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Helping you easily find everything you need to know about the rules and regulations regarding transfer pricing and Country by Country reporting for every country you do business with.
Global transfer pricing guide
Transfer pricing - Czech Republic
01 Jan 20257 min read
This publication provides a high-level overview of Czech Republic's transfer pricing rules and outlines who to contact for expert guidance in this area.
Contents
Introduction to transfer pricing in Czech Republic
The Czech transfer pricing (TP) legislation is based on Act No. 586/1992 of Coll., on income tax, as amended (ITA) which is the fundamental national law regulating the application of transfer prices between related parties. Article 23 (7) of the ITA stipulates that if the prices negotiated between related parties differ from those negotiated between independent entities in regular business relations under the same or similar conditions and the difference is not satisfactorily substantiated, the taxpayer’s tax base shall be adjusted for this difference.
The ITA also specifies which entities are considered as related parties, i.e. generally direct or indirect ownership greater than 25 percent based on voting rights or share capital. As related parties are considered also other related persons such as persons participating in the management or control, close persons, persons that created a legal relationship mainly for the purpose of reducing the tax base or increasing tax losses, etc.
Further, Czech transfer pricing guidelines are included in the instructions issued by the Ministry of Finance or by the General Financial Directorate and generally follow OECD principles stipulated in the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations.
The decrees issued by the Ministry of Finance or by the General Financial Directorate (Decree D-32, D-34, D-334, D-10 and D-59) are generally considered as instructions issued to the tax administration units as to how they should apply transfer pricing principles.
For the transfer pricing documentation purposes, the OECD Transfer Pricing Guidelines apply. The OECD TP methods are accepted.
There is no specific guidance on the available transfer pricing methods in the ITA or other primary law.
The description of available transfer pricing methods can, however, be found in Decree D-34, which replaced the previous Decree D-332. The decree provides for the traditional transaction methods, namely:
the CUP (comparable uncontrolled price) method;
the resale price method; and
the cost-plus method.
The decree also provides for profit-based transaction methods, namely:
the profit split method; and
the TNMM (transactional net margin method).
The ITA provides in section 23 (7) that, should it not be possible to determine the arm’s length price, the price will be determined in accordance with the Property Valuation Act. Thus, there is one more method, namely determining the fair market value based on expert valuation.
Decree D-34 provides that, in the process of determining the arm’s length price, all the five basic methods foreseen in the OECD Guidelines may be used, and the appropriate method should be selected based on a comparability analysis and subsequent determination of which method is the most suitable.
The Czech Republic has a self-assessment regime, where the onus is on the taxpayer to ensure that transfer pricing regulations are adhered to.
Transfer pricing documentation
Czech tax legislation does not prescribe the obligation to maintain any TP documentation (including preparation of a benchmarking study, or a functional and risk analysis). Nevertheless, documentation proving that the arm’s-length principle was followed in related-party transactions is typically required by the Czech tax authorities during a potential tax audit. It is a common practice of Czech tax authorities to require a transfer pricing documentation from a taxpayer, since a taxpayer bears the burden of proof.
It is therefore highly recommended that such documentation should be prepared in advance and that the TP methodology applied in transactions with related parties be properly documented.
Common practice nowadays is the requirement of Czech tax authorities to dispose of the documentation in Czech language, if it is used as evidence in tax proceedings.
As a member of the EU, the Czech Republic has adopted the EU TP Code of Conduct (master file approach). However, it is at the taxpayer’s discretion to follow the Code.
The Czech guidance contains the concept of a local file and a master.
There is no threshold applied for obligation to prepare a transfer pricing documentation or for obligation to prepare a documentation in the master file/local file format.
Generally, long-term loss-making position of contract manufacturing companies (especially toll manufacturers), situations where a company’s functional profile does not correspond to its profitability, provision of the various intragroup services, royalties, intangibles and financing are focus areas of transfer pricing audits. Due to cross-border exchange of information carried out among tax authorities, number of cross-border tax audits focused on transfer pricing increases.
Standard penalties are applicable in the case of additional tax assessment from the tax authority. It means a penalty amounting to 20 % of the additionally assessed tax plus late payment interest.
Economic analysis and how to demonstrate an arm’s length result
Prior to the comparability analysis, it is necessary to perform a functional, risk and asset analysis which is a key element when determining the functional profile of a company (the tested party).
When determining an arm’s length price, transfer pricing methods primarily depend on the availability of comparable information (comparable price or comparable gross or net margin). It is, therefore, necessary to perform the comparability analysis to identify comparable data based on transactions carried out between independent entities. Decree D-34 emphasizes that prior to carrying out the comparability analysis, it needs to be established that the transaction actually took place (substance test) and also the transaction provided a benefit for the taxpayer (benefit test) as foreseen in article 24 (1) of the ITA.
Both global and regional comparable companies are accepted. However, in practice, a search is generally undertaken to find local comparables first but if the sample is insufficient, it could be extended to the EU region. This approach is acceptable by Czech tax authorities.
A search for comparable companies is usually made in a TP database (e.g. TP Catalyst).
Advance Pricing Agreements (APAs), dispute avoidance and resolution
The Advance Pricing Agreements (APA) are in the form of binding ruling valid for up to 3 years (if conditions and the law remain unchanged), which set out the method for determining transfer prices in related party transactions.
This concept of a “binding ruling” is set out by Section 38nc of the ITA. First, the taxpayer files a request and, consequently, the tax administrator decides whether the taxpayer has chosen a relevant transfer pricing method which results in a transfer price determination on an arm’s-length basis. The binding ruling can be issued only for transactions effective in a particular tax period or that will be effective in the future. It is impossible to apply for the binding ruling concerning business relations that have already influenced the tax liability (tax base or tax loss) for the previous taxable period.
Guidance D-32 describes the process for issuing binding ruling and the details for the application. Generally, the decision on the method of transfer pricing between related parties is effective for three tax periods following the day when the decision was issued.
In the case of European disputes, the Arbitration Convention shall apply. Non-European disputes are executed based on double tax treaties agreed between countries in question.
Exemptions
Transfer-pricing documentation has not been obligatory in the Czech Republic yet, however a special annex to the corporate income tax returns related to intra-group transactions needs to be completed provided that:
a taxpayer carried out a transaction with a related party seated outside the Czech Republic, or
a taxpayer showed a tax loss and simultaneously carried out a transaction with a related party seated in the Czech Republic or abroad, or
a taxpayer was granted investment incentives in a form of tax relief and simultaneously carried out a transaction with a related party seated in the Czech Republic or abroad.
However, this obligation relates only to a taxpayer who meets at least one of the following conditions:
total assets exceed MCZK 40, or
yearly net turnover exceeds MCZK 80, or
average number of employees is more than 50.
Related developments
Digital services tax in the Czech Republic has not yet been implemented.
Teams of experienced tax administrators were created to perform tax audits focused on transfer pricing. The analysis made is based on the data filled in the special annex to the CITR which enables the tax authorities to choose the entity which should be subject to a further procedure.
Further data are gathered by the tax authorities from the Country-by-country report that is mandatory for certain multinational enterprises.
More attention has been paid lately by the tax authorities to transactions with intangibles and group restructurings.
Contact us
For further information on transfer pricing in Czech Republic please contact:
