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Czech Republic

Extensive Summary of the Czech Republic’s Transfer Pricing Requirements

​1. Introduction​​

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This summary provides an in-depth overview of the Czech Republic’s transfer pricing framework. It covers the legal and regulatory background, key laws, the scope of application, documentation and methodological requirements, compliance measures, highrisk industries and transactions, and the anticipated future developments in this area.

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2. Legal and Regulatory Framework

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2.1 Core Legislation and Regulations

 

In the Czech Republic, transfer pricing legislation and guidance are designed to ensure that intercompany transactions between related parties are priced in a manner consistent with the arm’s length principle. This principle, as outlined by the OECD Transfer Pricing Guidelines, serves as the foundation for the country's transfer pricing rules. Below is an overview of the key transfer pricing legislation and guidance in the Czech Republic::

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  • Act No. 586/1992 Coll. on Income Taxes:

    • The Income Tax Act is the primary piece of legislation governing corporate income taxation in the Czech Republic and includes provisions for transfer pricing.

    • The Act requires that transactions between related parties be priced in accordance with the arm’s length principle, ensuring that tax deductions or income reported reflect what would have been agreed upon by independent parties in similar transactions.

    • This Act sets out the legal requirement for transfer pricing documentation and provides a basis for the tax authorities to review and adjust intercompany transaction prices in case of non-compliance.

  • Czech Transfer Pricing Guidelines (issued by the Financial Authority):

    • The Czech Ministry of Finance issued guidelines that are aligned with OECD standards for transfer pricing. These guidelines provide detailed instructions on how to comply with transfer pricing requirements and the methodologies that can be used to determine arm's length pricing.

    • These guidelines emphasize the need for comprehensive transfer pricing documentation and provide a detailed analysis of the methods businesses should use to justify their pricing in related-party transactions.

  • OECD Transfer Pricing Guidelines:

    • The OECD Transfer Pricing Guidelines serve as the basis for the Czech Republic's transfer pricing rules. Czech transfer pricing legislation incorporates the OECD’s guidelines on how to determine arm’s length prices and provides businesses with the flexibility to apply various methods, such as the Comparable Uncontrolled Price (CUP) method, the Cost Plus method, and the Transactional Net Margin Method (TNMM).

    • The Czech Republic’s tax authorities, the Financial Administration, follow OECD recommendations for compliance checks and transfer pricing adjustments.

  • OECD’s BEPS (Base Erosion and Profit Shifting) Action Plan:

    • Czech transfer pricing laws have been updated to comply with the OECD BEPS Action Plan. Notably, the Czech Republic has adopted Action 13 regarding transfer pricing documentation requirements, including Master File, Local File, and Country-by-Country Reporting (CbCR) for large multinational enterprises (MNEs).

    • The Czech Republic has aligned its regulations with OECD BEPS Actions, requiring companies with significant cross-border operations to submit detailed reports on global income, taxes paid, and the allocation of profits across jurisdictions.​

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2.2 Alignment with International Standards

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The Czech transfer pricing (TP) laws are designed to align with international standards, particularly those established by the OECD Transfer Pricing Guidelines and the OECD's BEPS (Base Erosion and Profit Shifting) Action Plan. This alignment ensures that the Czech Republic's transfer pricing rules are consistent with global tax practices and provide a fair and transparent system for taxing related-party transactions. Below is a detailed analysis of how the Czech TP law aligns with international standards:

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  • Alignment with the OECD Transfer Pricing Guidelines:

    • The core of Czech transfer pricing law is the arm’s length principle, which is directly aligned with the OECD Transfer Pricing Guidelines. This principle mandates that transactions between related parties must be priced as if the transactions were conducted between independent entities in the open market.

    • Czech legislation (as outlined in the Income Tax Act and the Ministry of Finance’s Transfer Pricing Guidelines) requires that intercompany pricing be set in accordance with this principle to prevent profit shifting or tax avoidance through manipulated pricing between related entities.

  • Transfer Pricing Methods:

    • The OECD Transfer Pricing Guidelines provide a framework for selecting the most appropriate transfer pricing methods. The Czech Republic follows these guidelines and permits the use of the following methods:

      • Comparable Uncontrolled Price (CUP) method

      • Cost Plus method

      • Transactional Net Margin Method (TNMM)

      • Resale Price Method

    • These methods are applied by Czech tax authorities to ensure that intercompany transactions are priced correctly. The OECD’s preference for the CUP method as the most reliable method for determining arm’s length pricing is mirrored in Czech law.

  • Alignment with the OECD BEPS Action Plan:

    • OECD BEPS Action 13: Transfer Pricing Documentation:

      • The Czech Republic aligns with OECD BEPS Action 13, which introduced detailed requirements for transfer pricing documentation. This includes:

        • Master File: A global overview of the multinational group, including business structure, intangible assets, financial arrangements, and transfer pricing policies.

        • Local File: A more detailed file for each entity, including intercompany transactions, transfer pricing methods used, and supporting economic analysis.

        • Country-by-Country Reporting (CbCR): For large multinational enterprises (MNEs) with consolidated revenues exceeding €750 million, the Czech Republic requires the submission of CbCR to report global income, taxes paid, and business activities by country.

