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Guidance D - 292

Communication by the Ministry of Finance in respect of s. 38nc of Act no. 586/1992 Coll., on income taxes – binding consideration over the transfer pricing policy used in related party transactions

Ministry of Finance
Department  39
Ref. no.: 39/116 680/2005-393 and 39/105 193/2007-393
Responsible officials:
Ing. Michal Roháček, tel. 25704 4162
Mgr. Lucie Vojáčková, tel. 25704 4157
Ing. Markéta Sedláková, tel. 25704 4194   

Prague, January 25, 2008

Guidance D – 292
as amended, applicable as of January 1, 2008

Communication by the Ministry of Finance in respect of s. 38nc of
Act no. 586/1992 Coll., on income taxes – Binding consideration over the transfer pricing policy used in related party transactions

In the frame of amending  the Act no. 586/1992 Coll., on income taxes, as amended (AIT), there has been a concept of „binding consideration over the transfer pricing policy  used in related party transactions“ (hereinafter only as “binding consideration”) implemented in the AIT with the effect from January 1, 2006 which means the implementation of so called advance pricing agreements  into the Czech tax law.

S. 38nc of the AIT is the extension to the s. 34b of the Act no. 337/1992 Coll., on the administration of taxes, as amended (hereinafter only as “AAT”) stipulating a procedure regulating an issuance of binding consideration in general, and determining the application of the binding consideration in cases of so called transfer pricing (refer also to OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations – hereinafter only as “OECD Guidelines”). The binding consideration takes over principles of advance pricing agreements in the sense of OECD Guidelines (paragraphs 4.124 - 4.166) and other international standards (hereinafter only as “APA”), and adjusts them to the conditions of the Czech tax law. The binding consideration  provides the taxpayers with the possibility to verify in advance whether the method for setting up the transfer price  (transfer pricing method)  is complying with the arm’s length principle for the purposes of tax base definition as provided for in Article 9 – Associated enterprises  of the Double Taxation  Treaty, as well as in s. 23 par. 7 of AIT.

Upon a request by a taxpayer, a tax authority shall decide whether the taxpayer selected transfer pricing method leading to appropriate allocation of incomes and expenditures between  associated enterprises. Such consideration shall mean a certain degree of certainty for the taxpayer in respect of the way, how the tax authority assesses the transfer pricing method  by the taxpayers for the purposes of tax base definition. If in the period for which the binding consideration  was issued the taxpayer meets all the conditions based on which the tax authority took the decision, and if the facts and circumstances effecting  the transfer pricing method  do not change in principle, the tax authority shall consider the prices determined in this way as a usual prices under s. 23 par. 7 of AIT during a tax audit or other way of evidence collection and tax assessment.

When applying this provision the tax authority shall follow mostly  the procedures recommended by the OECD Guidelines, and shall also take into account the results of APA related issues discussions in EU working bodies, namely  EU Joint Transfer Pricing Forum.


For what kind of transactions

The procedure under s. 38nc of AIT in further reference to s. 34 of AAT shall be used in cases when the taxpayer effects prices in transactions with persons related to him (hereinafter just as „taxpayer“) by course of s. 23 par. 7 of AIT.

In order to increase his legal certainty, the taxpayer may apply for the assessment of the transfer pricing method he proposes, namely for the cases which are being brought into effect in the current taxable period or will be brought into effect in future. It is impossible to apply for the binding consideration concerning the transactions that have already influenced the level of tax liability (tax base or tax loss) for the taxable period which already was subject to  obligation to file a tax return.

If the transaction has existed already for several years, it is possible to apply for the binding consideration only for the year when application is filed and the following years.   If the taxpayer applied the same transfer pricing policy already in the past, in case of the positive consideration he may suppose that despite of the lack of valid binding consideration applicable on the previous periods the tax authority will apply the same procedure as the one applied in the binding consideration when assessing the transfer price during the tax audit covering  previous periods, and if the terms are equal he will come to the same deliberations.

Who files the application

The application may be filed by the taxpayer, to whom the binding consideration shall apply, i.e. the one who stipulates the price concerned . 

