Rozsudek k zohlednění finančního výsledku při testování převodních cen

The setting of transfer prices for manufacturers with limited functions and risks is often based on costs incurred plus a profit mark-up (i.e., the cost-plus method or the TNMM). Such an approach typically assumes that only operating costs are included in the analysis. At the same time, transfer pricing principles provide that a manufacturer with limited functions and risks should achieve a modest but stable profit over the long term. In practice, however, situations arise where such a manufacturer has transfer prices set in a way that covers all operating costs plus an arm’s-length profit mark-up, yet still reports an overall loss due to significant interest expenses or foreign exchange losses.

This issue was recently addressed by the Regional Court in Plzeň in its judgment No. 57 Af 6/2025-57. In the case at hand, the taxpayer, a contract manufacturer with limited functions and risks, had received a loan from a related party that was used for its operating activities. While the taxpayer’s operating profitability was consistent with the benchmark study submitted, it nevertheless reported an overall loss in the audited year due to substantial interest expenses. The tax authority assessed profitability at the EBT (earnings before tax) level, arguing that this approach was consistent with the arm’s-length principle and that an independent enterprise would likewise reflect all costs associated with its activities in its pricing, including financing costs.

The taxpayer argued that, under transfer pricing principles, the appropriate indicator to test should be operating profit. The Regional Court acknowledged that financial expenses, including interest expenses, do not necessarily have to be automatically excluded from the profitability analysis of the tested entity. Where such expenses are directly linked to the operating activities and have a significant impact on the financial performance of the tested entity, taking them into account in a benchmarking analysis may be justified. The Regional Court therefore dismissed the lawsuit and the available data show that the taxpayer did not file a cassation complaint with the Supreme Administrative Court.

The judgment also follows the current trend in Czech case law, which places greater emphasis on the economic substance of transactions and the functions actually performed, rather than on the formal contractual arrangements, when assessing transfer pricing matters.

Author:

Klára Kišková