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Guidance D - 258

Communication by the Ministry of Finance in respect of international standards application in taxation of transactions between associated enterprises – transfer pricing

Ministry of Finance
Department 49
Issue No: 491/1554/2004
Responsible official: Ing. Michal Roháček, tel. 257044162
Prague, January 13th, 2004

Guidance D – 258
Communication by the Ministry of Finance in respect of international standards application in taxation of transactions between associated enterprises – transfer pricing

Transfer of goods, intangible assets and services within multinational enterprises allocating their production, development, trading and other activities to various states are capturing a great share in the worldwide business. For the purposes of unification and simplification of the mentioned transfer valuation, there are principles and procedures stipulated in the Transfer Pricing Guidelines for Multinational enterprises and Tax Administrations processed in the form of OECD Fiscal Issues Committee Report applied internationally.
These principles and procedures must be applied in accordance with the valid international Double Taxation Treaties entered into by the Czech Republic and other states pursuant to valid Czech Republic law.
The issuance of this methodology guidance aims at assuring unified approach to taxation of the mentioned transfers within multinational enterprises both by the tax administration and taxpayers.
This methodology guidance has been processed with respect to the existing Czech legislation and relevant valid international conventions. It does not aim at detailed description of the whole wide matter of transfer pricing issues or at substitution or reformulating of the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (refer to item 2.3.), but it strives to deal with the application of the basic principles in the tax administration under the conditions of the Czech republic.

Note: For the purposes of simplification there are the following abbreviations and acronyms used in the text:

AIT – Act no. 586/1992 Coll., on income tax, as amended
AAT – Act no. 337/1992 Coll., on administration of taxes, as amended
OECD – Organisation for economic co-operation and development
Model Convention – OECD Model convention on avoidance of double taxation (Model Tax Convention on Income and on Capital)
Treaty – bilateral treaty on avoidance of double taxation
Guideline – Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations
MNE – multinational enterprise

Explanation of terms and other abbreviations and acronyms used in context of transfer pricing is included in following parts of this guidance, namely in Glossary, which is a part of the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations.


It is possible to state in a simplified way that for the transfer prices we can consider the “prices” applied in transactions executed between two taxpayers associated in economic and personnel way, in the terminology of Double Taxation Treaties there is a term associated enterprises used. These prices must be set up in the same level as if applied on enterprises, which are not associated in economic or personnel sense (independent enterprises). The prices determined in such way are the prices determined based on an arm’s length principle. In the Czech conditions we can say that this concerns using the “usual prices” for income tax base definition as stipulated in our tax laws.
This concerns verification of appropriateness of profit sharing by the associated enterprises arising from the transaction carried out between such associated enterprises.
An arm’s length principle is regulated in

A. Treaties when examining transactions and their valuating between associated enterprises where one is a resident of the Czech Republic and the other one of a state having a Double Taxation Treaty signed with the Czech Republic.

B. national AIT when examining transactions and their valuation between enterprises associated in economic and personnel sense, and namely under situation when

– such transactions are executed between two Czech taxpayers (residents)
– such transactions are executed between a Czech resident on one side and a resident of a state not having signed a Double Taxation Treaty with the Czech Republic on the other side

In this guidance, the matter of transfer prices is limited only to cases stated in item A as arises from the following text of this chapter.

1.1. Bilateral Double Taxation Treaties

This concerns mostly the Article 9 under most of the bilateral Double Taxation Treaties (hereinafter only “Treaties”) as well as Model Convention on Avoidance of Double Taxation issued by OECD (hereinafter only “Model Convention”):

  1. When regulating prices for taxation purposes in respect of transactions executed between associated enterprises it is necessary to respect primarily relevant provisions of the Treaties. This obligation arises from the provisions of s. 37 of AIT:
    “The provisions of the Act are to be used only if the international Treaty, the Czech Republic is bound by, does not provide for otherwise”. In this case, Double Taxation Treaties are considered as such binding treaties. For the purposes of entering into such treaties OECD has worked out the Model Convention on Avoidance of Double Taxation.
    The tax administration issues are regulated in a similar way as the provisions of s. 96 of Act no. 337/1992 Coll., on administration of taxes, as amended (hereinafter AAT) are to be followed. The obligation to prefer international treaties in general (it means also for tax purposes) arises from the wording of the Article 10 of Act no. 1/1993 Coll., Constitution of the Czech Republic, as amended: “Promulgated international treaties ratified by the Parliament and binding the Czech Republic are a part of the Czech legal order; if international treaties do not provide for otherwise, the international treaties shall be used.”
  2. The possibility to adjust tax base in transfers between associated enterprises arises from the Article 9 par. 1 of the Model Convention:
    a) an enterprise of a Contracting State participates directly or indirectly in the management, control or capital of an enterprise of the other Contracting State, or
    b) the same persons participate directly or indirectly in the management, control or
    capital of an enterprise of a Contracting State and an enterprise of the other
    Contracting State,
    and in either case conditions are made or imposed between the two enterprises in their
    commercial or financial relations which differ from those which would be made between independent enterprises, then any profits which would, but for those conditions, have accrued to one of the enterprises, but, by reason of those conditions, have not so accrued, may be included in the profits of that enterprise and taxed accordingly.“