      • The CbCR helps to increase tax transparency and allows tax authorities to assess risks of profit shifting and base erosion.

    • Tax Compliance and Transparency:

      • BEPS Action 13 emphasizes the importance of global tax transparency in preventing tax avoidance schemes. The Czech Republic has implemented these documentation requirements, ensuring that MNEs provide sufficient data on their financial arrangements, profit allocations, and intercompany transactions.

      • The CbCR is submitted to the Czech tax authorities and allows them to access information about MNEs’ global tax positions, ensuring that taxes are paid where economic activity occurs.

    • OECD BEPS Action 8-10: Intangible Assets and Risk Allocation:

      • The Czech Republic’s transfer pricing laws also reflect the principles of BEPS Actions 8 to 10, which address the tax treatment of intangibles and the allocation of risks and profits among related parties.

      • These actions are specifically designed to prevent profit shifting through the manipulation of pricing for intangible assets (such as intellectual property) or through risk-shifting mechanisms within multinational groups.

      • The Czech Republic requires taxpayers to document the economic substance of their intercompany transactions, including intangible asset transfers and financing arrangements, in line with OECD guidance.

  • Double Taxation Agreements (DTAs):

    • OECD Model Tax Convention:

      • The Czech Republic has signed numerous Double Taxation Agreements (DTAs) based on the OECD Model Tax Convention. These treaties help resolve cross-border tax disputes and provide guidelines for allocating taxing rights between jurisdictions, particularly in the case of transfer pricing adjustments.

      • The Mutual Agreement Procedure (MAP), which is part of these DTAs, allows businesses to resolve double taxation arising from transfer pricing adjustments between the Czech Republic and other countries.

    • MAP and OECD Guidelines:

      • The Czech Republic’s implementation of MAP under its DTAs follows the OECD guidelines for resolving disputes related to transfer pricing and double taxation. This process provides businesses with a way to resolve cross-border disputes and ensure that income is not taxed twice by different jurisdictions.

  • Documentation Deadlines and Penalties for Non-Compliance:

    • Documentation Deadlines:

      • In alignment with the OECD Transfer Pricing Guidelines and BEPS Action 13, the Czech Republic mandates that transfer pricing documentation be prepared before the annual tax return is filed. The documentation should be available upon request from ANAF (Czech tax authorities) within 15 days of the request.

      • The CbCR must be submitted within 12 months of the fiscal year-end, mirroring the timeline recommended by the OECD.

    • Penalties for Non-Compliance:

      • Penalties for non-compliance with transfer pricing documentation requirements are in line with international standards. Fines may be imposed for failure to submit adequate transfer pricing documentation or for submitting documentation late.

      • Additionally, transfer pricing adjustments can be made by the tax authorities if they find that the transactions are not in line with the arm's length principle, potentially leading to higher tax liabilities and interest on overdue taxes.

  • Documentation Submission Deadlines and Penalties for Non-Compliance:

    • Documentation Deadlines:

      • Transfer pricing documentation should be prepared before submitting the tax return and should be available for submission upon request by the tax authorities within 15 days.

    • Penalties:

      • Penalties for failure to comply with transfer pricing documentation requirements may include fines and tax adjustments.

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In addition to OECD Transfer Pricing Guidelines and OECD BEPS Actions, the Czech transfer pricing legislation is also aligned with EU directives. These directives aim to standardize and harmonize tax rules across EU member states to enhance tax transparency, prevent tax avoidance, and ensure fair taxation. Here’s how the Czech Republic's transfer pricing laws align with relevant EU directives:

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  • EU Anti-Tax Avoidance Directive (ATAD):​

    • The directive establishes common rules that all EU member states, including the Czech Republic, must adopt to prevent tax avoidance strategies that exploit gaps in the tax laws.

    • The Czech Republic's transfer pricing regulations are aligned with the provisions of ATAD, specifically concerning rules for interest deduction limits, controlled foreign company (CFC) rules, and hybrid mismatches.

  • The EU Anti-Tax Avoidance Directive (ATAD) aims to address aggressive tax planning within the EU and prevent base erosion and profit shifting (BEPS).

  • Transfer Pricing and ATAD:

    • ATAD introduces provisions aimed at ensuring that interest payments between related parties are not used to artificially reduce tax bases. The Czech Republic adheres to these provisions, which apply limits on the amount of interest expense that can be deducted for tax purposes.

    • Transfer pricing rules in the Czech Republic are in line with ATAD's objectives of ensuring that intercompany transactions are conducted at arm’s length and that companies do not use transfer pricing arrangements to shift profits to jurisdictions with lower tax rates.

  • EU Directive on Administrative Cooperation (DAC6):

    • The EU Directive on Administrative Cooperation (DAC6) mandates the reporting of cross-border tax arrangements that may have the potential to be used for aggressive tax planning. This includes transfer pricing schemes that might be used to shift profits or avoid taxes.

    • Under DAC6, intermediaries (such as tax advisors and lawyers) and businesses must disclose potentially aggressive tax arrangements to the tax authorities. This helps tax authorities detect harmful tax practices and potential transfer pricing abuses.

    • Czech alignment: The Czech Republic follows DAC6 by requiring businesses to report cross-border arrangements that may involve transfer pricing risk. This aligns with international standards aimed at enhancing tax transparency and reducing tax avoidance.

