Czech Republic vs. B.p., s.r.o., June 2007, Supreme Administrative Court , Case No 8 Afs 152/2005 – 72

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The subject-matter of the dispute was the exclusion of the rent for lease of machinery and equipment. It referred to the lease and sublease agreements for non-residential premises, machinery and equipment with the companies B.p., s.r.o. and M.-T., s.r.o., by which the parties agreed that the objects of the lease agreements would be used free of charge for a certain period of time – during the trial period.

Bp s.r.o. disputed the use of transfer prices in accordance with the arm’s length principle and the question of the tenant’s payment behaviour. It argued economic aspects – the possibility of making a real profit over a longer period of time. According to the taxpayer the tax authority should have examined the possibility of obtaining a total profit for the taxpayer over a five-year period and not simply applied ‘the most ideal course of market economics (i.e. the business partners are always solvent and the market situation is optimal)’. It also supplemented the application with a profit forecast, from which it concluded that ‘from a long-term profitability point of view, it was therefore worthwhile to support the related parties during the transitional period’.

According to the tax authorities, although the procedures and methods set out in the OECD Directive are not directly enshrined in domestic tax law (nor is there a direct reference to the OECD Directive), the binding nature of the OECD Directive in the interpretation of arm’s length under double taxation treaties derives from the Vienna Convention on the Law of Treaties, Article 31 of which contains rules of interpretation. In this respect, the OECD Directive is an interpretative document on double taxation treaties.

Judgement of the Court

The Court dismissed the appeal and decided in favour of the tax authorities.

“In addition to the above, the Supreme Administrative Court notes that the above-mentioned guidelines (Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations) are part of the OECD Declaration of 21 June 1976 on International Investment and Multinational Enterprises (available, for example, at , which is only a recommendation by governments to multinational companies; it is therefore not a legal regulation (soft law).

With regard to the objection to the application of section 23(7) of the Income Tax Act, it should be noted that the complainant does not dispute that the rent is subject to that tax in accordance with sections 18(1) and 22(1)(e) and (g)(5) of the Income Tax Act, nor does it dispute the court’s conclusion that the parties were personally and economically linked, nor the notion of consideration in rental and sublease agreements. In other words, the complainant does not refute the legal conclusions of the court and the tax authorities, which formed the basis for the application of Article 23(7) of the Tax Code. of the Act. The conceptual features of the contracts concluded by the complainant are precisely the aforementioned consideration. Therefore, the dispute as to whether a ‘foreign’ entity would have been willing to conclude a contract on the same terms, including the argumentation of economic aspects, is inappropriate. Hypothetical circumstances (relating, moreover, to third parties), which have no direct connection with the grounds on which the Regional Court based its decision, cannot lead to the conclusion that the appeal is well-founded.

The objection concerning the need to take account of the applicant’s costs of further renting of premises, machinery and equipment is not admissible under Article 104(4) of the Code of Civil Procedure, since the applicant did not raise it in the proceedings before the Regional Court whose decision is under review, nor does it claim that it could not have done so. Therefore, the Court could not deal with that objection.

For the reasons set out above, the Supreme Administrative Court concludes that the complainant’s cassation complaint is unfounded and therefore dismisses it…”

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