Related parties in the Czech Republic according to the Income Tax Act

Transactions between related parties in the Czech Republic are regulated by the requirement to comply with the arm’s length principle. According to the Czech Income Tax Act, related parties in the Czech Republic are understood as follows:

• persons related through capital (25% threshold),
• persons otherwise related who are persons
  1. where one person participates in the management or control of another person,
  2. where identical persons or close persons participate in the management or control of other persons, then such other persons are persons otherwise mutually related; if a person is a member of the supervisory boards of two persons, such persons shall not be deemed otherwise related,
  3. controlling and controlled and also persons controlled by the same controlling person,
  4. who are close,
  5. who have created a legal relationship predominantly for the purpose of reducing a tax base or increasing a tax loss.

Based on the precise definition of a related person, the last variant of “otherwise related persons” is the most problematic. For this reason, it is important to examine two judgements of the Czech Supreme Administrative Court, which clarify the definition of related parties in the Czech Republic.

Obligations and difficulties of the tax authority

The Czech Supreme Administrative Court is of the opinion that to adjust the tax base according to the Czech Income Tax Act, it is essential to prove compliance with the related persons’ criterion. This is done by the tax authority. Admittedly, proving a creation of a legal relationship predominantly for the purpose of reducing a tax base or increasing a tax loss is difficult, but it is not sufficient to find that the price is excessive. The only exception could be the case of a clear price overrun for goods or services whose normal price is generally known or available, in the absence of any reasonable explanation for the acquisition of those goods or services, or that it was an artificial transaction (pointless for the real economic functioning of the tax entity), the only explanation for which is the reduction of the tax base. In this case, the company would also not be able to explain the difference between the price paid and the arm’s length price.

Likewise, sufficient evidence of creating related parties in the Czech Republic as defined by that provision would emerge if the buyer accounts for artificially increased tax costs, while the seller takes advantage of the tax loss they would already have available. It is essential, however, that the excessive price must be quite obvious, and the circumstances of the individual case must not offer any reasonable explanation other than the performed transaction being the result of an agreement between two persons to obtain a tax advantage. 

Another judgment of the Supreme Administrative Court on related parties in the Czech Republic

It follows from another judgment of the Czech Supreme Administrative Court (1 Afs 109/2021) that if the recipient of the service actually paid a certain price and at the same time it was not proven that the funds would be returned to them, paying the overpriced service for the purpose of incurring higher expenses would lack any rationality as it would be financially disadvantageous.

Both court decisions therefore mean the tax administrator is obliged to examine the possible existence of other circumstances indicating that such a relationship was established mainly to reduce the tax base or increase the tax loss, i.e. that the companies are otherwise related as defined by Section 23 para. 7 b) of the Czech Income Tax Act.

If you would like to know more about transactions between related parties in the Czech Republic or other transfer pricing issues in the country, please do not hesitate to contact the experts at WTS Alfery, the exclusive representative of WTS Global for the Czech Republic.

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Who must prepare a transfer pricing report? 

A Serbian entity that enters into transactions with related parties is obliged to prepare a transfer pricing report. Two parties are related if:

• one party controls more than 25% of the shares in the other party;
• one party controls more than 25% of the voting rights in the other party’s management bodies;
• both parties are controlled by the same individual/company (more than 25% of the shares/voting rights).

In addition, if a Serbian entity enters into transactions with companies from tax havens (such as Hong Kong, Panama, Liechtenstein, Monaco, British Virgin Islands, US Virgin Islands, etc.), it is also obliged to prepare a transfer pricing report and provide evidence that these transactions are in line with the arm’s length principle.

A full transfer pricing file is needed for the following types of transactions:

• Financial transactions (such as loans and credits), regardless of their value. (However, if a Serbian entity receives an interest-free loan from a related party, a transfer pricing analysis is not mandatory.)
• Commercial transactions (sale/purchase of goods, services, property, etc.) with a related party, provided that the total annual value of transactions with that party is higher than RSD 8 million (roughly EUR 68,000).