  • EU Directive on the Common Consolidated Corporate Tax Base (CCCTB):

    • The CCCTB is an EU proposal aimed at creating a common tax base for corporations operating within the EU. It would allow businesses to compute their taxable base consolidated at the EU level and then allocate the tax base across member states according to a formula.

    • While the CCCTB is not yet fully implemented, the Czech Republic, as an EU member state, is preparing for its potential future application. This would impact transfer pricing by providing clearer guidelines on how to allocate profits between related companies in different EU countries.

    • The CCCTB would ensure that profit allocation follows a formula that reflects where real economic activity is taking place, which is also in line with OECD transfer pricing rules.

  • EU Directive on Dispute Resolution Mechanisms (EU Arbitration Convention):

    • The EU Arbitration Convention aims to provide a procedure for resolving transfer pricing disputes between EU member states. It provides businesses with a mechanism to avoid double taxation and resolve disagreements over how transfer pricing should be applied between EU countries.

    • In the case of transfer pricing adjustments, the Czech Republic allows for the Mutual Agreement Procedure (MAP) under EU Arbitration Convention. This mechanism helps resolve disputes and prevent double taxation on the same income when related-party transactions are involved across borders.

    • The Czech Republic’s transfer pricing laws reflect the EU’s broader tax dispute resolution framework, enabling companies to resolve cross-border transfer pricing issues fairly and efficiently.

  • EU Directives on Tax Transparency:

    • The EU’s tax transparency initiatives are designed to improve public disclosure of tax-related information and promote fairness in corporate tax reporting. These initiatives are aligned with global OECD standards and focus on preventing profit shifting to low-tax jurisdictions.

    • Czech alignment: In line with EU directives, the Czech Republic requires businesses to submit transfer pricing documentation that follows international standards (e.g., OECD Transfer Pricing Guidelines) and allows tax authorities to verify that transfer prices are set according to the arm’s length principle. Additionally, Country-by-Country Reporting (CbCR) for multinational enterprises (MNEs) is required, ensuring transparency about how profits are distributed globally.

    • This is consistent with EU’s focus on tax transparency and promoting fair tax practices.

  • EU Directive on Controlled Foreign Companies (CFC Rules):

    • The EU’s Controlled Foreign Company (CFC) rules aim to prevent profit shifting to jurisdictions with low or no taxation. Under these rules, profits that are artificially shifted to low-tax jurisdictions through transfer pricing manipulation are subject to taxation in the parent company’s home country.

    • The Czech Republic has implemented CFC rules, which require that controlled foreign companies (CFCs) in low-tax jurisdictions be subject to Czech taxation, even if the income is not repatriated.

    • These rules align with OECD BEPS Action 3, which recommends countries to tax foreign profits if they are artificially shifted to low-tax jurisdictions, reducing the incentive to engage in transfer pricing manipulation.

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3. Scope and Application of Transfer Pricing Rules

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3.1 Definition of Related Parties

 

In the Czech Republic, the definition of related parties is crucial for determining whether transfer pricing rules apply to a set of intercompany transactions. The Czech tax laws align with international standards, particularly the OECD Transfer Pricing Guidelines, and establish criteria for what constitutes related parties for tax purposes. Below is a detailed breakdown of the definition of related parties under Czech Republic law:

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  • Control and Influence:

    • A related party relationship exists when one entity has the ability to control or significantly influence the decisions of another entity. This can be through ownership of shares, voting rights, or through contractual agreements that allow one party to exert influence over the management, business operations, or financial decisions of another.

    • Control may be direct or indirect and is usually determined based on the level of influence one entity can exert over another, even if no formal ownership is present.

  • Ownership Threshold:

    • In the Czech Republic, entities are considered related parties if one company owns at least 25% of the share capital or voting rights of the other company, either directly or indirectly. This is a common threshold used to identify entities that may influence or control one another.

    • If the ownership threshold is met, the relationship is considered related, even if the two entities operate in different industries or markets.

  • Family Relationships:

    • Family members can also be considered related parties under Czech law. For example, an individual who controls or owns a significant share of a company and has family members who control or influence another company could establish a related-party relationship.

    • Family relationships can be used to identify related parties, particularly in small businesses or family-owned enterprises where decision-making may be centralized within the family unit.

  • Affiliates and Subsidiaries:

    • Entities within the same corporate group, including parent companies and subsidiaries, are related parties. This includes both domestic and international subsidiaries and their parent companies, where the parent company holds a controlling interest (usually defined as more than 50% of the shares or voting rights).

    • Affiliated entities, even if they do not hold controlling stakes but have significant influence, may also be considered related.

  • Partnerships and Joint Ventures:

    • Partnerships or joint ventures where two or more entities have shared control or decision-making authority may also create a related party relationship, especially if the entities share profits, risks, and management duties.

    • In such arrangements, the terms of intercompany transactions may be scrutinized to ensure compliance with arm's length pricing.

  • Indirect Control via Intermediaries:

    • Indirect control through intermediary companies or investments is also recognized in the Czech definition of related parties. If an entity owns or controls another entity through a chain of companies or via intermediate holding companies, the related-party relationship still exists.

    • For example, if Company A owns 100% of Company B, and Company B owns 100% of Company C, then Company A is considered a related party to Company C, even though there is no direct ownership between Company A and Company C.