    Letters a) and b) of this provision defines associated enterprises, following part then determines terms for the application of an arm’s length principle.
    This provision is in fact an equivalent to provision of s. 23 par. 7 of AIT, and entitles the tax administration to check and determine a tax base for associated enterprises.

1.2. National Law

An arm’s length principle is regulated in national law by s. 23 par. 7 of AIT, which:

  1. regulates and determines conditions for using the “usual” price for the purposes of income tax base definition as follows:
    „If the prices agreed between enterprises associated in economic or personnel sense or between otherwise associated enterprises differ from prices which would be agreed effected between independent enterprises in usual business relations under the same or similar conditions, and if the difference is not reasoned in a satisfactory manner, the tax administrator shall adjust the taxpayer’s tax base applying the difference…
  2. determines enterprises associated in economic or personnel sense:

    Legal status before 31.12.2003:

    „Enterprises associated in economic or personnel sense mean the situation when one person/enterprise is engaged directly or indirectly in management, control or assets of other enterprise, or if there are the same legal or natural persons involved directly or indirectly in management, control or assets of both persons/enterprises or related natural person. Engagement in control or assets means the possession of more than 25% share in registered capital or right to vote share.“

    National law expands the range of persons in respect of whom the tax authority may adjust their tax base using “usual prices” concept also to
    • persons associated differently: „Persons associated differently mean persons establishing business relations mainly for the purposes of tax base reduction or tax loss increase.“
    • persons next of kin.

Nevertheless, under this provision such tax base adjustment with regard to transactions between persons associated differently or persons next of kin may be applied only on relations between the persons who are the residents of the Czech Republic or residents of a state the Czech Republic has entered into Treaty with.

Legal status since 1.1.2004:
With the effect from 1.1.2004 the AIT has been amended besides other in s. 23 par. 7 The term Persons associated in economic or personnel or different way has been replaced by the term associated persons (entities). Such definition, in fact, complies with the wording of the law valid till 31.12.2003, although it is more precise and transparent:
„For the purposes of this Act, the term ´associated persons´ means

  1. capitally associated persons, while
    1. if one person is directly involved in capital or right to vote of another person, or if one person is directly involved in capital or right to vote of more persons, and person’s share represents at least 25% of registered capital or 25% of right to vote, all the persons concerned are the capital associated persons,
    2. if one person is indirectly involved in capital or right to vote of another person, or if one person is directly or indirectly involved in capital or right to vote of more persons, and person’s share represents at least 25% of registered capital or 25% of right to vote, all the persons concerned are the capital associated persons,
  2. persons associated in a different way, namely
    1. when one person in engaged in management or control of another person,
    2. when the same persons or persons next of kin are engaged in management or control of other persons, these other persons are associated persons
    3. controlling and controlled persons, and also persons controlled by the same controlling person
    4. persons next of kin 20c)
    5. persons which established legal relation mainly for the purpose of tax base reduction or tax loss increase

The share in registered capital or share in right to vote in taxable period or period in respect of which the tax return is being filed is determined as arithmetic average of monthly statuses.” Under this wording of the law, the application of “usual price” against the Treaties is used in case of persons under letter b) of item 4. and 5. on which the same limitation of application as for persons associated in a different way and persons next of kin applies under the wording of AIT valid before 31.12.2003.

The limit of 25% share in registered capital or right to vote shall be applied under existing as well as new wording of AIT also when assessing whether the companies concerned are the associated enterprises under the Treaties.

