By: Lucie Teplá
June 17, 2025 4 min read
In judgment 1 Afs 2/2025-54, the Supreme Administrative Court (SAC) addressed the question whether the cost of materials should be included in the cost base for calculating the remuneration of a contract manufacturer where the company formally owns the materials but they are procured by the parent company in cooperation with a key customer.
In this case, the Czech subsidiary manufactured server cabinets from material supplied by its Taiwanese parent company. The sale and its terms were managed by the parent company. In checking the transfer prices, the tax authorities used the net margin method with a mark-up on total costs (including material costs), thereby finding a lower profitability compared to comparable independent companies, and assessed tax.
The company defended itself against the additionally assessed tax because, in its view, although it is formally and legally the owner of the production material, the parent company procures the material in close cooperation with a key customer. In the view of the company, all risks associated with the material are born by the parent company and therefore the cost of the material should not be included in the cost base for calculating the profit margin for the production service provided.
According to the SAC, the decisive factor in the case at hand is that the company purchased the material, owned it during the production process, owned the work in progress and sold the final product after the production was completed, which entails certain risks that must be taken into account, not eliminated.
The SAC upheld the tax administrator’s view that, in the present case, the ownership of the material is inseparably linked to certain risks and therefore the cost of the material enters the cost base for calculating the remuneration. The aforementioned court decision further confirms that the analysis of functions, risks and assets is an important part of transfer pricing documentation and its outcome can have a significant impact on the pricing of transactions between related parties.
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