Czech Republic: Arm’s length price, advertising as a deductible expense (court decision)

Arm’s length price determined as a price invoiced to other advertising agencies or end-clients for the same or similar supply

Advertising as a deductible expense (court decision)

The Supreme Administrative Court addressed the concept of “related persons” for transfer pricing purposes.

The court—in its judgment 2 Afs 148/2020-37—emphasized with regard to the income tax provisions concerning related persons, the existence of a “chain” is crucial, and it is not necessary to examine the subjective aspect of the matter. Rather, it is sufficient that the taxpayer benefits from the chain by claiming an amount (in this case, for advertising) as a tax-deductible expense.

The court further addressed the definition of what is an arm’s length price. With reference to prior case law, the court’s decision stresses that this is the price applied between independent entities, or if no such information exists or is not available, a hypothetical estimate based on logical and rational considerations and economic experience. A price in a transaction that is comparable to the transaction under review can be used. If the transaction under review exhibits different parameters than the transaction from which the price is taken, the arm’s length price must be adjusted accordingly.

In the case before it, the court held that the arm’s length price is to be determined as a price invoiced to other advertising agencies or end-clients for the same or a similar supply. The court concluded that a price range is to be determined, and the price most advantageous for the taxpayer is to be used (an approach that generally is in line with relevant case law).

The court also agreed that the cost for which a golf tournament can be held says nothing about the arm’s length price of advertising at this golf tournament.

Read an October 2021 report prepared by the KPMG member firm in the Czech Republic


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