Transfer Pricing in Czech Holding Structures: Agreements That Withstand Audits

26.2.2026 | ARROWS law firm

A holding structure allows you to efficiently manage multiple companies, share resources, and optimize the tax burden in the Czech Republic. However, intra-group agreements and their pricing are the most common reason why the Czech Financial Administration initiates in-depth tax audits. This article will show you how to set up agreements so that they are lawful, defensible during a tax audit, and economically sound.

In the image, we see a lawyer consulting on the setup of intra-company agreements.

Article contents

Why government authorities pay attention
What transfer pricing is and why authorities review it
Practical solutions for pricing within a holding group
Transfer pricing documentation
Most common mistakes when setting prices
The international aspect of a holding group
How to start remediation

Quick summary

All transactions between entities within a holding group—from leasing machinery to intra-group services—must be priced under the arm’s length principle (market distance principle), i.e., as if the parties were independent.
The Czech tax authorities have long focused on transfer pricing audits—without proper documentation proving that the set prices are justified, the taxpayer bears the full burden of proof in the Czech Republic.
Czech legal rules require adjusting the tax base by the difference between the agreed price and the market price. Although Czech law does not explicitly impose an obligation to prepare specific documentation for all taxpayers, in practice it is essential to meet the burden of proof.
Key prevention measures include a written contract, a functional and risk analysis, a benchmarking study, and continuous updates of the documentation. Otherwise, you risk additional tax assessments, a 20% penalty, and high late-payment interest.

Why government authorities pay attention

A holding structure is a legal and economically advantageous way of doing business, but states monitor it closely due to the risk of so-called base erosion and profit shifting (BEPS). When a parent company charges “rent” to a subsidiary for machinery or provides management services, this is a transaction between related parties. This creates room for purposeful price manipulation that may not reflect economic reality.

In the Czech Republic, the Financial Administration (tax authority) specialises in this area through its analytical teams, which automatically evaluate data from tax returns. This is not a system error, but a sustained trend aimed at protecting state tax revenues.

The attorneys at ARROWS, a Prague-based law firm, handle this agenda on a daily basis and know the typical mistakes made by statutory bodies. Experience with clients in holding structures and joint-stock companies shows that high-quality legal and tax structuring is key to protecting assets under Czech law.

What transfer pricing is and why authorities review it

Transfer pricing is the term for pricing transactions between related parties. For independent companies, the market (supply and demand) determines the price. Between a parent and a subsidiary, however, the market mechanism is missing, so statutory regulation under Czech legislation comes into play.

The arm’s length principle provides that the terms agreed between related parties must not differ from the terms that would be agreed between independent parties in ordinary commercial relations. If a parent company charges its subsidiary CZK 50,000 per month as rent for machinery while the usual market price is CZK 8,000, a tax issue arises. The Czech tax office will not recognise such an expense for the subsidiary and will assess additional tax.

Czech legislation sets out this obligation in Section 23(7) of Act No. 586/1992 Coll., on Income Taxes. If prices differ from market prices and the difference is not satisfactorily substantiated, the tax administrator will adjust the tax base by the identified difference. Interpretative practice follows the OECD Transfer Pricing Guidelines, which the Czech Republic respects.

Key concepts in transfer pricing:

Arm’s length principle – transactions must reflect market conditions.
Functional and risk analysis – mapping who performs which functions in the transaction, uses which assets, and bears which risks.
Benchmarking study – a comparability analysis using independent market data demonstrating that the price is at arm’s length.

Practical solutions for pricing within a holding group

Let’s imagine a holding group that owns production machinery (AssetCo) and leases it to an operating company (OpCo). How should the price be set so that it is defensible under Czech transfer pricing rules?

Calculating the lease price of assets

For real estate or standard vehicles, the comparable uncontrolled price (CUP) method can often be used—comparison with market price lists.

For specific production lines or single-purpose machines, market comparables often do not exist, so the cost plus method is used, based on the owner’s costs increased by a customary profit mark-up. A functional analysis is also crucial, determining who bears the risk of breakdown and who pays for repairs.

If the owner (the holding company) merely “holds” the asset, but all risks and maintenance are borne by the lessee (the subsidiary), the rent must be lower than if the owner provided full service.

