, which creates uncertainty for both businesses and taxpayers. Inconsistent interpretation often leads to the same expense being accepted in one audit and rejected in another, depending on the judgment of the individual auditor. This undermines tax predictability and the principle of equal treatment.

What is considered an operating expense?

An operating expense is any cost incurred in the course of business activity that directly or indirectly contributes to the generation of income. A fundamental requirement is the existence of a genuine business purpose and adequate supporting documentation. A tax invoice alone is not sufficient. Evidence must demonstrate the connection of the expense with the company’s operations, such as contracts, technical reports, deliverables, or other substantiating records.

Business purpose as a key criterion

In an audit, the decisive factor is not the accounting classification of the expense but the real reason it was incurred. The company must demonstrate what business need it serves and how it relates to its activities. Vague or generic justifications, without objective documentation, render an expense vulnerable to challenge.

Proportionality as a control mechanism

Even when an expense serves a business purpose, it may be disallowed if it is deemed excessive in relation to the size, turnover, or standard practices of the industry. Benchmarking against proportionality indicators and comparable businesses can provide an objective reference point and limit subjective assessments.

Business benefit versus personal benefit

Equally important is the distinction between expenses that primarily benefit the business and those that mainly serve the personal interests of shareholders or management. Where the dominant benefit is personal rather than business-related, the expense cannot be tax-deductible, even if it has been recorded in the company’s books.

The need for clear and binding guidance

Effective resolution of this issue requires the establishment of uniform, clear, and binding rules. A comprehensive administrative guideline, setting out specific criteria, practical examples, documentation requirements, and safe-harbor provisions, could significantly reduce disputes and enhance compliance.

Conclusion

Clear delineation of operating expenses is a cornerstone of a reliable and predictable tax system. When rules are transparent and applied consistently, tax audits serve as a safeguard of legality rather than a source of uncertainty. Documentation, proportionality, and objectivity form the foundation of fair and effective tax practice.

Nikos Karamanos

Economist, Tax Consultant

Founder & CFO at Athens Financial Services