Czech Republic: Subsidiary deemed to be contract manufacturer of foreign parent company (Supreme Administrative Court decision)
Court relied on existence of international hire of labor arrangement.
The Supreme Administrative Court (SAC) held that a Czech subsidiary of a Japanese parent company was deemed to be a contract manufacturer of the parent because the subsidiary’s management consisted predominantly of employees of the parent posted under an international hire of labor (IHOL) arrangement. The court thus allowed the tax authority’s adjustment to the subsidiary’s taxable profit under the transfer pricing rules even though the subsidiary supplied goods or services primarily to third parties and no clearly defined transaction with the parent company existed in relation to its core business of manufacturing.
Although the court emphasized that for purposes of a functional and risk analysis, the decisive factor is the actual performance of decision-making functions and not the mere existence of an agreement on international hire of labor, the court found that the fact that senior management positions were filled through the IHOL arrangement weighed particularly against the taxpayer, as did the fact that the subsidiary’s executive director was not paid by the subsidiary but by the parent, which reinvoiced the costs of posted workers and the executive director to the subsidiary without any markup.
Read a March 2026 report prepared by the KPMG member firm in the Czech Republic