Czech Transfer Pricing Case: ERT Automotive Bohemia Wins Appeal Against Tax Authorities


The Supreme Administrative Court of the Czech Republic upheld the decision of the Regional Court in České Budějovice, ruling in favour of ERT Automotive Bohemia s.r.o. in a transfer pricing dispute. The court found that the tax authorities failed to determine the reference price properly and adequately address the taxpayer’s explanations regarding the controlled transaction.

Case Information:

Court: Supreme Administrative Court of the Czech Republic
Case No: 10 Afs 257/2022
Applicant: ERT Automotive Bohemia s.r.o.
Defendant: Appellate Financial Directorate
Judgment Date: June 15, 2023

Key Points of the Judgment:


ERT Automotive Bohemia s.r.o. is an automotive industry company that provided manufacturing and repair services for upholstery products to its sister company, Reiner Lasertec GmbH, from January to November 2013. Both companies were owned by the parent company Notos Beteiligungen GmbH.The applicant charged EUR 0.15 per minute of work for its services to Reiner Lasertec. In December 2013, ERT Automotive Bohemia changed its business model, taking over Reiner Lasertec’s role as an independent manufacturer and final supplier.

Core Dispute:

The Czech tax authorities suspected that ERT Automotive Bohemia had provided services to Reiner Lasertec at a price lower than what would have been agreed between independent parties. They sought to adjust the company’s corporate income tax base for the 2013 tax year under Section 23(7) of the Income Tax Act.

Court Findings:

  1. Reference Price Determination: The court found that the tax authorities did not correctly determine the reference price. They relied on a single independent transaction that was not sufficiently comparable to the controlled transaction.
  2. Comparability Analysis: The tax authorities failed to adequately account for the differences between ERT Automotive Bohemia’s roles in the controlled and independent transactions. In the controlled transaction, the company acted as a subcontractor, while in the independent transaction, it was a final supplier.
  3. Burden of Proof: The court emphasized that the tax authorities bear the burden of proof in establishing the reference price and demonstrating the difference between the agreed price and the reference price.
  4. Taxpayer’s Explanations: The tax authorities did not sufficiently address ERT Automotive Bohemia’s explanations regarding the costs covered by the agreed price and the company’s circumstances during the controlled transaction.


The Supreme Administrative Court dismissed the tax authorities’ appeal and upheld the Regional Court’s decision to annul the additional tax assessment. The case was referred back to the tax authorities for further proceedings.

Transfer Pricing Method:

The tax authorities initially used the Transactional Net Margin Method (TNMM) to determine the reference price. However, they later switched to the Comparable Uncontrolled Price (CUP) method, comparing the controlled transaction with a subsequent transaction between ERT Automotive Bohemia and Boshoku Automotive.

Major Issues and Areas of Contention:

  1. Comparability of Transactions: The primary issue was whether the independent transaction chosen by the tax authorities was sufficiently comparable to the controlled transaction, given the different roles played by ERT Automotive Bohemia in each case.
  2. Reference Price Determination: The court criticized the tax authorities’ approach to determining the reference price, particularly their reliance on a single independent transaction and failure to adequately adjust for differences between the transactions.
  3. Burden of Proof: The case highlighted the importance of tax authorities meeting their burden of proof in transfer pricing cases, especially in demonstrating the appropriateness of the chosen comparable transactions and reference price.
  4. Consideration of Taxpayer’s Explanations: The court emphasized the need for tax authorities to adequately address and consider the taxpayer’s explanations regarding the circumstances of the controlled transaction.
  5. Business Model Changes: The case underscored the challenges in assessing transfer pricing when a company undergoes significant changes in its business model, as ERT Automotive Bohemia did in December 2013.

Expected or Controversial Decision:

The decision aligns with established principles in transfer pricing and tax law, emphasizing the importance of proper comparability analysis and the tax authorities’ burden of proof. The decision significantly reinforces these principles and provides guidance for future transfer pricing cases in the Czech Republic and potentially other jurisdictions.