1.3. Transfer Pricing Guidelines

When applying the arm’s length principle in the sense of the Article 9 of Treaties in determination of tax base, the definition of prices for tax purposes is perceived as the most difficult problem in transfers of goods, intangible assets and services between associated enterprises. For this purpose, the OECD Committee on Fiscal Affairs processed the report “Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations” (hereinafter only Guidelines) in 1995. These Guidelines were reviewed down to chapter VIII and expanded by “Guidelines for monitoring of procedures used in application of OECD Transfer Pricing Guidelines and involvement of business community in the process” and “Guidelines for conducting Advance Pricing Arrangements under the Mutual Agreement Procedure“ (MAP APAs)
The Guidelines were published in the Czech Republic in Financial Newsletter no. 10 on October 6, 1997 /Finanční zpravodaj č. 10 ze 6.10.1997/ (chapters I-VII) and Financial Newsletter no. 6 on June 30, 1999 /Finanční zpravodaj č. 6 ze 30.6.1999/ (chapter VIII and following guidelines).

Note: The mentioned guidelines may be found also on internet site of the Czech Tax Administration

The Guideline on transfer pricing aims at unification of procedures applied by the tax administration and associated enterprises when solving transfer pricing cases, aims at minimising conflicts between them and avoidance of costly court litigations as well as assistance in application of par. 2 of Article 9 of Model Convention – adjustment of profit for tax purposes (refer to item 6).

1.4. Implementation of the Guidelines to the Czech Legislation

The principles of the Guidelines have not been directly implemented in tax laws nor there is any direct reference to them in the Czech tax laws. Nevertheless its binding effect in interpretation of Treaties arises from the fact that the Czech Republic is a signatory to multilateral Vienna Convention on Law of Contracts (published in Collection of Acts under the number 15/1988 Coll. as Notice by the Minister of Foreign Affairs on Vienna Convention on Law of Contracts dated on September 4, 1987). Article 31 of the Convention states general rules for its interpretation.
The Guidelines of Transfer Pricing correspond in their character and way of adoption and implementation to the documents stated in Article 31 of the Vienna Convention, namely par. 2, as the OECD member states (and the Czech Republic has joined them in 1995) have reached consensus in this matter. In this respect the Guidelines may be used for the tax purposes in the same way as other OECD member states use them – as interpretation rule for the Article 9 of Treaties.
Although from the view of national tax law the Guidelines are not legally binding documents, the basic principles (with exceptions arising directly from national tax law) are applicable also for transactions between enterprises associated in economic and personnel sense in the frame of the Czech Republic, as an arm’s length principle is determined both in the Guidelines and AIT.

1.5. Subject of examination under the OECD Guidelines

The above stated definitions show that under the Guideline transactions and their valuation as well as allocation of profit brought by them between associated enterprises involved in the transactions concerned may be subjected to the examination. As the Guidelines are understood as an interpretation rule for the Article 9 of the Model Convention (i.e. bilateral Treaties) it always must concern the relations between “a company in one State and the company in another State”, in other words between domestic and foreign taxpayers.

Transactions between associated enterprises are also denominated as controlled transactions or dependant transactions. In the same way the prices of these transactions are denominated as controlled or dependant ones.

1. 6. Associated Enterprises

Definitions stated in the Article 9 of the Model Convention and in s. 23 par. 7 of AIT show that the term ´associated enterprises´ (associated in economic or personnel sense) means the situation when a enterprise of one State is engaged directly or indirectly in management, control or assets of the other State enterprise or if there are the same persons (same legal or natural persons) engaged directly or indirectly in management, control or assets of both enterprises in both States.

What is meant by share in control or assets of the company is precisely defined in s.23, par. 7 of AIT (more than 25% share in registered capital or right to vote). Treaties do not contain this definition, and that is why the national law is to be applied.
When assessing whether one person (one enterprise) is involved in the management of the other enterprise, it is necessary to refer to general regulations, i.e. Commercial Code. As management one can understand acting on behalf of the enterprise, i.e. acts performed by authorised representatives of a body corporate, e.g. corporate agents (limited liability companies) or partners (joint-stock companies, cooperatives), general partners (limited partnership company) etc. However, members of Supervisory Board performing controlling activities being control/checking body cannot be considered as the persons having share in the management of the enterprise. It is always necessary to evaluate particular activity performed by each person entitled to act on behalf of the enterprise, namely whether the person may influence decision taking or whether the person is directly involved in the decision-making process.

