Recent Court Decision – Compensation Due to Influence of Parent Company

This case is another example of case law from Czech Republic, which elaborates on the frequent use of the approach by the tax administration of deeming notional (hypothetical) a transaction between a taxpayer and its controlling shareholder. In this particular case, the Czech entity taxpayer was selling automotive parts to both related and unrelated parties but for a period over 12 years generated no taxable profits and was in a position of accumulated loss. The tax administration disagreed with the functional profile analysis, in particular with the risk control outcomes and argued that the key entrepreneurial risks had been under control of the shareholder. As a consequence, the tax administration deemed notional the transaction that required compensation of the loss of the Czech entity. The tax assessment was performed on the basis of the TNMM. The taxpayer challenged this approach but the regional court held in favour of the tax administration.