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Dear Readers,

We want to inform you about Judgment of the Regional Court in Hradec Králové No. 31 Af 3/2024, in which the Court dealt with an additional tax assessment in connection with a fictitious transaction between a Czech firm and its foreign parent company. The Regional Court agreed with the procedure adopted by the Financial Administration, confirming the additional tax’s assessment due to the existence of so-called fictitious (hypothetic) transaction.

The matter in dispute involved consideration of the level of control exercised by the parent company over the Czech subsidiary. The Financial Administration arrived at a decision that the Czech firm was under a full control of the parent company, primarily in the field of strategic management, and, as a consequence, considered the Czech firm a company with a limited business risk.

Decision of the Regional Court

The Regional Court challenged (just like the administrator did) the function of and risks borne by the Czech firm, one of the reasons being the fact that the Czech firm’s senior management was composed exclusively of employees seconded by the parent company. In addition to that, all assignments and orders were discussed and agreed directly by the parent company.

The Court therefore deduced that key functions and associated risks were borne by the parent company, rather than its Czech subsidiary. As a result, the loss reported by the Czech firm in long term did not comply with the functions actually performed and risks genuinely faced by the Czech firm in the Group. The Czech firm, which in fact was not in charge of its own business strategy, nor did it borne major business risks, could not fully bear the loss incurred.

In light of the facts described above, the Court confirmed the Financial Administration’s conclusion that the Czech firm was controlled by the foreign parent company, which was supposed to compensate for the Czech firm’s loss, rather than being an independent entity. As a consequence, the Tax Administrator assessed additional tax with reference to the standard market value of profitability.

If you have to cope with a situation similar to the one mentioned above and need advice as to how to set up transfer prices, we will be happy to assist you.

Lenka Kolmanová
kolmanova@clarksonhyde.cz