Czech Republic: local rules

The arm's length rule is in section 23(7) of the Income Tax Act 586/1992 Coll. (ITA). If prices between related persons differ from prices unrelated persons would agree in ordinary business, and the difference is not satisfactorily documented, the tax base is adjusted by the difference. If no arm's length price can be found, the price under the property valuation law is used. Related persons include capital links of at least 25% and links by management, control, close family or a relationship created mainly to cut tax. The rule covers domestic and cross-border dealings, and permanent establishments are measured against a Czech resident doing the same work (s. 23(11)). GFŘ Guidance D-34 (2019, replacing D-332) says the OECD Guidelines are the basic material to use. They are not law.

Czech law has no duty to prepare a master file or local file, and no size threshold for one. D-34 says so and points to the Tax Code: the taxpayer proves the facts in its return (s. 92(3)) and the tax office can call on it to prove them (s. 92(4)). In practice the company carries the burden of showing its prices are at arm's length, and good documentation is its best proof. Ministry of Finance Guidance D-334 (2009, still listed as current) recommends a master file and a country file in line with the EU code of conduct, but not as a duty. D-34 says a D-35 will replace D-334. Documents should be ready when the company proves its tax, applies for a binding ruling (s. 38nc ITA) or starts a mutual agreement procedure. Companies above a size test also file the related-party transactions overview with the tax return.

D-34 follows the five OECD methods: comparable uncontrolled price, resale price, cost plus, transactional net margin and profit split. It says to work from a comparability analysis and to move from CUP through the other traditional methods to the profit methods when the more direct methods cannot be applied reliably. It supports benchmark studies with multi-year data and the interquartile range, if the reasons for using it are stated. A TP adjustment can also be taxed as a profit share on payments to foreign related persons (s. 22(1)(g) point 3 ITA), which can bring withholding tax, with an exception for some EU and EEA recipients.

There is no special transfer pricing penalty. The Tax Code tools apply. Added tax carries a penalty of 20% of the amount (s. 251(1)), and 1% if a loss is reduced. There is no such penalty on tax added through a permitted amended return (s. 251(4)). A late return costs 0.05% of the tax per day after a 5 working day grace period, up to 5% and at most CZK 300,000 (s. 250). Late payment interest follows the Civil Code rate from the 4th day after the due date (s. 252). A fine of up to CZK 500,000 can follow if a company ignores a tax office call without a good excuse (s. 247(2)). CbC breaches carry fines up to CZK 1.5m for a parent and CZK 600,000 for other Czech entities (s. 13zp of Act 164/2013). Pillar Two duties carry fines up to CZK 1.5m (s. 140 of Act 416/2023).

Act 416/2023 Coll. on top-up taxes applies to reporting periods starting on or after 31 December 2023. It has two linked taxes: the allocated top-up tax (income inclusion rule and undertaxed profits rule) and the Czech top-up tax (a qualified domestic minimum tax). The undertaxed profits rule starts with periods that begin on or after 31 December 2024, and earlier where the group's parent is in an EU state that used the 6 year deferral (s. 148). It covers large multinational and large domestic groups with revenue of at least EUR 750m in two of the four prior periods. There is no registration. Each Czech payer files an information return and tax returns electronically with the Specializovaný finanční úřad. The information return is due 15 months after the period (18 months for the group's entry period) and the tax return 22 months after, neither before 30 June 2026 and with no extension of either. For calendar 2024 the Financial Administration gives 1 July 2026 and 2 November 2026. The tax is due on the last day of the return deadline.

Companies that meet a size test file a Přehled transakcí se spojenými osobami (form 25 5404/E) with the corporate income tax return. Groups with revenue of at least EUR 750m (converted at the ECB January 2015 average rate for other currencies) must file a CbC declaration (Ohlášení) once and a CbC report (Oznámení) every year, 12 months after the reporting period, with the Specializovaný finanční úřad (Act 164/2013 Coll., s. 13za and following). A binding ruling on the way related-party prices are set can be requested from the local tax office (s. 38nc ITA, GFŘ Guidance D-32). Mutual agreement procedures follow the tax treaties, the EU Arbitration Convention and EU Directive 2017/1852. Tax Code s. 33(4) moves a deadline that falls on a Saturday, Sunday or public holiday to the next working day. The Czech public holidays under Act 245/2000 are 1 January, Good Friday, Easter Monday, 1 May, 8 May, 5 July, 6 July, 28 September, 28 October, 17 November, and 24, 25 and 26 December. A months-based Tax Code deadline ends on the day with the same number as the day after the period ends, so a 31 December year end plus 3 months is 1 April, not 31 March. Corporate tax returns filed electronically, which covers every company with a data box, are due 4 months after year end.