1.7. Other provisions including an arm’s length principle

Beyond the above mentioned basic definitions (s. 23 par. 7 of AIT, Article 9 of Treaties) there are both in the Czech national legislation and international conventions other specific provisions included containing principles regarding taxation of transactions effected between persons of special relationship:

  • AIT:
    • s. 23, par. 7 of AIT – interests on loans: the „usual“ price, i.e. price which would be effected between independent enterprises, means the interest in amount of 140% of the Czech National Bank discount interest rate applied in the period when the parties entered into contract,
    • s. 23, par. 11 of AIT – an arm’s length principle for the purposes of permanent establishment tax base definition,
    • s. 22, par. 1, letter g) item 3. of AIT – „reclassification“ of differences between transfer price arranged and price usual in the market under s. 23 par. 7 of AIT and interests non-deductible as expenditure (cost) under s. 25 par. 1 letter w) and their expression as profit shares,
    • s. 25, par. 1, letter w) of AIT – thin capitalisation (time limitation under par. 2).
  • As of the day of the Czech Republic’s accession to EU, the provisions of AIT amendment no. 438/2003 come into effect implementing the rules for taxation in respect of some transactions between associated persons within EU member countries:
    • s. 19, par. 1, letters zf) - zl) {with the exception of letter zk) - comes into effect on 1.1.2011} – implementation of Council Directive 90/435/EEC of 23.7.1990 on the common system of taxation applicable in the case of parent enterprises and subsidiaries of different Member States and a Council Directive 2003/49/EC of 3.6.2003 on a common system of taxation applicable to interest and royalty payments made between associated enterprises of different Member States
    • s. 23a - § 23d – implementation of Council Directive 90/434/EEC of 23.7.1990 on the common system of taxation applicable to mergers, divisions, transfers of assets and exchanges of shares concerning companies of different Member States
  • Double Taxation Avoidance Conventions:
    • Article 7 of the Model Convention – Profit of enterprises: pursuant to this Article, the profit of permanent establishments (determined in Article 5 of the Treaties) is allocated under the similar an arm’s length principle with a certain modification arising from specific position of the permanent establishment against the company executing its activities through the permanent establishment.
    • Article 10, par. 3 of the Model Convention – definition of ´dividend´ term (in relation to „reclassification“ under s. 22, par. 1, letter g) item 3.
    • Article 11 of the Model Convention – Interests, par. 6
    • Article 12 of the Model Convention – Royalties, par. 4
    • Article 23 of the Model Convention – Methods for elimination of double taxation

These provisions are rather specific, and have their own solutions rather different from classical application of transfer pricing issues, and this methodology guidance does not treat them further on.


When examining whether the transfer prices are in compliance with the arm’s length principle, the following principle is followed:

  • members of multinational groups are assessed as if they were separate and independent enterprises (i.e. as independent taxpayers);
  • the attention focuses on nature of transactions between them (e.g. what they are oriented on, what they are applied to etc.).
    Comparison between terms and conditions of controlled transactions and those of independent transactions is the basis for an arm’s length principle application, i.e. performance of due comparability analysis. While:
    • controlled transaction means any business relation (transactions, transfers) between associated enterprises;
    • independent transaction means business relation between independent enterprises.

2.1. Comparability analysis

To perform comparability analysis it is necessary to identify comparable independent transactions to the controlled transactions which are subject to tax examination or tax administration procedure. In order the transactions or the conditions under which the transaction is effected could be considered as comparable, one of the following criteria must be maintained:

  1. none of the differences between the controlled and comparable transaction should influence a condition (factor) being assessed, i.e. possible differences identified may be considered as insignificant and unimportant, or
  2. there is a possibility to implement relevant adjustments so that the influence of the identified differences may be eliminated.

However, when applying and auditing the transfer prices, it is only rarely possible to find fully comparable transactions in respect of conditions under which these transactions are performed. In most cases it is necessary to make adjustments (elimination) of differences influencing pricing pursuant to item b).

2.2. Factors determining comparability

When undertaking comparability analysis, the following 5 factors have to be taken into account:

2.2.1. Possession of assets and services

  • in respect of things (e.g. goods, real estates etc.), their physical features, quality, reliability, market availability, market offer volumes must be assessed;
  • in respect of the property of intangible nature, it is necessary to concentrate attention on the form of transaction (e.g. whether it concerns licensing or sale), property type (e.g. patent, trade mark,
  • kow-how), duration and level of protection, expected profit from intangible property use/enjoyment;
  • in respect of services provided, the nature and scope of the services must be considered.

