By: Hana Brothánková, Ivana Fujáčková
March 24, 20263 min read
The Supreme Administrative Court (SAC) addressed a dispute between a Czech automotive company and the tax authority regarding an additional income tax assessment. According to the tax authority, the Czech company operated with limited powers, while key decisions were made by the parent company through seconded managers. Consequently, the tax authority challenged the loss reported by the Czech entity.
The tax authority established an arm’s length range and found that the Czech company’s results fell below this level. Based on this, it concluded that the Czech company should have received compensation from its parent company and adjusted its tax base accordingly.
The SAC confirmed that the conclusion regarding the necessity of such compensation between related parties was sufficiently substantiated during the proceedings. However, the court also pointed out that the tax authority had failed to address all of the Czech company’s objections and, therefore, remanded the case for further proceedings. On one hand, the ruling confirms the historical view on the issue of parent company instructions; on the other, it highlights the factual nature of the burden of proof.
This decision builds on earlier case law and confirms the SAC’s existing approach to the application of Section 23(7) of the Income Tax Act (ITA). However, this is not a final resolution; we will continue to monitor further developments in the dispute.
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