Czech transfer pricing basics: pricing deals inside a group

A Czech subsidiary pays its foreign parent a "management fee". The parent charges its Czech subsidiary a royalty for a brand nobody outside the group has heard of. The subsidiary lends money to a sister company at an interest rate chosen at a board meeting. All three might be perfectly sound. All three are also the kind of payment a tax authority looks at first, because related companies can move profit between countries by choosing the price. Transfer pricing is the discipline that polices it.

This piece sets out the Czech approach in plain terms. It is not a substitute for a transfer pricing study, which needs a specialist who knows the group's facts.

The principle: the arm's length test

The rule is easy to say. Transactions between related parties should be priced as if they had been agreed between independent parties dealing at arm's length. Czech law, in the Income Tax Act, requires the tax base to be adjusted if related parties agree prices that differ from those independent parties would have agreed, and that the difference was caused by the relationship. The OECD Transfer Pricing Guidelines are widely used as the interpretive reference, and the Financial Administration's published guidance follows them.

The test applies to goods, services, royalties, loans, guarantees and anything else that crosses between related parties. It applies to transactions within Czechia as well as across borders, though the cross-border ones draw more attention.

Who counts as related

Related parties (spojené osoby) include companies connected by a capital or voting interest above a statutory threshold, by common management or control, and some family relationships. The definition also covers cases where one party has the ability to influence the other's decisions. A shareholder with a modest stake, a director's relative, a sister company under the same parent: all can be caught. Check the definition in the Act, not a rule of thumb from another country.

Choosing a method

The OECD recognises five main methods. The comparable uncontrolled price method compares the price with one charged between independent parties for the same thing. The resale price method works back from what a distributor sells for. The cost plus method adds a mark-up to the supplier's costs. The transactional net margin method compares a profit indicator, such as operating margin, with those of comparable independent companies. The profit split method divides combined profit according to each party's contribution.

Which one fits depends on the facts, and the "most appropriate method" is the right one, not the most convenient. For simple services, cost plus is the common choice. For distributors and contract manufacturers, a net margin comparison is typical. For unique intangibles, there may be no reliable comparable, and the analysis becomes harder.

Comparables and databases

A transfer pricing study usually searches commercial databases for independent companies doing similar work, then looks at their margins to build a range. If the group's result falls in the range, that supports the pricing. If outside, an adjustment toward the range is expected. The quality of the comparables matters more than the volume; tax authorities do not accept a list of unrelated firms in a different industry.

Documentation in practice

Many countries require a standard documentation package. Czech law is lighter: there is no statutory form for most taxpayers, but the burden is on the taxpayer to demonstrate that prices are at arm's length. In practice, the Financial Administration expects a documentation file in the OECD style, with a description of the group and the local company, the transactions, the functional analysis, the method chosen and the benchmarking. A file prepared when the transaction occurs carries more weight than one assembled after an audit letter arrives.

Companies must also disclose their transactions with related parties in their tax return and in the notes to their accounts. A mismatch between the two raises questions.

Groups above the OECD revenue threshold also produce a master file, a local file and country-by-country reporting, which are shared among tax authorities. Smaller groups are not obliged to do so but benefit from the same structure.

Common transactions and their traps

Intra-group services. The service must have been actually performed, must benefit the Czech company, and must not be something the company would not have paid for if independent. A generic "management fee" with no evidence of services is the easiest item for an auditor to disallow.

Royalties and licences. The licensed asset must exist, the licensor must own the rights, and the rate must be defensible. Paying a royalty on a brand the licensee has built itself invites challenge.

Loans. The interest rate should reflect the borrower's credit standing, the currency, term and security. Interest paid to related parties also meets rules that limit deductibility of financing costs for larger companies. A zero-interest loan is not a safe option either, as the authority may impute interest.

Guarantees. A parent that guarantees a subsidiary's bank loan provides a service, and an arm's length fee may be due.

What happens in an audit

The tax authority can ask for the documentation, question the method and propose an adjustment to the tax base. The adjustment increases the Czech company's taxable income. If the other country does not adjust correspondingly, the group is taxed twice on the same profit. Penalties and interest can follow, and the process can extend over years.

Relief from double taxation comes through the mutual agreement procedure in a tax treaty, where the two tax authorities negotiate. EU member states have an arbitration convention for transfer pricing disputes as well. These routes are slow, and most companies prefer to avoid the dispute.

Getting certainty in advance

A company can apply to the Financial Administration for an advance pricing agreement (APA), which fixes the method and sometimes the result for a number of years. The procedure carries a fee and requires disclosure of the group's facts. APAs can be unilateral, between the taxpayer and one authority, or bilateral, involving two. They suit large, stable transactions where the cost of a dispute would be high.

Small companies are not exempt

A small Czech subsidiary of a foreign group may feel too minor for transfer pricing. The rule applies regardless of size. What differs is the proportion of effort: a short file explaining the main transactions and the reasoning is better than nothing and better than a 100-page study no one reads. The Financial Administration has published guidance on simplified approaches for low value-adding services, following the OECD (as of 2026; check the official source).

Where to start

Draw up a list of every payment between the company and its related parties. Next to each, write down what was bought, who benefited and how the price was chosen. If there is no answer to the last question for a significant item, that is the one to look at first. A specialist can then advise on method and documentation.

Frequently asked questions

Does transfer pricing apply to purely Czech groups?

Yes. The arm's length test applies to related-party transactions within Czechia too.

Do I need a formal transfer pricing study?

Czech law does not prescribe a standard form for most taxpayers, but you must be able to prove arm's length pricing. A written file is the usual way.

What is country-by-country reporting?

A report on a group's income, tax and activity in each country, required of very large multinational groups and exchanged between tax authorities.

Can I agree prices with the tax office in advance?

Yes, by applying for an advance pricing agreement, subject to a fee and conditions.

This is a general explainer, not legal or tax advice.