Czech Republic:  The burden of proof on the taxpayer in case of intra-group services

On 16 May 2023, the SAC issued its final decision on the Stock Spirits Group case, which discusses the legitimacy of deduction of expenses incurred as intra-group services. These expenses included consulting services remunerated with a feature resembling a profit split method, as well as charges made for support services and recharge of services from third parties related to the refinancing of the loan. The key issue of dispute was the burden of proof on the taxpayer to establish that the services could be deducted for tax purposes, rather than discussing the specific transfer-pricing methodology.

In May 2014, the Czech tax authorities conducted an audit of Czech-based company STOCK Plzeň-Božkov, a traditional producer of alcoholic beverages in the Czech Republic and a member of the international Stock Spirits Group for the tax year 2011. As a result of the audit, the tax authorities denied the deduction of costs for several types of intra-group services by applying the so-called “benefit test”, which was applied in two steps. 

First, tax authorities examined whether STOCK Plzeň-Božkov actually received the services. Secondly, the tax authorities analysed whether the services contributed to generating or maintaining the company’s taxable income, i.e. how they benefited the company’s business.

The three types of disputed intra-group services in this case included the following:

1. Consulting services related to production activities and value management of the manufacturing process, which were remunerated with reference to 20% of the cost savings. The reward was tied to precise criteria and payment was agreed upon only for the result –achieved savings in three key areas: (i) more efficient use of material, (ii) reduction of overhead costs, and (iii) reduction of direct costs. SAC upheld the company’s position against the challenge by the tax authorities.
   
   
2. Support services in IT and HR; management services of the CEO; legal, financial management, sales, marketing, and other services related to administration which were remunerated with the reference to costs + 5%. The SAC did not agree with STOCK Plzeň-Božkov'sposition and instead supported the position of the tax authorities and the regional court, which both concluded that the company did not sufficiently prove the scope and content of the services provided, either through documentary evidence or in another way.
   
   
3. Recharge of services provided by third parties allegedly related to the refinancing of the STOCK Plzeň-Božkov'sfinancial liabilities, and reinvoiced based on an allocation key. The SAC did not accept the company’s arguments and supported the position of the tax authorities which was also supported by the regional court. The SAC acknowledged that it was not disputed that the loan was refinanced and that this step was necessary, but this alone was not enough to meet the burden of proof in relation to the reinvoiced expenses.

The judgment marks a significant development in the legal framework surrounding intra-group services and their tax implications. This landmark case delves into the complexities of proving the legitimacy and business purpose of services charged within a corporate group, particularly focusing on consulting, support, and third-party services related to financial restructuring. The court's findings emphasise the critical need for detailed evidence to substantiate the actual delivery and direct benefit of such services to the paying entity. 

This decision not only reinforces the stringent standards required for tax deductibility of intra-group transactions, it also serves as a crucial guideline for multinational corporations operating within the Czech jurisdiction, urging a thorough re-evaluation of their documentation and internal pricing strategies to ensure compliance with the established legal norms.

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Richard Jahoda is the founder and managing partner of Grinex Advisory, s.r.o., responsible for tax and M&A advisory.