Czech Republic vs. LCN GROUP s.r.o., July 2021, Supreme Administrative Court, Case No 2 Afs 148/2020 – 37

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LCN Group had deducted costs in its taxable income for marketing services provided by related parties – PRESSTEX MEDIA SE and TARDEM Media s.r.o. and PAPILIO.

The claimed advertising costs from PRESSTEX in FY 2012 was produced and implemented by PAPILIO and subsequently invoiced to LCN Group, virtually unchanged, at a price 23 times higher than the price of the advertising, without the corresponding value added being justified. In relation to FY 2013, LCN Group claimed advertising costs from TARDEM in a similar pattern where the price was increased by up to 56 times. In both tax periods, LCN Group’s advertising/promotion costs were related to sporting events (gymnastics world cup, tennis tournament and golf tournaments).

The tax authorities concluded that the prices agreed between the parties was not at arm’s length and issued an assessment.

The Regional Court annulled the assessment. It argued that the tax authorities had not sufficiently dealt with the identification and description of the conditions under which the prices of the controlled transactions had been agreed. The tax authorities had not considered the “commercial strength” and “advertising capacity” of the parties.

The tax authorities brought this decision to the Supreme Administrative Court.

Judgement of the Supreme Administrative Court.

The Supreme Administrative Court set aside the decision of the Regional Court and refered the case back to that court for further proceedings.

The arm’s length price is the price applied between independent entities or, if no such data exists or is not available, a hypothetical estimate based on logical and rational considerations and economic experience.

As regards the “commercial strength” of the parties, the Regional Court did not specify that concept, did not indicate what aspects should be taken into account in the context of that condition, or how that condition affects the prices for advertising services.

With regard to the alleged lack of consideration of advertising capacity at the time the contracts were concluded, it may be noted that this aspect may be relevant in assessing the reasons for the difference in prices between the related parties and those agreed in normal commercial relations. However, the possible proof of this fact falls within the scope of the assessment of whether the tax payer has satisfactorily substantiated the price difference. The Regional Court did not deal with this issue.

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