A lessor rented real estate for a low price to related parties. The tax authorities claimed that the price was too low and required additional income to be taxed with the lessor. The lessor explained that the low rental fees were due to the poor condition of the real estate that was leased to related parties.
The tax authorities rejected this explanation and concluded that the taxpayer had not proven the real condition of the real estate in the examined period.
Judgement of the Court
The court ruled that: the burden of proof was on the tax authorities and the authorities had to prove all significant parameters of the controlled transaction. The tax authorities must establish the arm’s length price (called the “reference price” in the decision) in order to be able to require that the taxpayer explain the difference between the arm’s length price and the intercompany Price.
Furthermore, the tax authorities must give the person to whom the tax base is to be adjusted the opportunity (both in time and in fact) to explain and substantiate the observed difference between the prices in a satisfactory manner. If the taxpayer is able to discharged that burden of proof, the tax authority’s adjustment of the tax base is not an option.
CzechNo 7 Afs 74-2010 - 81