The documentation must include the acquisition price, depreciation, financing costs, overhead allocation, and justification of the profit mark-up. Without these data, the price is open to challenge in the Czech Republic.

Pricing services within a holding group

Service pricing is a frequent target of audits. How do you determine the price for the work of an in-house lawyer or an IT department for subsidiaries?

For low value-adding services (routine administration, IT support, accounting), a simplified approach is often used under OECD and Czech General Financial Directorate (GFŘ) guidance, where a 5% profit mark-up is added to direct and indirect costs.

It is important to demonstrate the so-called Benefit Test—i.e., that the service was actually provided and that the subsidiary derived an economic benefit from it. Flat-rate invoicing “for consulting” without timesheets and specification is insufficient for a Czech tax audit.

The attorneys at ARROWS, a Prague-based law firm, recommend keeping detailed timesheets and cost allocation keys so it is clear how the total amount was calculated.

Setting interest rates on intra-group loans

Intra-group financing is subject not only to the arm’s length interest rate test (Section 23(7) of the Income Taxes Act), but also to thin capitalisation rules (Section 25 of the Income Taxes Act) and limitations on the deductibility of excessive borrowing costs under Czech tax law.

The interest rate must correspond to the rate the debtor would obtain from a bank with the same credit rating and collateral. Simply adopting the CNB rate or EURIBOR without a risk premium is not sufficient, and the debtor’s creditworthiness must be taken into account.

Transfer pricing documentation

In the Czech Republic, transfer pricing documentation (Transfer Pricing Documentation) is not strictly mandatory by law for all entities in a precisely prescribed format; however, the burden of proof lies with the taxpayer. The Czech Financial Administration (tax authority) typically requires documentation structured as a Master File and Local File to demonstrate that pricing is correct under Czech tax rules. In practice, the absence of such documentation effectively means being unable to defend the set prices.

The OECD documentation structure includes:

Master File (Basic documentation) – describes the group’s global structure, strategy, intangibles, and financial flows.
Local File (Specific documentation) – a detailed analysis of specific transactions of the Czech taxpayer, functional analysis, method selection, and benchmarking.
Country-by-Country Reporting (CbCR) – mandatory only for large multinational groups.

The Czech legal team at ARROWS, a Prague-based law firm, ensures this documentation is prepared to withstand review by the tax administrator and to shift the burden of proof back to the tax office.

Main risks of incorrect contract setup

Risks and penalties	How ARROWS helps (office@arws.cz)
Additional tax assessment and penalties: If the tax office challenges the price, it will assess additional tax and impose a penalty of 20% of the additionally assessed amount.	Preparation of TP documentation: We will prepare a Master File and Local File with robust economic reasoning.
Late-payment interest: Late-payment interest is calculated on the additionally assessed tax at the CNB repo rate + 8 percentage points per year, potentially retroactively for several years.	Preventive contract audit: We review and adjust pricing settings before an audit occurs.
VAT risks: Incorrect classification of supplies may lead to additional VAT assessments, especially for cross-border services or cost recharges.	Comprehensive tax analysis: We assess transactions not only from a corporate income tax perspective, but also for VAT under Czech legislation.
Liability of statutory bodies: A managing director who agrees to an unfavorable intra-group price breaches the duty of due managerial care under Czech law and may be personally liable with their assets.	Legal protection for management: We set approval processes and decision documentation (Business Judgment Rule).
Issues with bank financing: Banks require transparent reporting, and suspicious related-party transactions reduce the credit rating.	Due diligence: We prepare your structure for an investor’s entry or bank financing.

Most common mistakes when setting prices

When taking over clients at ARROWS, a Prague-based law firm, we often encounter recurring errors that unnecessarily increase tax risks in the Czech Republic.

The first common mistake is “rough estimate” pricing, where managers set a price without any calculation, which cannot stand up in court or before the authorities. Every price must be supported by a calculation or a comparison.

Another issue is outdated contracts without updates, which do not reflect inflation or current energy and wage costs. The Czech tax office can easily demonstrate that an independent party would have adjusted the price over the years.

A significant mistake is also the absence of a Benefit Test for services, where the parent company invoices the subsidiary for services the subsidiary does not need, which the authorities will treat as a tax-non-deductible expense under Czech tax rules.

