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Transfer pricing

Transfer pricing refers to the procedures for determining the price applied to transac-
tions between two economically or personally related parties for tax purposes, so that
the transactions correspond to the conditions which would have been negotiated by
independent parties.


According to the requirements of Czech tax laws, the price should be set at the usual
amount, i.e. at the price which would have been negotiated between independent enti-
ties (under the arm’s length principle). This is how transfer prices should be inspected
by tax authorities.

According to the most recent statistics of the Ministry of Finance of the Czech Republic, in 2020 tax authorities carried out 249 inspections focused on transfer pricing.
The tax inspections led to the additional assessment of income tax in the amount of CZK 1.4 billion, and to an increase in the tax base of the inspected entities by 7.9 billion CZK. Between 2014 and 2020, tax authorities carried out 2 431 inspections and assessed tax in the total amount of CZK 4.5 billion.


Examples of transactions usually negotiated between related parties and transac-
tions frequently targeted by tax inspections are as follows:

  1. Transactions related to sales of semi-products, final products, material and goods;
  2. Transactions with tangible property: purchase, sale, rental, lease (for example, of
    machinery, real estates);
  3. Transactions with intangible property: sharing logo expenses, research and devel-
    opment costs used by group companies, valuation of licenses and royalties (DEM-
    PE analysis), etc.;
  4. Providing services: providing supportive intra-group services (accounting, tax ser-
    vices, public relations, personnel and marketing services, etc.), sharing costs on
    service centres within the group (a wide range of services), providing managerial
    and consulting services;
  5. Group funding: providing loans and credits, subordinated and mezzanine debt, is-
    sued bonds, cash pooling and other forms of financing (for example, financial as-
    sistance), including the so-called hidden financing;
  6. Providing guarantees and other forms of security.

We recommend that clients pay extra attention to the setting of transfer prices and
their documentation; the documentation should include a description of the applied
methods to determining transfer prices in transactions between related parties. They
are usually described in a Master File for the entire group, and in a Local File for each
company within the group.

In general, the issue of transfer prices is relevant to every entity, or an accounting unit,
which records at least 1 transaction in its report on relations between the accounting
unit and the person controlling the accounting unit, or between the accounting unit
and persons controlled by the same controlling person (and between the accounting
unit and its controlled persons). Transfer prices will also apply to any entity which, as
a part of its corporate income tax return, submits a separate attachment to item 12 of
section I. The attachment is submitted and filled out separately for each related party
under Sec. 23 (7) (a) and (b) of the Income Taxes Act, if an entity carried out trans-
actions with its related person during the tax period, or during the period for which
the entity submits a tax return, and other conditions are met, which are listed in the
instructions for filling out a separate attachment to item 12 of Section I.


VGD provides consultancy to clients leading to the correct setting, valuation and doc-
umentation of transfer prices, so that they have sufficient information and arguments
for negotiations with the tax authority, namely:

  • Preparation (or assistance with the preparation) of transfer pricing documentation
    (Local File, Master File) including their regular periodical updates,
  • Preparation (or assistance with the preparation) of comparative studies (bench-
    marking) and/or preparation of comparative analyses using external paid data-
    bases, for example on the basis of a purchased online license to use the “Royalty
    Range” database, which contains financial/accounting data on comparable inde-
    pendent companies, also data on comparable independent transactions with differ-
    ent types of intangible assets, on comparable independent financial transactions
    and on fees for different types of services,
  • Preparation (or assistance with the preparation) of expert transfer pricing valua-
    tions, or assessing the compliance with the arm’s length principle in relation to cur-
    rent or planned transactions between related parties,
  • Transfer pricing strategy planning and related group structure,
  • Proposal and processing of pricing (i.e. recommendations as a part of the initial
    setting of prices between related parties),
  • Preparation (or assistance with preparing) of the assessment of the correctness of
    internal agreements from the tax perspective – preparation / revision of contractual
    documentation for group transactions,
  • Assistance during transfer pricing inspections initiated by tax authorities and the
    preparation of a “defense file” in the case of a tax inspection,
  • Assessment of basic risks associated with transfer pricing,
  • Assessment of the so-called substance and benefit test,
  • Setting or review of the transfer pricing system (revision of existing documentation
    – Master File and Local File),
  • Analysis and documentation of financial transactions of all kinds (intra-group loans
    and simple loans, cash-pooling, guarantees, financial assistance, etc.),
  • Consulting in the field of intangible assets (arm’s length test, DEMPE analysis, etc.),
  • Consulting in the field of allocation of profits to permanent establishments,
  • Assistance in preparation of Country-by-Country reporting,
  • Training of financial / risk controlling employees on the issue of risks in the field of
    setting of transfer pricing.

If you are interested in any of the services, or if you would like to consult an issue,
please do not hesitate to contact our expert office: VGD Appraisal, s.r.o.,
Ing. Daniel Knopp, Head of Transfer Pricing and Senior Valuation Consultant,, phone: +420 605 295 968.



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