February 2026 – A recent Czech Supreme Administrative Court decision (3 Afs 165/2024‑67) is a timely reminder that transfer pricing is not only about invoices and formal agreements. For tax purposes, economic reality prevails: if a Czech subsidiary absorbs costs or risks arising from a parent company’s strategic decision without arm’s‑length compensation (or other adequate consideration), the tax authorities may deem it a controlled transaction and adjust the tax base. This remains true even if the strategic instruction is wholly informal or unwritten.
There is also a second, often underestimated, layer not explicitly addressed in the judg ment: the legal obligations of local management under Czech law. And although this may appear to be a largely theoretical risk for executive directors, it can crystallise very quickly. In particular, in situations involving a change of ownership or when the Czech company encounters financial difficulties. Those are the moments when the conduct of directors and historic decision‑making tend to be scrutinised in detail, and uncompensated effects of group‑driven instructions can become a very real issue.
A familiar scenario: headquarters instructs a Czech plant to pivot to a new product line. Costs rise immediately, while profits may materialise only later, if at all. Two questions follow: who bears the start‑up burden at arm’s length, and what steps did local directors take to protect the Czech company and document the outcome?
Three takeaways for multinational groups and Czech local management
- Substance over form: a parent company’s “instruction” may constitute a controlled transaction even without a formal agreement.
- Limited‑risk profile must reflect reality: stable, modest returns and the absence of uncompensated strategic risks should be the norm, otherwise, a clear compensation mechanism is required.
- Local governance and liability matter: if the Czech company suffers a detriment, directors are expected / may be legally obliged? to seek recovery or compensation, not simply follow instructions from headquarters.
Key duties in practice include:
- Report on Relations: prepared by the executive body within three months after financial year‑end, as part of the annual accounts process. It should describe the group structure and control, key parent‑driven actions (including significant asset‑related steps), and intercompany agreements, and assess advantages, disadvantages and risks. Importantly, it must state whether any detriment occurred to the Czech company and, if so, how and when it was or will be compensated.
- Influence and the duty to compensate: any “influential person” who decisively influences a company to its detriment must compensate it, unless they can show that they reasonably and in good faith believed they were acting in an informed manner and in the defensible interests of the influenced company. If the detriment is not compensated by the end of the financial year (or an agreed reasonable period), exposure may extend to shareholders, and the influential person may become liable to creditors for unpaid debts caused by that influence.
If you are planning a restructuring, production transfer or business pivot, we can help align transfer pricing policy, contractual arrangements and board documentation so the model withstands scrutiny in an audit and does not escalate into a governance problem.