  • Transactions between Related Parties:

    • The Czech tax authorities require that transactions between related parties, whether domestic or international, must be conducted at arm's length. This means that the terms and conditions of the transaction should reflect what would have been agreed upon between independent parties in similar circumstances.

    • The definition of related parties is important for determining when the transfer pricing rules and documentation requirements apply, ensuring that intercompany pricing is justifiable.

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3.2 Types of Transactions Covered

 

Under Czech transfer pricing law, specific related-party transactions are subject to the arm's length principle, which ensures that intercompany transactions are priced as if they were between independent entities. These transactions must be properly documented and comply with the OECD Transfer Pricing Guidelines to avoid tax adjustments or penalties. Below are the types of transactions specifically covered by Czech transfer pricing regulations:

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  • Sale and Purchase of Goods:

    • Transactions involving the sale or purchase of tangible goods between related parties are subject to transfer pricing rules.

    • Prices for these transactions must reflect what independent entities would agree upon under similar circumstances.

    • This includes goods for resale, raw materials, and finished products.

  • Provision of Services:

    • Services provided by one related entity to another, such as management services, administrative support, technical services, and consulting services, are also covered by transfer pricing regulations.

    • Charges for these services must be at arm’s length, based on what independent companies would charge for similar services under comparable conditions.

    • This includes both routine services (e.g., IT support, back-office functions) and complex services (e.g., R&D, management consultancy).

  • Licensing and Use of Intangible Assets:

    • Intangible assets such as patents, trademarks, copyrights, software, and other intellectual property (IP) are subject to transfer pricing rules.

    • Transactions involving the transfer or licensing of these intangible assets between related parties, such as royalties or license fees, must be priced in accordance with the arm’s length principle.

    • The terms of such agreements must be consistent with what would have been negotiated between unrelated entities in similar circumstances.

  • Intra-group Financing:

    • Financing transactions between related parties, including loans, interest payments, and guarantees, are covered by Czech transfer pricing laws.

    • The interest rates on these loans must align with market rates (i.e., set at arm’s length).

    • Terms of the loans, such as repayment schedules and collateral, should also be consistent with those agreed upon between independent entities in similar transactions.

  • Cost-Sharing and Profit-Sharing Arrangements:

    • Cost-sharing arrangements (CSAs), where multiple related parties share the costs of a project (such as R&D or marketing activities), are subject to transfer pricing rules.

    • The allocation of costs and the method used to divide profits must reflect what would be agreed upon by unrelated parties and must be documented.

    • Profit-sharing agreements where profits or losses are divided between related parties must also comply with the arm’s length principle.

  • Sale or Transfer of Financial Assets:

    • Transactions involving the sale or transfer of financial assets, such as shares, bonds, or other securities, are subject to transfer pricing rules.

    • The prices at which these assets are sold or transferred between related entities must reflect market values, ensuring that the transfer pricing is arm’s length.

  • Lease and Rental Transactions:

    • Leasing or rental arrangements between related parties involving tangible assets (such as real estate, machinery, or vehicles) are also covered.

    • The lease terms (e.g., rental payments, duration, maintenance responsibilities) must reflect what would be agreed upon by independent parties.

    • Market-based rental prices and fair terms should be applied to avoid transfer pricing issues.

  • Intra-group Sales of Services:

    • In addition to routine services, more complex transactions involving the sale of services (such as management fees, research and development services, licensing services, etc.) must comply with transfer pricing regulations.

    • Services rendered by one related party to another must be priced in line with what would be agreed between independent entities under similar circumstances.

  • Reattribution of Income Between Related Entities:

    • Transfer pricing rules also cover the reallocation of income among related entities, especially where intangibles or intellectual property are involved, or in cases where profits are generated by cross-border transactions.

    • For example, if a related party receives income from the use of an intangible asset owned by another entity, the income must be allocated in a way that reflects each entity's contribution.

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3.3 Exemptions and Simplifications

 

Under Czech transfer pricing law, there are certain exemptions and simplifications that aim to reduce the compliance burden for businesses, particularly smaller entities or less complex transactions. These exemptions are designed to ensure that companies can still comply with the arm’s length principle while avoiding overly burdensome documentation requirements. Below is a detailed look at the key exemptions and simplifications under Czech transfer pricing law:

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  • Exemptions for Small and Medium Enterprises (SMEs):

    • SMEs with annual revenue below a specified threshold (typically EUR 200 million in consolidated group revenue) are exempt from the full transfer pricing documentation requirements.

    • These businesses may not need to prepare a Master File or Country-by-Country Reporting (CbCR) but must still adhere to the arm's length principle and maintain a simplified transfer pricing study for intercompany transactions.

  • Simplified Documentation for Low-Value-Added Services:

    • For transactions involving low-value-added services, businesses are allowed to apply simplified methods to determine arm's length pricing.

    • Low-value-added services include routine activities such as administrative services, IT support, marketing services, and other back-office functions.

    • For these services, companies can apply a cost-plus method or use a markup on costs to determine the pricing for the services provided.

  • Exemptions for Domestic Related-Party Transactions:

    • Domestic transactions may face less scrutiny compared to international transactions under Czech law, although they must still comply with the arm's length principle.