If there is a legal entity, which has not been established yet, engaged in the assessed transaction, the application may be filed by another entity/person, e.g. the legal entity founder or a  representative authorized by him under s. 9 and 10 of AAT. There is the condition that the legal entity being established must be identified in a clear way, i.e. its name, legal form, registered office, place of business, position in the group’s organisational structure, and business activity description must be stated.

Where the application should be filed

The application for the binding consideration shall be filed by the taxpayer to his local jurisdiction tax authority , i.e. to his local Tax Office. When filing the application on behalf of the legal entity the establishment of which is being planned, the application shall be filed to the tax authority that should have the local jurisdiction over the legal entity after its establishment.

Procedure exercised by the tax administration over the transfer pricing policy

The tax administration assessing the transfer pricing method assumes that the data stated by the taxpayer are full and right. It is not a duty of the tax authority to verify all the financial indicators, actual level of costs and revenues, actual volume of performance, product or service parameters etc. The tax authority shall check comparables, and shall assess whether the transfer pricing proposed by the taxpayer is complying with the at arm’s length principle.

If later on, in the course of tax audit, local investigation or other way of evidence obtaining, the tax authority finds out that the stated circumstances do not correspond to information based on which the binding consideration was issued, the decision on the binding consideration shall be cancelled under the s. 34b par. 5 of AAT.

When issuing the binding consideration, the tax authority shall proceed from the transfer pricing method selected by the taxpayer. If the taxpayer provides sufficient reasoning for his selection of the particular transfer pricing method, the tax authority shall consider that method  as the appropriate one for  the binding consideration.

When assessing the application, the tax authority uses the procedures for verification of transfer prices in case of the tax base and tax assessment correctness examination (refer also to the Ministry of Finance Guidance D-258 – Communication by the Ministry of Finance in respect of international standards application in taxation of transactions between associated companies – transfer pricing).

The tax authority is entitled to review all information necessary for the verification of the transfer pricing appropriateness, namely using the procedures stipulated in by AAT and/or in the international co-operation documentation (Act no. 253/2000 Coll., on international assistance in tax administration, article Exchange of Information in the frame of Double Taxation Treaties).

Issuing of consideration

The relevant tax authority   takes the decision in respect of the application for binding consideration (s. 38nc par. 3 AIT).

The tax administration is not bound by the law to issue the consideration in a particular term. The relevant tax authority shall issue the consideration without undue delay as it is not acceptable for the tax administration to prolong the term for the issuance of decision due to  failure to act. The term may be prolonged due to the procedures to be undertaken by the tax authority in order to investigate  the terms and circumstances necessary for the issuance of the consideration.

Beyond the significant particulars of the consideration under s. 32 par. 2 of AAT, the consideration  has to contain also the particulars under s. 34b par. 2 of AAT: 

a. data based on which the decision has been taken, that means that the list of data under s. 38nc par. 2 of AIT must be an inseparable part of the consideration, or reference to them (e.g. the decision has been taken based on the documentation received by the tax office in … as stipulated in the protocol of oral hearing no.  … dated on …)
b. reasoning of the consideration,
c. time and subject-matter scope (mainly stipulation of the taxable periods for which  the consideration  has been issued),
d. advice of appeal

Consideration effectiveness

Under s. 34b par. 4 AAT in the wording applicable as of January 1, 2008, the consideration is effective for definition of tax obligation by the tax authority assessing the tax obligation of the taxpayer upon whose application and in respect of whom the consideration  has been issued. The consideration is effective only if it was issued on the grounds of data identical with the actual status of the matter in the period when the decision of the tax obligation is issued.

Other stakeholders (i.e. other parties engaged in the assessed transaction ) as well as the other tax authorities concerned (having the jurisdiction over persons engaged) are to be notified of the consideration.

If the parties involved are the entities stipulated in s. 2 par. 3 and s. 17 par. 4 of AIT that are not tax liable for the incomes arising of resources on the territory of the Czech Republic, and if the parties are residents of a state having a Double Taxation Treaty signed with the Czech Republic, and if the Treaty allows the exchange of information about taxable entities, then the consideration is sent to the relevant tax office of the contracting state in the form of spontaneous exchange of information, as well as to the party involved. (The mentioned procedure shall not be applied if there has been a process of bilateral APA already initiated based on article 25 of the Double Taxation  Treaty.)