The last common risk is unresolved VAT, as companies forget that even intra-group invoicing is subject to value added tax if they are not in a VAT group registration.

Practical case: how a holding structure operates

Holding H owns a warehouse hall through a real estate company and leases it to its subsidiary logistics company.

ARROWS’ approach consisted of a functional analysis, which confirmed that the real estate company provides only ownership and major repairs. Subsequent benchmarking identified market rent for comparable halls in the area at CZK 120–150 per m². The price was set at CZK 135 per m² and supported by Local File documentation with screenshots of listings.

If an audit were to occur, we would submit this file, from which the tax administrator would see that the price has a rational basis, and the audit can therefore end without an additional assessment.

International aspect of a holding structure

For cross-border transactions, the situation is more complex because each state wants to tax the profit domestically. The Czech authority typically demands a higher price to generate higher income in the Czech Republic, while the foreign authority prefers a lower price.

This is where Double Taxation Treaties and the advance pricing agreement (APA) mechanism come into play, allowing you to obtain binding confirmation of the pricing method with the authority. The DAC6 directive on reporting cross-border arrangements is also important.

The attorneys at ARROWS International handle these situations in cooperation with foreign colleagues, so that the setup complies with both jurisdictions and avoids double taxation.

How to start remediation

To begin, we recommend conducting an audit of transactions and compiling a list of all invoicing between related parties. Next, it is necessary to check whether there is a valid written agreement for each transaction and whether you know who determined the price and how.

If your documentation is not in order, we recommend urgent remediation, including the preparation of ex-post documentation that reconstructs and justifies historical prices before the Czech tax office comes knocking.

Conclusion

Intra-group agreements are not merely an administrative formality, but a cornerstone of your holding’s tax security in the Czech Republic. Transfer pricing is an area where law, economics, and taxation intersect, and an error in the setup can cost a company millions.

The Czech legal team at ARROWS, a Prague-based law firm, includes specialists in tax law and corporate structures who, backed by high professional liability insurance, will protect your business.

Do you have a holding structure or are you planning one? Do not wait for an audit—contact us at office@arws.cz.

FAQ – Frequently asked questions on contract optimisation

1. What is the arm’s length principle?
The arm’s length principle requires that prices between related parties correspond to the prices that independent entities would agree in ordinary commercial relationships under comparable conditions. It is a fundamental rule under Section 23(7) of the Czech Income Taxes Act (ZDP).

2. Is transfer pricing documentation mandatory in the Czech Republic?
Czech law does not expressly impose an obligation to maintain documentation in a specific format (except for CbCR), but the taxpayer bears the burden of proof. Without documentation, it is practically impossible to demonstrate that the prices are at arm’s length. Therefore, in practice it is essential.

3. What is the penalty for incorrectly set transfer prices?
If the Czech tax authority (FÚ) assesses additional tax, it will impose a penalty of 20% of the additionally assessed tax (or 1% of the reduction of a tax loss). In addition, late-payment interest applies (the CNB repo rate + 8 percentage points) for the entire period during which the tax was not paid, which can significantly increase the amount.

4. Can a managing director be liable for incorrect pricing?
Yes. If a managing director of a subsidiary accepts a disadvantageous agreement with the parent company that harms the subsidiary, they breach the duty of due managerial care under Czech law and may be personally liable for the damage caused.

5. Do I need to address transfer pricing even for interest-free loans?
Yes. If a lender (e.g., the parent company) provides an interest-free loan to a subsidiary, a Czech tax issue arises on the lender’s side (it should tax the “foregone” interest, unless specific exemptions apply). On the borrower’s side, a financial benefit may arise.

Notice: The information contained in this article is of a general informational nature only and is intended for basic guidance on the topic. Although we strive for maximum accuracy, legal regulations and their interpretation evolve over time. To verify the current wording of the regulations and their application to your specific situation, it is therefore necessary to contact ARROWS, a Prague-based law firm, directly (office@arws.cz). We accept no liability for any damages or complications arising from the independent use of the information in this article without our prior individual legal consultation and professional assessment. Each case requires a tailored solution, so please do not hesitate to contact us.

Read also: