A financial loophole is allowing corporations to drain billions from the Czech Republic, not just through dividends but via the intricate strategy of transfer pricing. This year alone, companies are poised to move over 300 billion crowns abroad, not just from dividends but also by selling goods and providing consultancy and licenses, particularly in the IT sector, to their Czech entities at artificially inflated prices.

The Financial Administration acknowledges a surge in such illicit practices, describing them as attempts at tax optimization. Tomáš Weiss, a spokesperson for the Administration, notes an alarming increase in purposeful structures and chains between related parties, particularly in advertising, where prices are artificially inflated. Complex cases involving optimization schemes to divert profits from the Czech Republic through the transfer of intangible assets and subsequent licensing are also on the rise.

One common misuse involves transferring a trademark to a foreign-owned company. The Czech company sells the trademark to its foreign-related entity at a significantly lower price than its market value. Subsequently, the foreign company enters into a licensing agreement with the Czech entity, allowing it to continue using the trademark in the Czech Republic. However, the Czech company pays fees well above market prices to its foreign counterpart. Even after the trademark sale, the Czech entity continues to bear the costs of its maintenance and appreciation, despite the formal legal ownership residing with the foreign company.

The consequence of such practices is a diversion of profits abroad, as the undervalued purchase price for the trademark and the overvalued licensing fees lead to a decrease in corporate income tax collection. Profits are often funneled to countries with lower income taxation from licensing fees, with Cyprus being cited as an example.

While transactions between related companies should adhere to arm’s length principles and market conditions, violators face consequences ranging from additional taxes and penalties to potential criminal prosecution for the company’s statutory bodies. The Financial Administration, which has been monitoring transfer prices for a decade, is now extending its scrutiny beyond large multinational corporations to focus increasingly on medium and small businesses, according to court expert Martin Koldinský.

Article by Prague Forum