Czech Republic: Transfer prices incorrectly set by companies receiving investment incentives

Czech Republic: Transfer prices incorrectly set

The Supreme Administrative Court issued a judgment holding that when companies receive investment incentives under prior incentive regimes, the taxpayer’s failure to meet a specific condition—that the taxpayer would not increase the tax base for calculating tax relief by the amount of related-party transactions—did not result in a complete loss of the investment incentives but just a reduction of the tax relief or benefit.


The income tax law (as in effect until 30 April 2015) contained a provision under which taxpayers receiving investment incentives that failed to comply with a condition not to increase the base for calculating the tax relief by the amount of related-party transactions in a manner not compliant with the economic principles of normal business relations would forfeit the incentive.

The harshness of this condition was mitigated by an amendment to the income tax law (effective from 1 May 2015). The amendment provided entitlement to the tax incentive or relief in the tax period in which the condition was not satisfied would be reduced (and not a complete disallowance). The amount of the reduction would be the product of the tax rate (19% corporate income tax rate) multiplied by the part of the change in the tax base that arose from the incorrectly set transfer prices between related parties.

The transitional provisions of the amendment further stipulated that the mitigating consequences of non-compliance would also apply to proceedings concerning investment incentives initiated before the amendment’s effective date. However, the transitional provisions themselves did not address whether this treatment would also apply in situations when the condition was breached before 1 May 2015.

The Supreme Administrative Court held that since the transitional provisions did not contain any special, separate rules for investment incentive schemes, even breaches of the condition not to increase the base for calculating the tax incentive by transactions entered into between related parties in the periods prior to the amendment's effective date would be governed by the amended law. Consequently, the failure to meet the condition had the effect of reducing the tax incentive claimed, rather than a complete loss of the investment incentives.  

Read an October 2020 report prepared by the KPMG member firm in the Czech Republic

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