Groundbreaking decision of the Supreme Administrative Court - investment incentives

23. 11. 2020

On November 9, 2020, our article on the groundbreaking decision of the Supreme Administrative Court in the matter of the client represented by our office was published on website. This decision will have a positive impact, especially for entrepreneurs receiving government aid in the form of an investment incentive.

Especially those entrepreneurs who receive a tax allowance due to an investment incentive and the tax office questioned the transfer pricing setting during a tax audit, should pay attention to our article.

You can find our article under the following link

As the article is in Czech only, we are summarizing it for you below. For any additional questions, please contact our colleagues.

The amendment to the Income Tax Act with effect from 1 May 2015 introduced a relief of the sanction for entrepreneurs who breached the special conditions for drawing investment incentives due to their transfer pricing setting being in conflict with the legislation. This special condition applies for group members who sell or buy services and products within the group.

If the transfer pricing setting violated the legal regulations in such way that the entrepreneur artificially increased the tax base and thus drew a higher tax rebate, the group member breached the special conditions for investment incentives and could have therefore lost the tax discount for the entire period during which the incentive was applied. As a consequence, the tax subject was obliged to file additional tax returns for all tax periods in which he applied the tax reduction.

Such punishment could have been very severe in some cases.

The Supreme Administrative Court has now confirmed that less severe sanctions will apply even to those entrepreneurs who have violated the conditions for receiving investment incentives before 1 May 2015.

Under the amended Income Tax Act, a group company which violates transfer pricing regulation loses the right to a tax rebate only in a proportional part for the tax period in which this violation occurred. This loss of tax discount corresponds to the amount of tax attributable to that part of the change in the tax base which arose from the breach of transfer price setting. The sanction under the amended Income Tax Act is therefore significantly less severe than the legal regulation before 1 May 2015.

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