If the total annual value of commercial transactions with a related party is lower than RSD 8 million (roughly EUR 68,000), the taxpayer is obliged to present these transactions, but there is no obligation to further analyse them from a transfer pricing perspective.

The transfer pricing report is submitted to the tax authorities for each fiscal year.

Is the transfer pricing regulation in Serbia aligned with the OECD Guidelines and BEPS?

The Serbian Ministry of Finance regulates transfer pricing on the basis of documentation published by the OECD and other international organisations, so we can say that transfer pricing regulation in Serbia is mostly aligned with the OECD Guidelines. However, in the Serbian Rulebook on transfer pricing there are some significant differences:

• In Serbia, a benchmarking analysis must be prepared for each fiscal year. Comparable independent companies from Serbia have priority over foreign comparable entities. If there are no comparable companies in Serbia, the geographic search may be extended to similar markets (Balkan states, Eastern Europe, European Union, etc.).

• It is not mandatory to prepare a master file. However, the information from the master file may be used in analysing transactions with related parties.

• The last version of the OECD Guidelines, published in July 2017, proposes the simplified approach in the analysis of low-value – adding intra-group – services (implementation of 5% cost plus margin without the need for benchmarking analysis). However, such approach is not regulated in the Serbian Rulebook on transfer pricing. Therefore, for intercompany services it is necessary to perform a functional analysis, a comparability analysis, as well as a benchmarking analysis (if there is no internal comparable transaction).

Although Serbia is not an OECD member state, it has started implementing BEPS measures. The National Assembly ratified the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting. In addition, Serbia is a member of the OECD/G20 Inclusive Framework on BEPS and is expected to propose new taxation rules for the digital economy. Therefore, transfer pricing regulation in Serbia will follow presented BEPS measures and initiatives.

What transfer pricing methods are applicable in Serbia? 

List of applicable transfer pricing methods in Serbia:

• comparable uncontrolled price (CUP) method
• cost plus (C+) method
• resale (RS) method
• transactional net margin (TNM) method
• profit split (PS) method

Combining two or more presented transfer pricing methods is also possible.

If none of these five methods is applicable in a certain case, a taxpayer may decide to use any other method for drawing a conclusion on price in accordance with the arm’s length principle. For example, in the case of a purchase/sale of property, an independent appraiser may be engaged to value the subject of the transaction. The estimated property value may then be used as an arm’s length price.

Are Advanced Pricing Arrangements (APAs) applicable in Serbia?

APAs do not exist in Serbian transfer pricing regulation. Therefore, it is not possible to obtain approval from the tax authorities on group transfer pricing policy.

Are there any safe harbour rules in Serbia?

Safe harbour rules do not exist in Serbian transfer pricing regulation. Thus, each transaction with the related party must be analysed in detail (e.g. functional analysis, comparability analysis, benchmarking analysis, etc.).

What are the penalties in the case of non-compliance with the transfer pricing regulation in Serbia?

If a taxpayer does not prepare and file a transfer pricing report for the tax authorities, the following expenses may be expected:

• penalty for a company not filing a transfer pricing report for the tax authorities: from RSD 100,000 (roughly EUR 850) to RSD 2 million (roughly EUR 17,000)
• penalty for a responsible individual not filing a transfer pricing report for the tax authorities: from RSD 10,000 (roughly EUR 85) to RSD 100,000 (roughly EUR 850)

• additional corporate income tax based on adjustment of tax base (if the transfer pricing analysis proves that the taxpayer’s tax base is lower than the tax base in accordance with the arm’s length principle)

• interest for not paying corporate income tax until the deadline

If additional corporate income tax is higher than RSD 1 million (roughly EUR 8,500), the offence may be considered tax evasion and may lead to imprisonment for the individuals responsible.

If you would like to know more about transfer pricing regulation in Serbia, you need help to prepare a transfer pricing report or you require transfer pricing consulting services in Serbia, please contact the consulting team of WTS Serbia, the exclusive representative of WTS Global in Serbia.

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