    • Domestic-only arrangements may have fewer documentation requirements, especially if the tax risk is minimal.

  • Exemption for Small Transactions:

    • Small transactions (typically below a certain value, such as EUR 100,000) between related parties may not need to follow extensive documentation procedures.

    • The arm’s length principle still applies, but businesses may not be required to provide full documentation for these smaller transactions.

  • Simplified Documentation for Intra-group Financing Transactions:

    • For intra-group financing arrangements, including loans and interest payments, the Czech Republic offers simplified documentation requirements in certain circumstances.

    • If the financing is relatively straightforward (e.g., low-risk loans with market-based interest rates), businesses may not need to provide extensive documentation or conduct detailed comparability analyses.

  • Exemption for Certain Intercompany Arrangements:

    • If the economic substance of a transaction is straightforward (e.g., routine goods or services), there may be simplified requirements for documentation or even exemptions.

    • This is intended to avoid burdensome requirements for low-risk, low-complexity transactions while ensuring that companies do not use transfer pricing to shift profits inappropriately.

  • Exemption for Low-Risk Transactions:

    • Low-risk transactions (such as cost-sharing arrangements or pass-through transactions) may be treated with simplified compliance.

    • These businesses might not need to provide extensive documentation for transactions deemed low-risk.

  • General Exemption for Related-Party Transactions with Non-Taxable or Exempt Entities:

    • Transactions with non-taxable entities (such as public entities, charitable organizations, or certain government agencies) may not require detailed transfer pricing documentation.

    • However, businesses are still expected to ensure that the pricing for such transactions complies with the arm’s length principle, even if the entity itself is exempt from tax.

  • Simplified Reporting for Certain Small-Scale Operations:

    • For certain small-scale operations with limited international activities or limited cross-border transactions, simplified transfer pricing compliance may apply.

    • These businesses might only need to report basic details about their related-party transactions in a summary format, without the need for detailed benchmarking or market analyses.

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4. The Arm’s Length Principle

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At the heart of Czech transfer pricing rules is the arm’s length principle. This principle requires that transactions between related parties be priced in a manner that reflects what independent entities would agree upon in comparable transactions.

 

4.1 Determination of Arm’s Length Price

 

Taxpayers in the Czech Republic must determine the arm’s length price using internationally accepted methods, including:

  • Comparable Uncontrolled Price (CUP) Method: Compares the price in a controlled transaction with that of a comparable uncontrolled transaction.

  • Cost Plus Method: Adds a reasonable profit margin to the cost base of the supplying entity.

  • Transactional Net Margin Method (TNMM): Compares net profit margins of controlled transactions with those from similar independent companies.

  • Resale Price Method: Bases the price on the margin earned by a reseller in a comparable uncontrolled transaction.

  • Profit Split Method: Allocates the combined profits from intercompany transactions based on the economic contributions of each entity.

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4.2 Comparability and Functional Analysis

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To justify the chosen pricing method, a robust analysis is required:

  • Functional Analysis: Detailed examination of the functions performed, risks assumed, and assets utilized by each party.

  • Economic Analysis: Consideration of market conditions, competitive dynamics, and industry-specific factors.

  • Contractual Analysis: Review of the contractual terms between related parties, including pricing terms, payment schedules, and any performance-related clauses.

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5. Documentation and Disclosure Requirements

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Robust documentation is a cornerstone of the Czech transfer pricing regime. Taxpayers must maintain detailed records to substantiate that their intragroup transactions adhere to the arm’s length principle.

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5.1 Key Documentation Elements

 

In the Czech Republic, the documentation requirements for transfer pricing are designed to ensure that intercompany transactions between related parties are priced according to the arm’s length principle. These requirements are aligned with OECD guidelines and ensure that businesses are transparent about their pricing practices. Below are the key documentation requirements under Czech transfer pricing law:

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  • Master File:

    • The Master File provides an overview of the multinational enterprise (MNE) group’s global business operations, organizational structure, and transfer pricing policies.

    • The Master File must include:

      • Organizational structure of the MNE group, including its subsidiaries, branches, and affiliates.

      • Business description of the multinational group, including its business strategy, key activities, and the roles of different entities within the group.

      • Financial information for the MNE group, including consolidated financial statements.

      • Intangible assets held by the group, including patents, trademarks, and other intellectual property, and how these assets are transferred within the group.

      • Financial arrangements, including intercompany financing, debt, and equity transactions, and how financing is structured within the group.

  • Local File:

    • The Local File provides detailed information about specific transactions conducted by a local entity with related parties.

    • The Local File must include:

      • Detailed description of the local entity’s related-party transactions (goods, services, financing, etc.).

      • The transfer pricing methods used for these transactions and a justification for the selection of these methods.

      • Economic analysis, including a comparability analysis to justify the pricing applied to the transactions.

      • Financial statements of the local entity for the relevant fiscal year.

      • Functional analysis of the local entity to determine the roles and responsibilities of the entities involved in the transactions (e.g., the risk assumption, functions performed, and assets used).

      • Benchmarking studies or external data used to support the arm’s length pricing of transactions.

  • Country-by-Country Reporting (CbCR):

    • For multinational enterprises (MNEs) with consolidated revenues exceeding €750 million, the Czech Republic requires Country-by-Country Reporting (CbCR).

