Czech Transfer Pricing 2026: Compliance, Documentation and Audit Defence

5.3.2026 | ARROWS law firm

Transfer pricing is one of the most intensively audited areas of the Czech tax administration. If your company carries out transactions with related parties, you face significant financial risk in the Czech Republic. In this article, you will learn how to set prices correctly in line with the 2026 legislation, what documentation must be prepared, and how to effectively defend against an additional tax assessment.

The photo shows a lawyer discussing the topic of transfer pricing.

Article contents

Why transfer pricing is a priority for the tax authorities
What the arm’s length principle is and why it is key
Transfer pricing documentation: Legal obligation vs. practical necessity
Functional and risk analysis: The foundation of success
Transfer pricing methods and benchmarking
Practical steps: How to ensure defensibility

Quick summary

The risk is ongoing and high: The Czech Financial Administration regularly assesses additional tax in transfer pricing cases amounting to hundreds of millions of CZK each year. A lack of documentation puts you at a disadvantage.
The arm’s length principle is binding: Transactions between related parties must be carried out at prices that independent entities would agree under comparable circumstances. Breaches lead to additional tax assessments, penalties, and high late-payment interest under Czech tax rules.
Documentation is effectively essential: Although Czech law does not impose a blanket obligation to maintain TP documentation in a specific format, the burden of proof lies with you. Without documentation prepared in line with OECD standards and the guidance of the General Financial Directorate (GFŘ), defending your position is difficult.
The complexity of the topic requires an expert approach: Selecting the method, performing a benchmarking analysis, and setting the functional profile require detailed knowledge of the methodology and market practice under Czech transfer pricing rules.

Why transfer pricing is a priority for the tax authorities

Advanced economies have been facing the BEPS phenomenon for years—base erosion and profit shifting. This is a situation where corporate groups optimise their tax burden by shifting profits to jurisdictions with lower taxation. The OECD and the European Union therefore continue to tighten the rules for intra-group pricing, including in the Czech Republic.

Statistics from recent years confirm that additional assessments resulting from transfer pricing audits are among the highest. The Czech Financial Administration, relying on the Income Taxes Act and methodological guidance, intensively checks whether companies trade at arm’s length prices. The trend of using international exchange of information will make audits in 2026 even more targeted.

For a member of a statutory body or a manager, this means one thing. If you do not manage transfer pricing systematically, you risk not only additional tax and sanctions, but also potential breach of the duty of due managerial care under Czech law.

When does transfer pricing apply?

Transfer pricing applies to any company that meets the definition of related parties under Section 23(7) of the Income Taxes Act. This mainly includes situations where the company:

has a parent or subsidiary company (in the Czech Republic or abroad),
trades with a sister company within the group,
is capital-linked with another person (a shareholding of at least 25%),
is otherwise connected (e.g., through personnel links) or acts in concert,
provides or receives intra-group financing,
pays royalties for intangible assets.

The myth that TP concerns only multinational giants is dangerous. The Czech Financial Administration commonly audits purely domestic transactions between Czech related parties if it suspects tax optimisation.

What the arm’s length principle is and why it is key

The cornerstone is the arm’s length principle. It is based on the logic that related parties should trade with each other on terms that independent entities would agree under comparable circumstances.

While independent businesses naturally protect their economic interests and negotiate on price, related parties may be motivated by the interests of the group as a whole, which can lead to price distortions. Czech law therefore provides that if prices differ from market prices and the difference is not satisfactorily substantiated, the tax base will be adjusted by the identified difference.

The burden of proof that the difference is economically and rationally justified lies primarily with the taxpayer. If you do not demonstrate that your prices reflect the market, the tax authority will adjust them and assess additional tax.

Transfer pricing documentation: Legal obligation vs. practical necessity

In the Czech Republic, there is no strictly prescribed statutory obligation for all taxpayers to maintain TP documentation in a specific form. However, Section 92(3) of the Tax Code imposes an obligation on the taxpayer to prove all facts stated in its tax return.

ARROWS, a Prague-based law firm, warns: if you do not have documentation prepared in advance, you will be on the defensive during an audit and the tax authority may proceed to assess tax using estimates. Without high-quality documentation, meeting the burden of proof for related-party transactions is practically impossible.

If, on the other hand, you submit documentation prepared in line with OECD methodology and the guidance of the General Financial Directorate (GFŘ) (in particular Guideline D-334), you effectively shift the evidentiary initiative to the tax authority. It then has to refute your conclusions, which is procedurally more demanding.

Documentation structure under international standards

The standard accepted by the Czech Financial Administration, based on the OECD Transfer Pricing Guidelines, is a two-tier structure:

Master File (Global documentation): Describes the group as a whole, organisational structure, ownership of intangible assets, and overall strategy.
Local File (Entity-specific documentation): A detailed analysis of the specific taxpayer, description of transactions, functional analysis, and benchmarking.
Country-by-Country Reporting (CbCR): A specific report for the largest groups with consolidated turnover exceeding EUR 750 million.

Key elements of Local File documentation

High-quality documentation for 2026 must include:

identification of related parties and a description of the organisational structure,
a detailed description of transactions (volume, nature, contractual terms),
a functional and risk analysis (who performs the functions and bears the risks),
selection of the method and its justification,
comparability analysis (benchmarking),
a conclusion confirming compliance with the arm’s length principle under Czech tax rules.