2.2.2. Functions performed

So called functional analysis means identification and comparison of activities and responsibility level (risks) taken by each associated enterprise in comparison to independent enterprises.
Companies may be charged with execution of different functions within the multinational group, and independent enterprises may also carry out different functions. This concerns, for instance, production activities, research and development, distribution, advertising, financing, management functions etc.
Similarly, each enterprise may undertake different risk level in its activities.

2.2.3 Contractual terms and conditions

Based on the contractual terms and conditions, it is possible to find out how the responsibilities and risks or revenues of transactions executes should be allocated (refer also to the previous point). Contractual terms and conditions may be also identified in correspondence or other documents

2.2.4. Economic circumstances

Comparing economic circumstances means comparison of market conditions, such as geographic location, market size, competition level, availability of similar products, supply and demand level, purchasing power, production costs, transportation costs, time factor (seasonality, implementation of novelties etc.), market regulation etc.

2.2.5. Business strategy

As a typical example of business strategy, an effort to penetrate into new markets may be mentioned, as the process may be significantly twisted due to the higher costs related to market launch of the product while applying lower final selling price on the product.

2.3. Other factors

When assessing whether the transfer prices have been set up in accordance with the at arm’s length principle, other facts must be also taken into account as, for instance:

  • ascertainment that the declared transaction was actually executed,
  • ascertainment that the controlled transaction is not closely related to other one (so called combined transactions) – in some cases it is impossible to assess individual transactions separately,
  • ascertainment that there are no mutual compensations included in contractual terms, for instance there are services charged against the delivery of goods and the price of services reduces the price of goods,
  • comparison of data for several taxable periods (e.g. development of profits in the recent years),
  • comparison of profits and losses within the whole group of associated enterprises (e.g. if the controlled entity reports losses whether the other group members are also reporting losses?).

2.4. Price range

When comparing and evaluating circumstances influencing the level of transfer prices we shall not always use absolute values, opposite – we shall nearly always use certain price margin / range of the prices of comparable products or services.


Based on the comparability and functional analysis executed, one may proceed to identification of transfer price level. For the mentioned purposes, the Guidelines recommend to use 5 basic methods of transfer price identification and/or combination of the methods.

The recommended methods may be dividend into two basic groups:

  • traditional transactional methods
  • transactional profit methods

3.1. Traditional transactional methods:

These methods are based on comparison between independent enterprises and prices used in controlled transactions, possibly based on gross margin comparison.

3.1.1. Comparable uncontrolled price method – CUP

The method compares prices used in controlled transaction with the prices of comparable uncontrolled transaction under comparable conditions.
This method is the simplest one in respect of usability although it requires great degree of comparability.
[So: Controlled price = independent price]
Used: best if there is a fully comparable (identical) product.

Comparable uncontrolled price method – CUP

3.1.2. Resale price method – RPM

The method compares the price for which the product purchased from the associated enterprise (supplier) is resold to an independent enterprise (final customer). This independent price is then reduced by the gross margin (gross surcharge) of the dependant seller.
[So: Controlled (transfer) price = independent price – surcharge charged by dependant seller]
Used: where the seller does not add value to the product sold, e.g. distributor

Resale price method – RPM

3.1.3. Cost plus method – cost+

The method is based on supplier’s costs in relation to property or services provided to an associated company in controlled transaction. These costs are then complemented with the relevant surcharge charged by the dependant supplier.
[So: Controlled (transfer) price = independent price + surcharge by dependant supplier]
Used: Where the dependant supplier (producer) does not contribute significantly to the value of products sold, e.g. in sale of semi-finished products, when entering purchasing or sub-delivery agreements etc.

Cost plus method – cost+

3.1.4. Summary for the traditional methods

Traditional transactional methods are always based on knowledge of the price, or knowledge of trading margin. When comparing the mentioned indicators, it is always necessary to „clean“ the indicators off the effects which may influence the level of price or surcharge.

3.2. Transactional profit methods

In profit transaction method profits generated by the transactions between the associated enterprises are examined.

3.2.1. Profit split method

The method proceeds from profit generated by the associated enterprises from the controlled transactions. The profit is then allocated between the associated enterprises involved in the controlled transaction based on contribution analysis (functional analysis). It means the total profit brought by the transaction is split in accordance with the share of each enterprise in the total profit.
In order to identify appropriateness of the profit sharing, we have to find enterprises with functions comparable to those of the associated enterprises involved in the transaction. Simply said, according to the profitability rate identified at those comparable independent enterprise we shall determine what profit should be obtained by the associated enterprise.
Used: where individual transactions are so much mutually associated that they cannot be assessed individually.

