Taxpayers subject to the documentation requirement must include a disclosure form with their tax return for each related party with which they have conducted transactions. The disclosure must include details of the related party, including name, residence, etc., and the transaction details. The transactions are to be classified by type, such as sale of goods, provision of services, financial transactions and payment of royalties. The aforesaid disclosure needs to be submitted within three months after the year-end or six months after the year-end, if the taxpayer is subject to the obligatory audit or the tax return is filed by a certified tax advisor.
Taxpayers meeting any one of the following will be required to submit the disclosure(s) with their tax return:
- Turnover exceeds CZK 80 million;
- Total assets exceed CZK 40 million; or
- Average number of employees exceeds 50.
In general, the requirement only applies for taxpayers that have transactions with non-resident related parties. However, if a taxpayer meets one of the above conditions and has reported a tax loss or is the recipient of investment incentives, they are also required to submit the disclosure(s) even if all related party transactions are domestic.
The new disclosure requirement applies for tax years beginning on or after 1 January 2014.
There is no specific requirement under the law to keep and maintain transfer pricing documentation. However, this obligation is derived from general procedural tax law rules, which require taxpayers to be able to substantiate any inclusions in their tax return or other submissions and to submit such justification whenever so requested by the tax authorities during tax audits. The domestic law does not prescribe the requirement of preparing the transfer pricing documentation on an annual basis, however the same may be prepared by the taxpayers annually to substantiate that their transfer prices are in line with the arm’s-length principle.
The Ministry of Finance takes the position in its (legally non-binding) Guidance D-334 that the transfer pricing documentation should include at least the following:
- A Master file containing information about, inter alia, the business, the organizational structure, a functional analysis and risk profile of group entities, and an overview of intragroup transactions; and
- A Local file containing, inter alia, the following information:
- Detailed description of the business and business strategy;
- Listing of transactions involving reporting company;
- A benchmarking set including a functional and risk analysis;
- Information about internal and/or external comparables; and
- Information about the transfer pricing policy and method selection policies, as well as on the role the reporting company plays in the overall transfer pricing policy of the group.
Guidance on the transfer pricing documentation (Guidance GFR D-35) will be published detailing the three-tiered documentation requirement viz, Local file, Master file, and Country-by-Country (CbC) report. Further, the domestic law does not provide for any threshold for preparing the aforesaid transfer pricing documentation.
On 19 September 2017, the Czech Republic implemented CbC reporting requirements in line with BEPS Action 13. The requirements are applicable for MNE groups meeting a EUR 750 million consolidated group revenue threshold in the previous year or average equivalent in another currency as published by the European Central Bank in January 2015. The requirements apply for fiscal years beginning on or after 1 January 2016 for Czech parented groups and for fiscal years beginning on or after 1 January 2017 for non-Czech parented groups (secondary local filing). Local non-parent constituent entities are required to submit CbC reports subject to standard secondary local filing conditions, including that the ultimate parent is not required to submit a CbC report in its jurisdiction of residence, there is systemic failure to exchange, etc.
CbC reports are due within 12 months following the end of the reporting fiscal year. In case of systemic failure for exchange, the deadline is at least 3 months from the date such failure is notified to the local entity.
All Czech members of an MNE group must provide notification to the tax authority, including details on the ultimate parent, the surrogate parent, or other reporting entity (if any) by the end of the reporting fiscal year.
The government has also launched the online form for CbC reporting as well as additional guidance regarding the CbC reporting tables, instructions, etc.
Generally, tranfer pricing documentation must be submitted in the Czech language. However, CbC reports can be filed in English language and the same has been clarified by the tax authorities that English is the preferred language.
There are no specific penalties for transfer pricing related infringements, and the penalties provided for under general tax law apply to transfer pricing cases as well. The penalty for understatement of income readjusted through a transfer pricing audit is 20% of the tax avoided, whilst that for the overstatement of losses is 1% (5% until 2010). Late interest is due from the 5th day at a rate equal to the Repo rate of the Czech national bank plus 14percentage points (currently a total of approximately 15%). Late interest is due for a maximum period of 5 years. Other penalties may include the recapture of previously enjoyed tax benefits and reliefs.
Readjusted income can sometimes be treated as a deemed dividend distribution, attracting dividend withholding tax as well as late penalty and late interest. Tax on a deemed dividend is assessed (together with penalty and interest).
Failing to comply with the CbC reporting obligations will result in penalties of up to CZK 1.5 million in case of Czech parented groups and CZK 0.6 million in case of consitutent entities of non-Czech parented groups. Further, a penalty of up to CZK 0.5 million would apply for not filing the CbCR notification or the transfer pricing appendix along with the tax return.