Functional and risk analysis: The foundation of success

The most common mistake is simply copying contracts without examining the reality. A functional and risk analysis (FAR analysis) must reflect how the companies within the group actually operate.

Imagine a situation where a Czech s.r.o. manufactures components for a foreign parent company, which supplies the materials and purchases all output. In such a case, the Czech company is effectively a so-called limited-risk contract manufacturer, which should be reflected in a stable remuneration rather than sharing the group’s overall loss.

ARROWS’ Prague-based attorneys regularly handle disputes where the tax administrator reclassified the function of a Czech subsidiary and assessed additional tax by imputing profit corresponding to higher value added. Correctly defining the profile (e.g., limited risk distributor vs. full-fledged distributor) is essential for defending the pricing.

Risk	Consequence	ARROWS’ role (office@arws.cz)
Mismatch of functions and risks	Additional tax assessment based on reclassification of the entity’s profile.	Analysis of the actual situation and remediation of contractual documentation so that it reflects reality.
Missing benchmark	The tax administrator will use its own data, often unfavourable.	Securing a professional benchmarking study from licensed databases.
Failure to evidence receipt of the service	Tax non-deductibility of costs (e.g., management fee).	Preparation of a “defence file” demonstrating the actual provision and benefit of the services.

Transfer pricing methods and benchmarking

The Czech legislation and the guidance of the General Financial Directorate (GFŘ) are based on OECD methods. Traditional transaction methods include the Comparable Uncontrolled Price (CUP) method, the Resale Price Method (RPM) and the Cost Plus method.

More commonly used are profit-based methods, in particular the Transactional Net Margin Method (TNMM), which compares net profitability with independent entities. For highly integrated transactions, the Profit Split method is used.

For 2026, it is crucial that the data used in benchmarking is up to date (typically for the last 3 available years). The tax administrator will not accept older data without an update analysis.

Penalties and consequences of additional tax assessments

If the Czech tax authority concludes that the arm’s length principle has been breached, the consequences are significant. In addition to the additional corporate income tax assessment itself (21%, or 19% for assessments relating to years before 2024), a penalty of 20% is automatically imposed.

You must also expect late-payment interest, calculated as the CNB repo rate increased by 8 percentage points. With higher CNB rates, this can amount to annual interest in the tens of percent. In addition, there is a risk of double taxation if the foreign authority does not make a corresponding adjustment.

Practical approach: How to ensure defensibility

To minimise risks, we recommend mapping all related-party transactions and verifying the pricing setup (a health check). Next, it is necessary to prepare the documentation (Master File and Local File) and secure benchmarking.

For intra-group services, emphasis is placed on the “benefit test”, i.e., evidence of the need for the service and its actual provision. The documentation must be updated regularly, and the comparable-company data should be reviewed at least every 1–3 years. The ARROWS team can assist you with these steps in the Czech Republic.

Advance Pricing Agreements

For maximum legal certainty under Czech law, Czech legislation allows you to request a binding assessment of the pricing method from the General Financial Directorate. If the authority approves the method and you comply with it, it cannot challenge your pricing setup in the future.

An APA is particularly suitable for large and complex transactions or restructurings. The administrative fee is CZK 10,000 per application, but the process requires comprehensive preparation, which ARROWS’ Prague-based attorneys will arrange for you.

Conclusion

Transfer pricing is becoming increasingly relevant in 2026. With the development of international data exchange (DAC7, DAC8), the Czech tax authority has an excellent overview of your flows. Relying on discrepancies not being discovered is a strategy with potentially devastating consequences.

High-quality documentation and properly set processes are the best safeguard, protecting against additional tax assessments and building the company’s credibility with the authorities. Documentation not only protects against penalties, but also significantly speeds up any potential tax audit.

ARROWS, a Prague-based law firm, has a team of specialists in tax law and transfer pricing under Czech legislation. Thanks to a strong professional background and professional liability insurance, we provide clients with the assurance of a professional solution.

FAQ – Legal questions on transfer pricing

1. Do I need transfer pricing documentation even if we are a small company?

Czech law does not distinguish company size for the application of the arm’s length principle. Even a small company must be able to demonstrate that its prices are at arm’s length. The scope of the documentation should be proportionate, but the burden of proof is always on you.

2. What is the risk of interest-free loans between related parties?

Providing an interest-free loan to a related party is risky. As a rule, the lender should tax so-called deemed interest that it would have earned on the market. Exceptions exist, but they must be carefully assessed in light of current case law.

3. Can we use a benchmark prepared by the parent company abroad?

Yes, if it is relevant for the Czech market (a so-called pan-European benchmark is often accepted). However, it is necessary to verify whether it reflects the specifics of the Czech entity’s transaction and whether the tested party has been selected correctly.

4. What is the “Benefit Test” for services?

For intra-group services, you must prove that the service was actually provided and delivered an economic benefit to the recipient. Without meeting the Benefit Test, the authority will not recognise the cost at all, regardless of the price.

5. Can prices be corrected retroactively?

Yes, by filing an additional tax return. This is always a better option than having the tax administrator discover the error, because you avoid the penalty and pay only late-payment interest.

Notice: The information in this article is based on the legal position applicable or expected for 2026 in the Czech Republic. Legal regulations and their interpretation may change. This text is for general guidance only and does not replace individual legal advice. To address your specific situation, contact office@arws.cz.

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