The Supreme Administrative Court ruling (3 Afs 165/2024) examined a case in which a multinational group led by a Japanese parent company decided to discontinue its original production and replace it with the manufacturing of components from a completely different industry. This decision was made centrally at the parent level, and the Czech subsidiary was required to implement it.
As a result, the subsidiary incurred significant costs for rebuilding production facilities, acquiring new technologies, installing production lines, and training employees. These expenses were fully borne by the subsidiary without any financial compensation from the parent company. The outcome was a tax loss exceeding CZK 70 million.
The company claimed this loss in its corporate income tax return, but the tax authority disagreed and reduced the loss during a tax audit, concluding that it did not comply with the arm’s length principle.
The court upheld the tax authority’s position, emphasizing the need to assess whether conditions between related parties reflect what independent entities would have agreed upon. In this case, substantial investment costs were shifted to the subsidiary without adequate consideration.
A key takeaway from the ruling is the broader interpretation of the term “transaction.” It includes not only contractually agreed supplies of goods or services, but also the economic consequences of strategic decisions within a group. Substance prevails over form.
