Czech Republic: Acquisition structure not abusive; cost base when applying net profit margin transfer pricing method

The KPMG member firm in the Czech Republic has prepared reports on recent tax-related Supreme Administrative Court (SAC) decisions (read more at the hyperlinks provided below).

• The SAC rejected the tax administration's view that the purchase of a share in a corporation financed by a loan and the subsequent merger to transfer the loan to the newly acquired operating entity constituted an abuse of law. The taxpayer’s ability to explain the economic rationale of the transaction contributed to the court’s decision in favor of the taxpayer. The requirement of the financing bank to effectively transfer the loan to the operating entity also played an important role. Read a July 2024 report
• The SAC held that the taxpayer must include the amortization of the valuation difference arising from a spin-off in its cost base when calculating the appropriate transfer price under the net profit margin method (TNMM). The tax authority argued that the taxpayer had artificially reduced the price of their products and consequently their tax base by excluding this item. The SAC agreed with the tax authority that the valuation difference was related to the taxpayer's production activities and thus must be taken into account when calculating operating costs and profitability. The SAC also emphasized that the tax deductibility of the item was not relevant in determining whether it must be taken into account. Read a July 2024 report