Following an audit, the tax authorities assessed an additional tax liability against Coca-Cola HBC Česko a Slovensko s.r.o., a decision that was upheld by the Financial Directorate on 4 August 2020 following an appeal.
Coca-Cola HBC Česko challenged this decision, arguing that Article 9 of the double taxation treaties with the Czech Republic, Austria and the Netherlands could not be applied directly without implementing legislation, and that the tax authority had wrongly invoked it. They also claimed that Slovak income tax law did not permit the disputed transfer pricing adjustments since foreign affiliates could not be considered “foreign dependent persons” under the law. The company also claimed that the tax authority had improperly reclassified intra-group loans as equity contributions, had wrongly denied interest deductibility and had misapplied allocation keys for management service costs. Coca-Cola also objected to procedural defects, including the use of new economic analyses introduced at the appeal stage without prior notification, which it claimed violated the principle of two-instance proceedings and the right to be heard.
The tax authorities maintained that Coca-Cola HBC Česko and its affiliates were related parties under Slovak law, and that transfer pricing rules applied. They argued that the tax administrator was entitled to adjust the tax base under Sections 17(5) and 18 of the Income Tax Act, in line with Article 9 of the OECD Model and the relevant double taxation treaties. The authorities defended the reclassification of the intra-group loan as equity due to a lack of economic justification, thereby treating related interest expenses as non-deductible.
Judgment of the Court
The Administrative Court ruled largely in favour of Coca-Cola HBC Česko, remanding the case for reconsideration.
The Court held that the tax authorities had committed significant procedural violations, particularly by introducing and relying on a new comparability study and sector analyses during the appeals process without notifying the taxpayer or providing an opportunity to respond. This contravened both the Tax Code and the principle of two-instance proceedings.
The Court also found that the contested decision was inadequately reasoned and lacked clarity on allocation methods. It also questioned the legal interpretation regarding dependent persons and loan reclassification.
Accordingly, the court annulled the contested decision and returned the case for further proceedings. Coca-Cola HBC Česko was awarded full reimbursement of costs.
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