3.2.2. Transactional net margin method – TNMM

This method examines pure profit margin in relation to respective base, i.e. compares financial indicators related to the controlled transaction with the financial indicators related to a comparable independent transaction (e.g. profitability, cost-effectiveness etc.)
TNMM works in the similar way as the resale price method or cost plus method.


3.3. Method selection

The selection of relevant method depends on analysis carried out, but it is impossible to determine strictly which method should be used. The appropriateness of each method must be assessed, namely in relation to information about comparable transactions available as well as in relation to the necessity of its adjusting for the purposes of correct transfer pricing identification. In this respect it is recommended to proceed from the simplest to the most complicated method (i.e. from CUP to TNMM) in the following sequence:

Method selection

Due to simplicity of use and greater probability of obtaining information about comparable conditions, it would be reasonable to prefer traditional transactional methods, i.e. CUP, COST+ and RPM.
If sufficient information is not available and you cannot use any of the traditional transactional methods, you will turn to profit methods, namely to PROFIT SPLIT, or TNMM.


In the Czech tax law there is no specific provision imposing an obligation on a taxpayer to present documentation on transfer pricing, although s. 31 of AAT – Evidencing, and namely par. 9, stipulates: “Taxpayer shall present evidences of all facts he is obligated to state in the tax return, reporting and accounting documents, or required by the tax administrator in the course of tax assessment procedure”. That means that the burden of proof lies (mostly) on the taxpayer.

Pursuant to the provision of AAT mentioned above, the tax administrator may require from the taxpayer to provide evidence and plausible reasoning of the transfer pricing used in accordance with an arm’s length principle.

If the tax administration requires presenting of transfer pricing documentation, provisions of AAT are followed in the frame of tax proceedings.

4.1. Documentation content

The presented documentation should contain data necessary for the execution of due functional and comparability analysis as well as for reasoning of the method used for calculation of the transfer price.
Generally, the documentation should contain the following groups of data:

  1. Information concerning the controlled transaction itself, i.e. data about
    • nature and conditions of the transaction,
    • economic/financial conditions and assets included in the transaction,
    • flows of assets or services subjected to the controlled transaction between the associated enterprises,
    • changes in business terms or existing agreements and arrangements.
  2. Information concerning each associated company engaged in the controlled transaction, i.e.
    • business overview,
    • organisation structure,
    • ownership relations within MNE group,
    • turnover volumes and operational results of several recent years preceding the transaction,
    • taxpayer’s level of transactions with foreign associated enterprises (e.g. level of stock turnover, provision of services, tangible property lease, utilisation and transfers of intangible property, interests on loans).
  3. Information concerning prices, business strategy and specific circumstances, i.e.
    • factors which effected the taxpayers and MNE group pricing or pricing policy (e.g. that there is a surcharge added to the production costs or that there are costs deducted from selling prices if foreign associated enterprises do not undertake wholesale activities); explanation of transfer pricing method selection; information may differ according to selected method,
    • compensation transactions (e.g. if the seller supplies goods for lower prices as the buyer provides him with services free of charge; if there is a higher licensing fee set up to compensate intentionally lower price; if there are two licensing agreements compensating each other),
    • strategy, type of business (e.g. entry to a market, market share increase in the existing market, fighting off increasing competition),
    • functions performed (production, assembly, sale, promotion and marketing services, wholesale, transportation, warehousing etc.),
    • risks assumed (risks associated with the change of costs, prices or stock; risks related to research and development, financial risks etc.),
    • financial information (documents explaining profit and loss in the scope necessary for valuation of transfer pricing policy adequacy within MNE group), etc.

4.2. Recording duty

In reasoned cases, based on tax administrator’s findings, the tax authority may impose a recording duty under s. 39 of AAT on the taxpayer (e.g. if the associated enterprise – the taxpayer does not provide due transfer pricing documentation in the course of tax proceedings or if the hitherto proceedings indicate that important facts may be kept hidden).


s. 23 par. 7 of AIT and the Article 9 par. 1 of the Model Convention entitle tax administration bodies to determine a new tax base based on finding that there were prices different from “usual prices” in the transactions between associated enterprises. This ex parte officii one-sided act may lead to double taxation.