    • The CbCR must be submitted on an annual basis and should include:

      • Revenue, profit before tax, and income tax paid in each jurisdiction.

      • The number of employees, assets, and capital in each jurisdiction.

      • A list of entities in each jurisdiction, including their main activities and the allocation of profits.

      • This report helps tax authorities assess tax risks and ensures global transparency in MNEs' operations.

  • Transfer Pricing Documentation Submission:

    • The transfer pricing documentation (both Master File and Local File) must be available for submission to the Czech tax authorities (ANAF) upon request.

    • The documentation should be prepared before the annual tax return is filed.

    • If requested, the documentation must be submitted to ANAF within 15 days of the request.

  • Simplified Transfer Pricing Documentation:

    • For businesses that qualify as small and medium enterprises (SMEs), with annual consolidated revenue below a specified threshold (typically €200 million), simplified documentation may apply.

    • These companies may be exempt from preparing a full Master File and Country-by-Country Reporting (CbCR) but still need to maintain basic documentation to justify their intercompany pricing under the arm's length principle.

    • Simplified transfer pricing studies may be required instead, which outline the related-party transactions and the pricing method used.

  • Documentation Requirements for Specific Transactions:

    • Intra-group Financing Transactions:

      • For intra-group financing arrangements (e.g., loans or guarantees), businesses must justify the interest rates and terms applied to the financing, ensuring they are consistent with market rates.

      • Documentation should include loan agreements, interest calculations, and comparability analysis to support the terms.

    • Low-Value-Added Services:

      • For low-value-added services (e.g., administrative, support, IT services), the Czech Republic allows businesses to use simplified documentation and a cost-plus method or markup on costs to determine pricing.

      • The documentation must include a description of the services, the method used to determine pricing, and a functional analysis.

  • Submission Deadlines and Penalties for Non-Compliance:

    • Deadlines:

      • Transfer pricing documentation (Master File and Local File) must be available when the annual tax return is filed and submitted upon request by the tax authorities.

      • CbCR must be submitted within 12 months after the fiscal year-end if applicable.

    • Penalties for Non-Compliance:

      • If a company fails to provide proper transfer pricing documentation or fails to comply with the submission deadlines, penalties may be imposed.

      • Fines for failure to submit the required documentation can be significant, and adjustments to taxable income can be made if the tax authorities determine that the intercompany pricing does not meet the arm’s length standard.

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5.2 Timing and Accessibility

 

In the Czech Republic, the deadlines for submitting transfer pricing documentation are designed to ensure compliance with arm’s length pricing requirements while aligning with international standards. Below is a detailed breakdown of the deadlines for the different types of transfer pricing documentation:

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  • Master File:

    • The Master File must be prepared annually and be available to the tax authorities upon request.

    • There is no specific deadline for submitting the Master File along with the annual tax return; however, it must be kept ready for inspection by the Czech tax authorities (ANAF) if requested.

    • The Master File should be maintained in advance of filing the tax return, so that it is available during a tax audit if required by ANAF.

  • Local File:

    • The Local File must be prepared before filing the annual tax return for the fiscal year.

    • The Local File should be available for submission upon request by ANAF and must be submitted within 15 days if requested during a tax audit or upon inspection.

    • The local entity should ensure that the Local File is available at the time of submitting the annual corporate income tax return (typically by March 31st of the following year if the fiscal year ends on December 31st).

  • Country-by-Country Reporting (CbCR):

    • CbCR is required for multinational enterprises (MNEs) with consolidated revenues exceeding the threshold of €750 million.

    • The CbCR must be submitted within 12 months after the end of the fiscal year of the ultimate parent company.

    • For example, if the MNE's fiscal year ends on December 31st, the CbCR must be submitted by December 31st of the following year.

  • Transfer Pricing Documentation Submission:

    • The transfer pricing documentation (both Master File and Local File) must be available by the time of filing the annual tax return.

    • If requested by ANAF, the documentation must be submitted within 15 days of the request.

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5.3 Penalties for Non-Compliance

 

In the Czech Republic, non-compliance with transfer pricing documentation requirements can result in significant penalties. These penalties are designed to encourage businesses to maintain accurate and complete documentation for related-party transactions and ensure that transactions are priced according to the arm's length principle. Below are the key penalties for non-compliance under Czech transfer pricing law:

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  • Fines for Failure to Submit Documentation:

    • If a business fails to submit the required transfer pricing documentation (e.g., Master File, Local File, or Country-by-Country Reporting (CbCR)) when requested by the Czech tax authorities (ANAF), the company may face fines.

    • The fines for failing to submit transfer pricing documentation can range from RON 5,000 to RON 50,000 (approximately €200 to €2,000), depending on the severity of the violation.

  • Penalties for Incomplete or Incorrect Documentation:

    • If the transfer pricing documentation submitted is incomplete, inaccurate, or does not meet the required standards, the Czech tax authorities may impose penalties.

    • This could include fines for incorrect or insufficient documentation, which can be imposed regardless of whether the documentation was submitted late.

    • Penalties for incorrect documentation can result in increased tax liabilities or the rejection of deductions for intercompany transactions.

