Czech Republic: Abuse of law concept, documentation of expenses for related-party services (regional court decisions)

The KPMG member firm in the Czech Republic prepared reports on two recent tax-related regional court decisions:

• The Regional Court in Prague held (judgment 55 Af 4/2020-137) that a company was entitled to deduct interest on a bank loan incurred for the purchase of shares in a related company with which it was to subsequently merge, rejecting the argument by the tax authority that the restructuring transaction was carried out for the sole purpose of obtaining a tax advantage and thus the deduction must be denied as an abuse of law. The court found that the main business reason for the restructuring transaction was to facilitate the takeover of the group of companies by a new investment group. The court also pointed out that the conditions for granting the loan were set by the lending banks, and it could not be assumed that the banks would create an artificial structure. The tax authority has appealed the judgment to the Supreme Administrative Court. Read a February 2023 report
  
  
• The Regional Court in Brno held (judgment 30 Af 57/2021-76) that a company failed to provide adequate documentation to support deductions for consulting services provided by its parent company (allegedly consisting of management and advisory services, negotiations, and reporting). The court acknowledged that it was reasonable to expect that the documentation in intra-group relationships would be less formal than between unrelated parties. However, the court agreed with the tax authority’s position that the company’s documentation did not support that the actual delivery and acceptance of services had taken place at all. The court stressed that appropriately prepared and continuously maintained documentation remains a basic prerequisite for defending the tax deductibility of expenses—specifically documentation and record-keeping of outcomes proving the actual provision of services, and documentation of the benefit for the taxpayer, together with an adequately set methodology for calculating remuneration (i.e., transfer pricing). Read a February 2023 report