Executive Summary
General Requirements
- The arm’s length principle is codified under Section 23(7) of the Czech Income Tax Act and applies to both domestic and international transactions.
- Related parties are defined by a direct or indirect interest in capital or voting rights of at least 25% or through personal management ties.
- The General Financial Directorate issues non-binding but widely respected directives, such as D-34, which align local practices with the OECD Transfer Pricing Guidelines.
- Taxpayers bear the burden of proof to demonstrate that intercompany transactions are conducted in accordance with market conditions.
Documentation Requirements
- There is no formal legal obligation under the Income Tax Act to prepare a Master File or Local File, though they are practically required to satisfy the general burden of proof during audits.
- Taxpayers must attach a mandatory annex to their corporate income tax return that discloses detailed information regarding transactions with related parties.
- For multinational groups with consolidated revenues exceeding €750 million, Country-by-Country Reporting is mandatory under Act No. 164/2013 Coll.
- Although documentation is not filed annually, it must be produced upon request by the tax authorities, typically within a timeframe of 15 to 30 days.
Results of Non-Compliance
- While no specific penalties exist for the absence of transfer pricing documentation, failing to prove the arm’s length nature of a transaction leads to tax base adjustments.
- Adjustments successfully challenged by authorities incur a penalty of 20% of the unpaid tax or 1% of the reduced tax loss.
- Late payment interest is charged at a rate consisting of the repo rate of the Czech National Bank plus 8%.
- Non-compliance with Country-by-Country Reporting can result in disciplinary fines up to CZK 1.5 million for the reporting entity.
Country Specific Information
- The tax authority follows the “substance over form” principle and frequently recharacterizes transactions according to their true economic nature.
- A specific safe harbor for low value-added intra-group services is accepted with a mandated markup range of 3% to 7%.
- Recent audit focus has intensified regarding management fees, marketing services, and license fees, particularly back-licensing arrangements to original owners.
- Benchmarking studies are recommended to be fully renewed every three years, with an annual update of the financial data for the selected comparable set.
Compliance Table
| Document | Deadline | Language | Thresholds, Scope & Penalties |
| Local File | No statutory deadline; submitted upon request typically within 15–30 days. | Czech. | No threshold. Required for all domestic and cross-border transactions to meet the burden of proof. Penalty: 20% of unpaid tax on adjustments. |
| Master File | No statutory deadline; submitted upon request typically within 15–30 days. | Czech; English sometimes accepted but translation can be demanded. | No threshold. Replaces specific local rules by following Guidance D-334. Penalty: Potential for unfavorable discretionary tax adjustments. |
| CbC Notification | Last day of the reported fiscal year. | Czech. | Group revenue > €750M. Required for all constituent entities; only filed if changes occur from the previous year. Penalty: Fines up to CZK 600,000. |
| CbC Report | 12 months after the end of the reported fiscal year. | Czech or English. | Group revenue > €750M. Mandatory for the ultimate parent or surrogate entity. Penalty: Fines up to CZK 1.5 million. |
| CIT Return Annex | 3 to 6 months post-FY (depending on tax advisor use). | Czech. | Specific triggers. Mandatory disclosure of related-party transaction volumes. Penalty: Fine up to CZK 500,000 for non-filing. |
Disclaimer: This information is obtained from secondary sources and is included for informative purposes. It should be confirmed by a local advisor.