5.1. Article 9 par. 2 of the Model Convention

As the name of bilateral tax treaties already shows (Double Taxation and Tax Fraud Avoidance Treaty), they follow the purpose of charging taxes on possible tax frauds but also avoiding double taxation, which may occur in charging taxes on international transactions.
In order to avoid double taxation, when taxing profits generated by transactions between the associated enterprises under the Article 9 – Associated Enterprises of the Model Convention, there is also par. 2 applied which says: “Where a Contracting State includes in the profits of an enterprise of that State — and taxes accordingly — profits on which an enterprise of the other Contracting State has been charged to tax in that other State and the profits so included are profits which would have accrued to the enterprise of the first-mentioned State if the conditions made between the two enterprises had been those which would have been made between independent enterprises, then that other State shall make an appropriate adjustment to the amount of the tax charged therein on those profits.
Under this procedure, in fact, one State relinquishes imposing taxes on part of multinational enterprise profit in the benefit of the other state. The similar situation as in the mentioned model case may occur also in the opposite direction, and foreign tax administration may require from the Czech tax administration reduction of the Czech company’s tax base.
However, as there are cases of intentional transfers of profits (tax base reduction) towards the tax jurisdiction with lower tax rates despite of the fact that the profit was clearly generated in the Czech Republic, in OECD Committee for Fiscal Affairs the Czech Republic has reserved the right not to include par. 2 of the Model Convention Article 9 into its bilateral treaties or to expand par. 2 with another paragraph limiting application of paragraph 2 (consequent profit adjustments) only to unintentional cases.
As each Treaty has been entered into in a different period, under different circumstances, it is always necessary to refer to particular bilateral Treaty whether there is par. 2 or 3 of the Model Convention Article 9 included.

5.2. Article 25 of the Model Conventions

Following the purpose of double taxation avoidance, the Treaties contain also the Article 25 of the Model Convention – Mutual Agreement Procedure. This article concerns implementation of the whole treaty, not only taxation of the associated enterprises. There is the main principle that if a person considers to be taxed not in accordance with the provisions of the valid Treaty, he may present his case to the competent authority (tax authority).
The competent authority shall endeavour, if the objection appears to it to be justified and if it is not itself able to arrive at a satisfactory solution, to resolve the case by mutual agreement with the respective competent authority of the other Contracting State.

The competent authorities of the Contracting States may also initiate negotiations to resolve by mutual agreement any difficulties or doubts arising as to the interpretation or application of the Treaties or for the elimination of double taxation in cases not provided for in the Convention.
The Article 25 of the Model Convention may be also applied irrespective of the remedies provided by the domestic tax law, e.g. there may be simultaneously appeal procedure running and the case may be resolved under the Article 25.
In respect of the transfer pricing issues, the Model Convention Article 25 is applied in associated enterprises taxation. However its application is so specific and complex that there is no space for more detailed analysis of its application.

5.3. Arbitration Convention

EU member states adopted „Convention on elimination of double taxation in connection with the adjustment of profits of associated enterprises“, 90/436/EEC, so called Arbitration Convention.
This Convention aims at resolution of disputes between two States that have not been resolved through bilateral negotiations of the States within defined terms. It applies only to disputes related to transfer pricing issues and possible double taxation arising from compensating adjustment for the associated enterprise in one of the States and non acceptance of the adjustment by the other State.
In such cases the States are obligated to set up an advisory (arbitration) commission comprised of representatives of the authorities concerned and independent persons, resident of the States bound by the Arbitration Convention. The commission is obligated to draw in a determined term its final position which shall serve as the basis for final agreement to be reached by the respective authorities of the States.
At present this Convention is not applied due to missing ratification of some related documents by several member states.
In connection with EU expansion by new member states in 2004, the Czech Republic has been also asked to join the Arbitration Convention and to ratify it as soon as possible.


Transfer Pricing Guidelines besides other provide for the possibility to effect advanced pricing agreements as the instrument eliminating disputes between tax administration and taxpayers in respect of transfer pricing application.
It is a matter of arrangement between the taxpayer and tax administration concerning the prices and conditions for transactions between associated enterprises still before their delivery.

Under the valid Czech tax laws application of such arrangements is impossible yet!


This methodology guidance is not a closed document. It will be continuously substituted with new wording reflecting both changes in legislation and newest knowledge and experience concerning transfer pricing issues application.