Czech Republic vs. Automotoklub Masarykův, January 2020, Supreme Administrative Court, Case No. 9 Afs 232/2018 – 63

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At dispute was the definition of the conditions under which a reference price (i.e. a price that would be negotiated between independent persons in normal business relations under the same or similar conditions) cannot be determined and the tax administrator should therefore use the administrative price (i.e. the price determined in accordance with the legal regulation) as the arm’s length price for adjusting the income tax base.

In 2013 Automotoklub Masarykův sold K. A. (a person who participated in its management) real estate for the purchase price of CZK 40 000 000.

The tax authorities adjusted the tax base in accordance with Section 23(7) of Income tax Act, comparing the agreed (purchase) price with the price determined in accordance with the Act on the Valuation of Property, as amended in the version applicable to the case at hand (hereinafter referred to as the Act on the Valuation of Property), which amounted to CZK 450,786,850.

The Regional Court concluded that the tax administrator failed to prove the fulfilment of the conditions under Section 23(7) of the Income Tax Act, as it failed to establish and substantiate by evidence that the agreed price could not be compared with the reference (market) price, and therefore proceeded prematurely to compare it with the administrative price (the price established pursuant to the Property Valuation Act).

This decision was appealed by the tax authorties.

Judgment of the Supreme Administrative Court

The Court decided in favor of the tax authorities.

When adjusting the tax base pursuant to Section 23(7) of the Income Tax Act, the agreed price may be compared with the price determined in accordance with the valuation regulation only if it is not possible to determine the price on the relevant market due to the absence of at least substantially comparable independent transactions that could be appropriately corrected.(According to the judgment of the Supreme Administrative Court of 29 January 2020, No. 9 Afs 232/2018 – 63)

“(i)f there are real independent transactions (transactions between independent parties in normal business relations) which are fully comparable to the transaction at issue, i.e. concluded for the same (similar) commodity under the same (similar) conditions, data on the prices of these transactions will suffice to establish the reference price. If the disputed transaction is not fully comparable with the independent transactions (usually because the commodity or the terms of those transactions will be different), it is necessary to start from the independent transactions which are as close as possible in terms of their parameters and to adjust the data on these transactions appropriately to take account of the differences between them.

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Czech SAC judgment of 29 January 2020 no 9 Afs 232-2018 - 63

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