Czech Republic: Assessing transfer prices, determining permanent establishment’s tax base

19 December 2018

The General Financial Directorate (GFD) in November 2018 published new Instruction D – 32 concerning a “binding assessment” (in other words, a binding tax ruling) of the manner by which the price agreed between related parties and the tax base of a tax non-resident relating to activities performed by a permanent establishment are determined.

Binding assessment determination

The new version of Instruction D – 32 replaces Instruction D – 333 (the prior version only concerned a binding assessment of the manner of determining transfer prices between related parties pursuant to Section 38nc of the Czech income tax law). Under a new provision in Section 38nd, beginning January 2018, it is also possible for taxpayers to apply for a binding assessment of the method under which the tax base of a tax non-resident relating to activities conducted by a permanent establishment is determined. This is further reflected in new Instruction D – 32.

Both Section 38nc and Section 38nd regulate the procedure for the tax administrator to issue a decision on the binding assessment at a general level. For taxpayers, such a decision for a binding assessment brings greater certainty as to how the tax administrator will view their method of setting transfer prices and of determining the income tax base or, potentially, tax losses.

The new version of the instruction also defines periods in respect of which requests for binding assessments can be filed.

  • Applications for binding assessments can only be filed for the tax period in which a request is submitted and for subsequent tax periods, for a maximum of three years.
  • Taxpayers cannot request a binding assessment for passed tax periods. However, if the taxpayer applies the same method of determining transfer prices and allocating profits to the permanent establishment under similar conditions in previous years and if the binding assessment issued for subsequent periods is “positive” and supports the taxpayer’s treatment, the taxpayer may assume that the tax administrator, during tax inspections, will treat it the same as under the binding assessment at issue.
  • As before, the new instruction does not regulate deadlines within which the tax administrator must issue a binding assessment decision. Typically, it takes six to eighteen (6 to 18) months, depending on the complexity of the transaction at issue.

In addition to Instruction D – 32, the GFD is preparing an update of Instruction D – 332 to reflect key changes introduced by the OECD Transfer Pricing Guidelines (2017). Other modifications could include, for example, changes to the taxpayer’s functional and risk profiles (i.e., taxpayers may have more profiles depending on their position in each separate intercompany transaction). The instruction could also:

  • Clarify benchmarking analysis rules and recommend that benchmarking analyses be performed at least every three years
  • Provide a more detailed description of the difference between an intangible asset’s legal and economic ownership
  • Include comments on the related effects on the determination of remuneration from a transfer pricing perspective

Updated Instruction D - 332 is expected to be published in the first half of 2019.


Read a December 2018 report prepared by the KPMG member firm in the Czech Republic


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