Significance for Multinationals and Revenue Services:

  1. Comparability Analysis: The case underscores the importance of conducting thorough comparability analyses when selecting comparable transactions for transfer pricing purposes. Multinationals should ensure that their transfer pricing documentation includes detailed explanations of the comparability factors considered.
  2. Business Model Changes: Companies undergoing significant changes in their business models should be particularly vigilant in documenting the impact of these changes on their transfer pricing arrangements.
  3. Burden of Proof: The decision reinforces that tax authorities bear the primary burden of proof in transfer pricing adjustments. This may encourage revenue services to be more thorough in their analyses and documentation before proposing adjustments.
  4. Multiple Methods: The case illustrates the potential benefits of considering multiple transfer pricing methods to support pricing arrangements, as the tax authorities’ switch from TNMM to CUP was subject to scrutiny.
  5. Taxpayer Explanations: Multinationals should be prepared to provide detailed explanations of their transfer pricing arrangements, including the economic rationale and specific circumstances influencing their pricing decisions.
  6. Documentation: The case highlights the importance of maintaining comprehensive transfer pricing documentation that addresses all aspects of the pricing arrangement, including the roles and risks assumed by each party.

Value of Transfer Pricing Expertise:

This case demonstrates the critical importance of transfer pricing expertise in managing tax risks and defending against tax authority challenges. The value of such expertise includes:

  1. Robust Documentation: Transfer pricing experts can help develop comprehensive documentation that addresses all relevant comparability factors and supports the chosen pricing method.
  2. Method Selection: Experts can guide companies in selecting the most appropriate transfer pricing method(s) for their specific circumstances, reducing the risk of challenges from tax authorities.
  3. Economic Analysis: Transfer pricing specialists can conduct thorough economic analyses to support pricing decisions and defend against potential adjustments.
  4. Risk Assessment: Experts can help identify potential transfer pricing risks and develop strategies to mitigate them before they lead to disputes with tax authorities.
  5. Dispute Resolution: In the event of a challenge, transfer pricing experts can provide valuable support in presenting technical arguments and negotiating with tax authorities.
  6. Business Model Alignment: Transfer pricing specialists can assist in aligning transfer pricing policies with changing business models, ensuring consistency and reducing the risk of disputes.

Preventative Measures and Tax Risk Management:

Companies should consider implementing a proper tax risk management process and establishing a tax steering committee to avoid or better manage cases like this. Key steps include:

  1. Establish a Tax Steering Committee: As outlined in the Tax Risk Management article, a tax steering committee can provide oversight and strategic direction for tax matters, including transfer pricing.
  2. Develop a Tax Risk Management Framework: Implement a structured approach to identifying, assessing, and mitigating tax risks, with a focus on transfer pricing.
  3. Regular Review of Transfer Pricing Policies: Conduct periodic reviews of transfer pricing arrangements to ensure they remain appropriate as business circumstances change.
  4. Enhance Documentation Practices: Maintain comprehensive, up-to-date transfer pricing documentation that addresses all aspects of the pricing arrangement and supports the economic rationale.
  5. Proactive Communication with Tax Authorities: Consider engaging in advance pricing agreements (APAs) or other forms of proactive communication with tax authorities to reduce the risk of disputes.
  6. Implement Technology Solutions: Utilize transfer pricing software and data analytics tools to improve the accuracy and consistency of transfer pricing analyses.
  7. Training and Awareness: Provide regular training to relevant personnel on transfer pricing principles and the importance of maintaining proper documentation.
  8. Cross-functional Collaboration: Ensure close collaboration between tax, finance, and operational teams to align transfer pricing policies with business realities.
  9. Scenario Planning: Conduct regular scenario analyses to assess the potential impact of business changes on transfer pricing arrangements.
  10. External Advisors: Engage external transfer pricing experts to provide independent reviews and insights into best practices.

By implementing these preventative measures and establishing a robust tax risk management process, companies can significantly reduce the likelihood of transfer pricing disputes and be better prepared to defend their positions if challenges arise. The ERT Automotive Bohemia case serves as a reminder of the complexities involved in transfer pricing and the importance of a proactive, well-documented approach to managing these risks.

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