Czech Republic’s transfer pricing laws align with the OECD Transfer Pricing Guidelines (OECD Guidelines) and currently, are incorporated within Article 260-2 of the Czech Income Tax Act (ITC), and Instructions issued by the tax authority.
Arm’s Length Principle
In the Czech Republic, the arm’s length principle is implemented through Section 23(7) of the ITC. This provision stipulates that transactions between related parties (called “spojené osoby”) must be priced the same way as they would be between unrelated parties under comparable conditions. If the agreed prices though will differ, and the difference cannot be explained by the taxpayer, the Czech tax authority will intervene and adjust the tax base.
Related Party Definition
In Czech tax law, related parties are companies or individuals that have a special connection. This includes parties that own at least 25% of another company’s capital or voting rights, either directly or indirectly. It also includes companies or people that control or manage each other, are under the same control, or are closely related to family members. Even if there’s no ownership, a relationship can still be considered “related” if it’s mainly created to lower taxes or increase tax losses. These relationships matter for transfer pricing because they may not reflect fair market terms.
Transfer Pricing Methods
The methods that can be used to determine the arm’s length price in the Czech Republic are:
- Comparable Uncontrolled Price Method
- Resale Price Method
- Cost Plus Method
- Transactional Net Margin Method
- Profit Split Method
In the Czech Republic, the transfer pricing methods are in alignment with the OECD Guidelines, and it does not provide a hierarchy among them. Instead, the selection of the method is based on the “most appropriate” principle.
Comparability Analysis
An important part of the transfer pricing compliance is the comparability analysis. Czech Republic follows the OECD Guidelines and applies the comparability analysis outlined in Chapter III, as regulated in tax authority Guideline GFR-D34. This means the Czech tax authority focuses on determining the fair market value in related-party transactions, these transactions are compared to similar ones between independent parties.
While the Czech legislator states a preference for domestic comparables over foreign ones, it does not allow for the usage of secret comparables.
Documentation Requirements
Even though Czech tax law does not require specific documentation, during the conduct of audits by the tax authority taxpayers are required to provide documentation. Guidance D-334 recommends having this documentation in compliance with OECD guidelines. Currently, there is no specific regulation of the Master or Local files.
Country-by-Country Reporting
In the Czech Republic, Country-by-Country (CbC) reporting requirements apply to multinational groups (MNEs) with consolidated revenues of at least 750 million euros in the previous fiscal year. The obligation falls on the ultimate parent entity resident in the Czech Republic, while a Czech subsidiary may be appointed as a surrogate parent when the actual parent is not subject to CbC reporting in its jurisdiction.
CbC report must be filed within 12 months after the fiscal year ends, and notification of the reporting entity and its jurisdiction must be submitted electronically by the end of the reporting period.
The Czech Republic follows OECD BEPS Action 13 and EU Directive 2016/881/EU and participates in the automatic exchange of CbC reports under the Multilateral Competent Authority Agreement.
Advance Pricing Agreements (APA) and Mutual Agreement Program (MAP)
Advance Pricing Agreements (APA)
In the Czech Republic, companies can apply for Advance Pricing Agreements with the tax authority to agree on how transfer prices will be assessed for future transactions. These agreements can be unilateral, bilateral, or multilateral, and they are shared with other EU countries. The Czech rules apply to APAs issued or changed from 2017 onward, and also to some older agreements that were still valid after 2014. However, APAs in the Czech Republic cannot be applied to past tax years (no roll-back is allowed).
Mutual Agreement Program (MAP)) in the Czech Republic is governed by tax treaties, based on the OECD Model Tax Convention. The tax authority – Financial Administration of the Czech Republic is the responsible institution that manages such agreements.
Approach to Transfer Pricing Audits
In the Czech Republic, transfer pricing is a major focus of tax audits, especially for large companies. A specialized tax authority has been established, to handle exclusively the audits for companies with turnover over CZK 2 billion. Since 2014, taxpayers must submit a transfer pricing appendix with their tax return, listing related party transactions. This helps tax authorities decide which companies to audit.
Penalties
As per Czech law, an additional tax may be levied, if during the audit the pricing of a related party transaction is found not to be at arm’s length. Penalties of up to 1.5 million Czech korunas may apply for failure to comply with the CbC reporting requirements.
Taxation at a Glance
The tax system in the Czech Republic is regulated through several tax laws which regulate direct taxes, indirect taxes, and tax procedures. Personal income tax and corporate income tax, are categorized as direct taxes, and collected at the national level for their worldwide income.
The official name of the Czech tax authority is “Financial Administration of the Czech Republic” and it is responsible for the administration, enforcement, and collection of taxes. The official currency is the Czech koruna (CZK).
The table below provides a summary of the main taxation rates related to businesses:
Tax Type | Tax Rate |
Corporate Tax | 21% |
VAT | 21% |
Withholding tax on dividends to non-residents | 15/35% |
Withholding tax on interest to non-residents | 15/35% |
Withholding tax on royalties to non-residents | 15/35% |
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