  • Penalties for Late Submission:

    • If the required transfer pricing documentation is submitted after the deadline or within the 15-day period following a request by ANAF, the business could face penalties for late submission.

    • The exact fine may vary depending on the nature of the late submission and the duration of the delay.

  • Transfer Pricing Adjustments and Increased Tax Liabilities:

    • If the tax authorities determine that the intercompany transactions are not priced at arm's length, they can make transfer pricing adjustments to increase the taxable income of the company.

    • This can lead to additional tax liabilities, along with interest on the additional taxes owed, and potentially further penalties if the adjustments are due to non-compliance with the arm’s length principle.

  • Interest on Underpaid Taxes:

    • If transfer pricing adjustments result in additional tax liabilities, interest will be charged on the amount of taxes that were not properly paid due to non-compliance.

    • The interest is calculated from the date the tax liability should have been paid until the actual payment date, and the interest rate is set by the Czech tax authorities.

  • Risk of Further Audits:

    • Companies that fail to comply with transfer pricing documentation requirements may face increased scrutiny from the Czech tax authorities in future audits.

    • Non-compliance can lead to more frequent tax audits, increasing the risk of additional penalties or adjustments to taxable income.

  • Revocation of Exemptions:

    • If a business fails to meet the transfer pricing documentation requirements, it may lose any exemptions or simplified procedures available to smaller entities or for low-value transactions.

    • The exemptions related to simplified documentation may be revoked, requiring the business to prepare more detailed documentation.

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6. Transfer Pricing Adjustments

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Under Czech Republic transfer pricing law, the National Tax Administration (ANAF) has the authority to make various transfer pricing adjustments if intercompany transactions do not comply with the arm’s length principle. These adjustments are intended to ensure that related-party transactions are priced in a way that reflects market conditions and prevents profit shifting or tax avoidance. Here are the key transfer pricing adjustments available to the Czech tax authorities:

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  • Income Adjustments:

    • If the tax authorities determine that the intercompany pricing does not meet the arm’s length standard, they have the authority to increase the taxable income of the company that is underreporting its income.

    • For example, if a selling entity in the Czech Republic sells goods to a related party at an unreasonably low price (below market value), the Czech tax authorities can increase the taxable income of the selling company by adjusting the price of the transaction to reflect an arm’s length price.

  • Expense Adjustments:

    • Similarly, if an entity claims excessive expenses for related-party transactions (such as overstated management fees or royalty payments), the Czech tax authorities can reduce the amount of deductible expenses, which in turn increases the taxable income.

    • For example, if a company deducts excessive interest payments to a related party that are not at arm’s length, ANAF can reduce the interest expense and increase taxable income accordingly.

  • Interest Rate Adjustments in Intra-group Financing:

    • For intra-group financing transactions, such as loans or guarantees, the Czech tax authorities can adjust the interest rate applied to related-party loans to bring it in line with the arm’s length standard.

    • If a related party has provided a loan at an unreasonably low interest rate, ANAF can adjust the interest to a market rate, which may result in an increase in interest income for the lender and an increase in interest expense for the borrower.

  • Adjustments for Intangible Assets:

    • The Czech tax authorities can adjust the pricing for transactions involving intangible assets, such as patents, trademarks, and copyrights, if the transfer price is not consistent with what independent parties would have agreed.

    • If the royalties or license fees paid between related parties for the use of intellectual property (IP) are too high or too low, the tax authorities can adjust these payments to reflect an arm’s length price.

    • Adjustments for intangibles are particularly important in the context of profit shifting to low-tax jurisdictions.

  • Recharacterization of Transactions:

    • The Czech tax authorities have the power to recharacterize a related-party transaction if they determine that the economic substance of the transaction is inconsistent with the agreed terms.

    • For example, if a loan agreement between related parties is deemed to be more akin to an equity investment, the tax authorities may reclassify the transaction and apply the corresponding tax treatment to reflect the economic reality of the arrangement.

    • Recharacterization can also apply if the transaction terms (such as interest rates, duration, or guarantees) are inconsistent with what would have been agreed between independent entities.

  • Profit Allocation Adjustments:

    • The Czech tax authorities can make profit allocation adjustments between related parties to ensure that profits are allocated to entities based on the economic substance of their activities, consistent with the OECD transfer pricing guidelines.

    • For example, if a Czech subsidiary is assigned a disproportionately low share of profits from intercompany transactions that involve intangibles or intangibles-based royalties, ANAF can adjust the profit allocation to ensure that the subsidiary’s share of the profits reflects its functions, risks, and assets.

  • Adjustments for Low-Value-Added Services:

    • The Czech tax authorities can make adjustments to low-value-added services if the markup or pricing applied does not reflect what would be agreed between independent entities.

    • Low-value-added services often include administrative services, back-office operations, and routine services. ANAF may apply a simplified cost-plus method to these transactions to ensure that the pricing is in line with the arm’s length principle.

  • Adjustments for Cross-Border Transactions:

    • In cross-border transactions, the Czech tax authorities may adjust the pricing to ensure that profits are not shifted to low-tax jurisdictions.

    • The tax authorities may adjust the income allocated to Czech entities if they believe that profits are being artificially shifted to countries with more favorable tax rates or lower levels of economic activity.

  • Adjustments for Permanent Establishments:

    • The Czech tax authorities can also make adjustments regarding permanent establishments (PEs).

