In its judgment of February 9, 2026, case no. 57 Af 6/2025-57, the Regional Court in Plzeň addressed the transfer pricing setup of a Czech contract manufacturer that had drawn a loan from a related party. The company reported a positive operating result, but after accounting for financial expenses, it ended up in a loss. Consequently, when applying the transactional net margin method (TNMM), the tax administrator did not use a net cost plus (NCP) indicator based solely on the operating result, but rather an EBT (Earnings Before Taxes) indicator that also accounts for the financial result. The court upheld this approach and dismissed the company's lawsuit.
The key conclusion is that interest expenses do not have to be automatically excluded when applying TNMM merely because they are classified as financial expenses for accounting purposes. Decisive factors include the specific economic circumstances, functions, and risks of the tested company, as well as the relationship of those costs to the tested activity. In the case at hand, the intra-group loan was used to finance day-to-day operations, and interest expenses significantly affected the company's overall profitability. According to the court, a rationally acting independent enterprise would factor the costs of financing required for operations into its pricing.
At the same time, the judgment did not address the arm's length nature of the loan itself or the interest rate. The tax authorities accepted their amount; the disputed issue was whether interest expenses should be factored into the testing of the manufacturing activity's profitability.
Practical Impact
The judgment is particularly relevant for routine or contract manufacturers and other companies with a limited functional and risk profile. We therefore recommend:
- When setting and subsequently testing transfer prices, do not evaluate the operating margin in isolation, but verify whether significant intra-group financing costs are in fact related to the financing of routine operations;
- Continuously monitor whether the pricing setup enables a routine company to cover relevant costs and achieve a profit appropriate to its functional and risk profile;
- Thoroughly document the choice of the profitability indicator in TNMM—the judgment cannot be interpreted to mean that interest must always be included in the indicator, but rather that its exclusion or inclusion must correspond to the actual economic functioning of the company;
- During the analysis, emphasize the economic substance of the financing and its link to the business, rather than relying solely on the accounting classification of costs. The court explicitly emphasized that for a rationally acting independent enterprise, the accounting categorization of costs is not decisive in itself.
From our perspective, however, the judgment does not introduce a fundamentally new principle in this regard. Rather, it confirms an approach that the tax administration has been promoting in the field of transfer pricing for many years: when assessing profitability, one must proceed primarily from the economic substance of a given item rather than solely from its accounting classification under Czech accounting standards. Therefore, if the financial result is economically related to the company's routine operations—particularly with regard to its functional and risk profile and its position within the group—it should be appropriately factored into the assessment of operating profitability.
This text was translated by AI.
