Transfer Pricing in Czechia

This week’s transfer pricing update heads to the Czech Republic, where a recent ruling by the Supreme Administrative Court of the Czech Republic (SAC) has clarified the limits of the cost plus method for intragroup services when it comes to tax deductibility of costs. A subsidiary using a cost plus recharge model attempted to include expenses normally non-deductible (such as entertainment or gifts) in its cost base simply because the recharge contract used costplus. The court said: nice try — that alone doesn’t suffice. 

For transfer pricing professionals advising multinational groups with routine service entities in Czechia, the takeaway is clear: a cost plus method doesn’t give a free pass to include non-deductible items unless you can demonstrate a direct, causal link between those costs and the revenue they generate. 

Legislative Background 

Under Czech tax law, certain expenses—entertainment, excessive gifts, penalties—are non-deductible by default. Yet the Income Tax Act contains special provisions allowing a deduction or nontaxation of income where there is a “direct and verifiable link” between the non-deductible cost and the generation of taxable income. 

In the past, tax authorities had permitted entities operating on a cost plus basis to recharge all their costs, including non-deductible ones, under the logic that cost plus inherently justifies a markup on full cost. However, the recent SAC decision rejects that blanket approach. 

The Case at Hand 

In the case, a Czech subsidiary of a multinational pharmaceutical company provided services on a cost plus basis to the parent. They included non-deductible costs such as entertainment and other expenses in the cost base for recharge. The tax authority challenged the deductibility and inclusion in cost base. 

Key facts: 

• The subsidiary used a cost-plus margin model for intragroup transactions. 

• Non-deductible costs were included in service cost base. 

• The taxpayer argued satisfactions of the special link provision: because those costs were recharged, they must relate to revenue. 

• The SAC rejected that, concluding inclusion in the cost base did not prove a direct link between cost and income generation. 

Why Czechia’s update in Transfer Pricing Matters

Cost plus ≠ automatic cost base coverage 

“The cost plus model covers it” is no longer a valid argument alone. The audit trail must show that each cost contributed to income—not just that it was present in the cost base. 

Causal link is critical 

The court demanded evidence that without the cost, the revenue would not have been earned. A recharge doesn’t flip the switch by itself. 

Arm’s length standard remains alive 

Cost base and service contracts must reflect economic reality — not just internal pricing mechanics. Routine entities and cost plus service providers in Czechia must revisit their cost inclusion policies. 

Monitoring documentation and proof 

Transfer pricing documentation must not only justify the cost plus margin, but provide functional analysis, benchmarking, and proof of expenses’ link to results. 

Double exposure risk 

If subsidiary charges cost plus with non-deductible expenses and deduct them locally, then the tax authority disallows deduction, the result is an upward adjustment — adding transfer pricing risks. 

How Reptune Supports Compliance in Complex Cost Plus Scenarios 

Reptune’s intelligent transfer pricing software helps businesses manage costplus models in a way that ensures alignment with tax regulations. Through automated cost classification, robust functional analysis, and dynamic linkage between documented costs and services rendered, Reptune users can clearly distinguish deductible from non-deductible items and support their cost allocations with data driven insights. This is particularly valuable in jurisdictions like Czechia, where tax authorities are closely scrutinising intragroup charges under cost plus methods. With Reptune, multinationals can reduce audit risks, align intercompany documentation with the arm’s length principle, and prepare their master file, local file, and transfer pricing reports with confidence. 

Conclusion 

The Czech Supreme Administrative Court’s decision signals a shift away from the assumption that cost plus pricing alone protects all intragroup cost deductibility. Especially for multinational enterprises, this means that routine service entities operating in Czechia must revisit cost base policies and ensure that non-deductible costs are either excluded or supported by a clear causal link to revenue generation. 

From a transfer pricing standpoint, it’s another reminder: methodology matters, but substance wins. Cost plus is a model—but it does not override underlying tax law, deductibility rules or the arm’s length standard. 

In short: no more “free lunch” for cost plus entities in Czechia.