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13.4.4. APAs and Dispute Resolution Mechanisms

Advance Pricing Agreement

The Ministry of Finance has an Advance Pricing Agreement (APA) process in place. For tax periods beginning after 1 January 2018, Guidance GFR D-32 on APAs (termed as ‘binding assessment’ in the guidelines) will prevail over the erstwhile Guidance D-333. As per the new guidance, an application can be submitted in the Czech language to the locally competent tax administrator by a taxpayer for an APA. Such an application can be made for the tax period in which it is filed and for subsequent tax periods.  An APA entered into shall be valid for a period as specified in the agreement. Generally, the validity is 3 to 4 years. Although APAs will not apply for past periods, the tax authorities would treat transfer pricing inspections for the earlier years on par with the outcome of the APA in the following cases:

  • If the related party transactions for the past period are similar to and under the same circumstances as the years covered by the APA; and
  • The same transfer pricing methods have been adopted for determining the transaction price and the profits attributable to the permanent establishment.

An APA will be generally applicable to a single transaction and a single permanent establishment. However, multiple transactions which are closely related and multiple permanent establishments engaged in similar activities or having different activities but closely interconnected, that cannot be separated may be aggregated.

Although there is no time period prescribed for the tax authorities to issue the directions, the process usually takes 6-9 months.

The APA will be concluded according to the principles of the OECD Transfer Pricing Guidelines and other international standards and will be guided by the transfer pricing principles laid out in Guidance D-332 (replaced by D-34 published on 28 May 2019), including the most appropriate method, transfer pricing documentation to be filed, etc.

Where the APA is in relation to a party who is resident of a jurisdiction having an agreement for exchange of information with the Czech Republic, the competent authority of that jurisdiction will be notified about the APA unless the APA was bilaterally concluded with the competent authority.

Dispute Resolution Mechanisms

Most Czech tax treaties contain a MAP clause, allowing the Competent Authorities of the Contracting States to consult with each other with the aim of resolving instances of (double) taxation not in line with the Convention.

Also, the Czech Republic is a signatory to the EU Arbitration Convention, which sets out (arbitral) dispute resolution mechanisms between the contracting parties.

On 6 August 2020, the Czech Republic implemented the EU Council Directive on tax dispute resolution mechanisms, which includes rules to ensure effective resolution of disputes concerning the interpretation and application of bilateral tax treaties and the Union Arbitration Convention, and in particular, disputes leading to double taxation. The law enters into force on 15 September 2020 and applies for disputes in relation to tax periods beginning on or after 1 January 2018.