The binding consideration comes into effect for the taxable periods stated in the consideration and cannot be applied after the period of 3 years from the end of the calendar year when the consideration came into legal effect.

The tax authority may cancel the consideration only upon the request filed by the taxpayer (refer to s. 34b par. 7 of AAT in the wording applicable as of January 1, 2008). The binding consideration  may not be used if there are the evidences that it was issued on the grounds of inaccurate, incomplete or false information provided by the taxpayer.

When applying for the cancellation of the binding consideration, the taxpayer may apply for the issuance of the new consideration in respect of the transaction concerned (refer to s. 34b par.5 of AAT).

The tax authority may verify the data based on which the binding consideration has been issued in accordance will the procedures under AAT, including the international verification. If the tax authority learns that the circumstances based on which the decision had been issued changed or were not met in the period concerned, he shall cancel the binding consideration  and/or shall determine the impact of the fact on the level of taxation.


The taxpayer shall present the application in an official language under s. 3 of AAT (Czech or Slovak).

The application must contain the data listed in s. 38nc par. 2 of AIT. When filing relevant documentation (especially under letter f) of the quoted provision), the taxpayer must demonstrate all the facts effecting transfer pricing method being assessed. The tax authority is entitled to ask for explanations and complementation of the application by course of s. 2 par. 9 of AAT.

In respect of the scope of relevant documentation, the Ministry of Finance has issued the Guidance of D type (D-293,Communication by the Ministry of Finance in respect of the scope of transfer pricing documentation). The principles stated in this Communication arise mainly from the Code of Conduct on Transfer Pricing Documentation for Associated Enterprises in the EU adopted by the European Commission in coherence with the conclusions of EU Transfer Pricing Forum and OECD Transfer Pricing Guidelines.

The taxpayer shall document the facts which could have significant influence on the assessed pricing in the application, and namely:

  • information concerning the group (possibly Masterfile) – description of business activities, complete ownership and organisational structure of the whole group, information on associated enterprises engaged in transactions including an overview of financial results of particular associated enterprises, allocation of functions within the group, allocation of risks, overview of intangible property ownership (licences, patents, know-how etc.) and licensing fees flow, overview of the transfer pricing policy implemented, list of cost contribution arrangements concluded, overview of advance pricing agreements entered into by the associated enterprises (binding consideration issued), commitment of the company to submit other evidences in reasonable time if the presented information about the group is insufficient etc. If it is expected that some of the above mentioned facts would be changed in close future, the changes should be also stated together with their reasoning.
  • information concerning the company – precise description of business activities, complete ownership and organisational structure, financial results of previous years and corresponding financial indicators, strategies adopted etc.
  • information concerning the transaction – precise description of subject of the transaction (i.e. precise description of goods and services traded), financial and trading terms, all relevant agreements and contracts entered into by the enterprises concerned, volume of the transaction, functions and risks associated to the transaction concerned etc. In case of intangible performance (management and marketing services, consultancy etc.), it is necessary to describe characteristics of the services provided in a sufficient way, to identify purpose of the services and expected benefits arising from them in more detailed way.
  • information concerning other circumstances effecting the transaction – company’s marketing strategy, specific economic conditions of the market, legislation specifics etc.
  • information concerning transfer pricing methods used – an explanation about the selection and application of the transfer pricing method, explanations why the particular way of pricing has been selected, information concerning comparable transactions (internal ones within the group and/or external ones between two comparable independent enterprises), comparability analysis under par. 1.15 – 1.35 of OECD Guidelines.


Administrative charges

The applicant is obliged to pay the administrative charge in amount of CZK 10 000 under the Annex to Act on Administrative Charges (AAC), Table of Charges, part I, item 1 (1) (v), and namely when filing the application to the tax authority taking the decision of tax obligations of the taxpayer, i.e. to the respective Tax Office.  Under s. 11 AAC – Temporary Provisions, the mentioned procedure shall be applied to applications for binding consideration filed on and after January 1, 2008; In case of applications filed before December 31st  2008, including, the hitherto system of fee payment shall be applied, i.e. CZK 50 000 when the consideration is issued.


Under s. 34 par. 3 of AAT in the wording valid as of January 1 2008, an appeal against the binding consideration  is not admissible.