The Financial Administration has issued a new GFD Directive D – 32 (replacing and extending the original GFD D-333). The Directive governs the binding assessment on the determination of prices agreed between related parties (following the Section 38nc of the Income Tax Act) and the method of determination of tax basis of a tax nonresident from activities carried out through permanent establishment (following Section 38nd of the Income Tax Act). This new directive affects all taxation periods commenced after January 1, 2018.
In general, the application must be submitted in the official language to a competent tax administrator for a basic administrative fee of CZK 10,000 (depending on the number of transactions/permanent establishments being assessed). In case the legal person has not yet been established, another person (e.g. founder or representative) can file the application with detailed information on the legal entity being established (business name, legal form, registered office, place of business, organization structure and description of activities). If the permanent establishment has not yet been established, the application can be filed by a foreign entity that is about to start the business in the Czech Republic.
The application may be filed for current or subsequent taxation period. The good news is, that if the same method of transfer pricing or profit allocation to permanent establishment was applied (under similar conditions) in the preceding periods, the taxpayer may expect the tax administrator to consider that for those past periods.
The effectiveness of the decision is linked to the tax administrator deciding on the entity’s tax liability and cannot be appealed against.
In addition to general conditions, the application being assessed as per Section 38nc has to include all facts that will or may significantly affect the pricing methodology (information on group, distribution of functions and risks, business relations and other relevant circumstances). The application may be filed for one transaction only, for aggregated set of transactions (where all transactions are assessed as an aggregate) or for a set of transactions not closely related (each transaction is then assessed separately).
The application pursuant to Section 38nd is assessed by the tax administrator based on the accounting data/tax records, while taking into account the tax basis usual in case of tax residents in a similar situation. Tax nonresident with more identification numbers shall mention all those numbers in the application. If certain data are yet to be known in the future, than the application must include their estimation and justification. Like in the case of provisions of Section 38nc, a tax non-resident may file one application for more permanent establishments, if their activities are inseparably connected.
If you wish to obtain detailed information or need an assistance when preparing the application for binding assessment, do not hesitate to contact us