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Czech Republic: Companies receiving investment incentives face transfer pricing issues

Czech Republic: Investment incentives, transfer pricing

There are reports that tax authorities have been systematically targeting transfer pricing issues of profit-making companies that receive investment incentives.

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The scenario is always the same—the tax authorities announce a routine inspection of corporate income tax to focus on compliance with the conditions required for receiving investment incentives. Among other things, questions are asked about related-party transactions. However, the real focus is on something else.

The Czech income tax law includes a specific condition for the receipt of certain investment incentives—namely, the taxpayer’s base for calculating the tax relief under the incentives must not be increased by business transactions with parties related through capital or personnel in a manner not compliant with common economic principles. If the tax authorities identify and prove (often using evidence provided by taxpayers themselves) a breach of this condition, taxpayers are sanctioned for their excessive profitability. Sanctions are imposed depending on when the “unlawful” increase in the base was proved, and may come in two forms: (1) either the investment incentives are withdrawn completely, in which case, the taxpayer must file additional tax returns for all periods when the incentives were received; or (2) the tax authorities may assess additional income tax on the detected excessive profitability.

Experience shows that tax inspections of this type may take place at any point in time during which the investment incentives are being received. Also, the tax authorities may look at companies that previously had been subject to audit of their investment incentives and no issues were uncovered regarding transfer pricing. This means that even if the methodology was not reviewed by the tax authorities in a prior audit, this does not provide any certainty that the same conclusions will reached in a subsequent inspection.

Bottom line: Do not underestimate what may appear to be seemingly routine tax inspections.
 

Read a July 2019 report prepared by the KPMG member firm in the Czech Republic

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