    • If the profit allocation to a permanent establishment (e.g., branch or subsidiary) in the Czech Republic is not appropriate based on its economic activities, ANAF can adjust the profit attribution to ensure that the PE is taxed in accordance with its actual economic contribution.

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7. Advance Pricing Agreements (APAs) and Mutual Agreement Procedures (MAPs)

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To provide certainty and resolve potential disputes, the Czech Republic offers mechanisms similar to those found in other OECD jurisdictions:

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7.1 Advance Pricing Agreements (APAs)

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Application Submission:

  • The taxpayer (company) submits a formal application for an APA to ANAF.

  • The application must include detailed information about the business operations, the related-party transactions in question, and the transfer pricing methods that the company proposes to use.

  • The application should also provide sufficient economic analysis and justifications for the choice of the proposed methods.

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7.2 Mutual Agreement Procedures (MAPs)

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Initiate the MAP Request:

  • The taxpayer (company) submits a formal request for a Mutual Agreement Procedure (MAP) to the Czech tax authorities (ANAF).

  • The request must include detailed information about the dispute, such as the transfer pricing issue, the relevant tax treaty, and the basis for the double taxation or disagreement between jurisdictions.

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8. Industries and Transactions with Higher Transfer Pricing Risk

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Certain industries and transaction types are considered inherently higher risk due to their complexity and the potential for profit shifting.

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8.1 High Risk Industries

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  • Manufacturing and Distribution:

    • Nature of Transactions: Involves multiple stages of production and distribution, where intercompany pricing for raw materials, components, and finished products is critical.

    • Risk Factors: Complex supply chains and cost allocations require rigorous functional and comparability analyses.

  • Financial Services:

    • Nature of Transactions: Involves intragroup financing, guarantees, and other financial instruments.

    • Risk Factors: Accurate pricing is essential to reflect true market risk, with mispricing potentially leading to significant adjustments.

  • Technology and Intellectual Property:

    • Nature of Transactions: Licensing of technology, software, and intellectual property rights.

    • Risk Factors: Valuation of intangibles is challenging due to the lack of direct comparables and rapid technological innovation.

  • Pharmaceuticals and Life Sciences:

    • Nature of Transactions: Encompasses R&D, licensing of innovations, and distribution agreements.

    • Risk Factors: High R&D investments and the allocation of returns on innovation require detailed documentation and robust economic analysis.

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  • 8.2 High Risk Transaction Types

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  • Intercompany Financing:

    • Key Considerations: Determining appropriate interest rates, fees, and risk premiums on loans and guarantees between related entities.

    • Risk Factors: Market volatility and credit risk mispricing may result in substantial tax adjustments.

  • Intangible Asset Transfers and Licensing:

    • Key Considerations: Accurate valuation of intellectual property and other intangibles.

    • Risk Factors: Rapid innovation and scarcity of directly comparable data increase the complexity and risk.

  • Service Agreements and Cost Sharing:

    • Key Considerations: Allocation of costs and benefits for shared services and centralized management functions.

    • Risk Factors: Complex functional analyses are needed to ensure that costs are allocated on an arm’s length basis.

  • Capital Asset Transactions:

    • Key Considerations: Transfers of significant fixed assets or equity interests require robust independent valuation.

    • Risk Factors: Misvaluation may have a material impact on taxable income, capital gains, and depreciation claims.

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9. Challenges and Emerging Trends

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9.1 Digital Economy and New Business Models

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  • Valuation of Digital Assets: Traditional valuation methods may require adaptation to accurately capture the value of digital assets and data-driven business models.

  • Complex Global Supply Chains: The digitalization of business processes and global supply chains adds complexity to establishing comparability and income allocation.

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9.2 Evolving International Standards and BEPS Initiatives

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  • Integration of BEPS Measures: The Czech Republic continues to integrate OECD BEPS recommendations into its transfer pricing framework, impacting documentation, adjustment mechanisms, and disclosure requirements.

  • Enhanced Transparency: Global moves toward greater tax transparency have led to more detailed reporting requirements and increased information exchange between tax authorities.​

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10. Future Outlook and Recommendations

 

​10.1 Continuous Monitoring and Proactive Management

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  • Dedicated Transfer Pricing Teams: Establish specialized teams to monitor regulatory changes, market trends, and ensure internal compliance.

  • Regular Policy Reviews: Continuously update transfer pricing policies to reflect current business operations and regulatory requirements.

  • Investment in Technology: Leverage advanced data analytics and IT systems to improve benchmarking accuracy and documentation processes.

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10.2 Strengthening Engagement with Tax Authorities

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  • Advance Pricing Agreements (APAs): Engage early with tax authorities to negotiate APAs and secure clarity on intragroup pricing methods.

  • Utilize Mutual Agreement Procedures (MAPs): Where disputes arise, participate in MAP processes to resolve cross border issues and avoid double taxation.

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10.3 Preparing for Heightened Regulatory Scrutiny

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  • Enhanced Documentation: Ensure that all transfer pricing documentation is comprehensive, current, and aligned with both domestic and international standards.

  • Ongoing Training: Regularly update the expertise of personnel involved in transfer pricing to stay informed about evolving methodologies and regulatory expectations.​

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