A Czech real estate company, AHI Oscar, had deducted the cost of intra-group services received from a related foreign service company. The price of the services had been calculated at a flat rate of 75% of the wages of the employees providing the support services, plus overhead costs.
The tax authority found that the overhead costs included in the calculation did not correspond to the actual costs and excluded these costs from the calculation. According to the tax authority, it was irrelevant to consider the arm’s length principle under Section 23(7) of the ITA.
AHI Oscar appealed to the Municipal Court, which upheld the tax authority’s assessment.
AHI Oscar then appealed to the Supreme Administrative Court.
Judgement of the Court.
The Supreme Administrative Court overturned the decision of the Municipal Court.
It was undisputed that AHI Oscar had actually incurred the declared costs and received the services from the related foreign service company.
According to the court, the tax authority’s position on the taxpayer’s obligation to prove the actual basis of calculation is not supported by Section 24(1) of the ITA. However, this does not mean that the service charge should automatically be a fully deductible expense. Given the facts, it was therefore necessary to apply the transfer pricing rules under section 23(7) of the ITA, which the tax administrator did not do. As the case concerned 2012 and the 10-year general limitation period for tax assessment had expired, there would be no further assessment of the arm’s length amount from a transfer pricing perspective.
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