Czech Republic
Jakub Vršecký & Tereza Benediktova
by Jakub Vršecký & Tereza Benediktova
Transfer pricing rules in the Czech Republic are governed by the Czech Income Tax Act, which implements the principles of the OECD Transfer Pricing Guidelines.
The General Financial Directorate and the Ministry of Finance issued decrees explaining recommended practices on transfer pricing. These decrees are considered to be general recommendations and interpretation guidance, rather than strictly binding legal sources. The relevant guidelines on transfer pricing are:
D-10 – on low value-added services provided between related persons/associated enterprises;
D-32 – on a binding ruling regarding the method for determining the transfer price between related parties;
D-34 – on the application of international taxation standards on transactions between related parties (transfer pricing); and
D-334 – on the scope of transfer pricing documentation.
Decree D-34 does provide some sequencing in the TP method selection process by suggesting that the selection process should begin with consideration of the comparable uncontrolled price (CUP) method, followed by consideration of other traditional transactional methods, and, finally, consideration of transactional profit methods. The decree, however, also states that sometimes it may be more appropriate to select a transactional profit method than a traditional transactional method, such as in cases where each party to the transaction provides a unique and valuable contribution or where information on the gross margins of unrelated parties is not available.
The CUP method is based on a proper comparative analysis, including an analysis of functions and risks, and cannot be applied in situations where an identical product is found but the parties to the transaction perform different functions and bear different risks.
The profit split method (PSM) may be used where the unique and distinct contribution of all parties to the transaction can be identified – for example, through the ownership of a unique tangible or intangible asset, and at the same time where the parties involved contribute high added value and bear corresponding risks in the functions performed.
Other methods that can be used are the resale price method (RPM), the cost plus method (CPM), or the transactional net margin method (TNMM).
Decree D-10 includes only those intragroup services with low added value that do not constitute the core business of the entities, are a routine function and do not constitute a significant cost or income of the undertakings concerned.
Regarding transfer pricing in the Czech Republic, key principles and concepts from the OECD guidelines are applied. These include the requirement to determine market prices for related party transactions, and to conduct comparability analysis to determine these prices. (See previous points.)
In the Czech Republic, there is no legal obligation to have transfer pricing documentation submitted to the tax administrator within certain deadlines. In practice, however, taxpayers must have it ready, or at least be able to prepare the documentation very quickly, in case of a tax audit. They are obliged to submit this documentation to the tax authorities within 30 days of receiving a written request.
The law also allows simplifications in marginal cases, and the court has ruled that the complexity of the transfer documentations should correspond with the complexity of the relations between associated parties.
a. Preparation of transfer pricing documentation
Before assessing whether the transaction satisfies the arm's length principle, it is necessary to assess whether the transaction took place (the substance test), and whether it benefited the taxpayer (the benefit test). If the answer to both questions is yes, the third test (the arm's length test) can be applied – in other words, to examine the conditions and whether the transfer prices comply with the arm's length principle.
b. Master and “Czech” local file
A master file is a file containing information on an entire group of companies which is uniformly applicable to all EU members. This information should include all economic facts and provide a comprehensive overview of the multinational company. The package documents the transfer pricing policy for the whole group and explains all internal business relationships.
The local file should, on the other hand, contains the analysis proving the arm’s length principal in concrete transactions. There is a general consensus that the local file alone is sufficient in relations between associated parties with simple organisational structure.
c. Penalties
There is no specific penalty for shortcomings in transfer pricing documentation. The general penalties applicable in tax procedures also apply in the case of transfer pricing inadequacies, and the expected outcome of poor documentation is the arrears and penalty from wrongly assessed income taxes.
APAs are generally and commonly used by multinational enterprises (MNEs), and provide legal certainty for the parties as the outcome ruling is binding for the tax office. Decree D-32 focuses on binding decisions, and the desired structure of the request. A binding assessment decision means a certain degree of certainty for the taxpayer about how the tax administration will assess the method of establishing the price between related parties, or the method of determining the tax base of a non-resident taxpayer on income earned through a permanent establishment located in the Czech Republic.
The process of obtaining this binding agreement in the Czech Republic is quite long – months, in some cases more than a year – and its validity is 3 years.
GGI member firmGrinex Czech RepublicPrague, Budweis, Carlsbad, Czech RepublicT: +420 222 516 889
Advisory, Auditing and Appraisals, Corporate Finance, Tax
Grinex Czech Republic provides its clients with a wide range of professional services. The firm makes comprehensive evaluations of the businesses of its clients, and draws on the expertise of its professionals to offer the best solutions available.
Jakub Vršecký, Senior Consultant at Grinex Czech Republic, leads the tax team at Grinex and has provided TP documentations to enterprises including finance, automotive and others. Thanks to his compliance and transactional background, processing set up and post implementation of transfer pricing rules can be part of TP projects in the Czech Republic.
Contact Jakub.
Tereza Benediktova is part of the Grinex tax team, with experience preparing transfer pricing documentations. She has been involved in several international projects.
Contact Tereza.
