On September 12, 2025, the Supreme Administrative Court of the Czech Republic issued a ruling in the case of Eli Lilly ČR, s.r.o., in which it analyzed the criteria for deductibility of costs related to intra-group transactions under the “cost plus” model.
The decision is noteworthy in that it clarifies the use of a “cost plus” margin in transactions between related parties, which does not exempt the obligation to demonstrate, both documentarily and economically, the direct connection between costs and revenue generation, in accordance with Article 24(2)(zc) of the Czech Income Tax Act.
The decision is key to transfer pricing practice and deductibility in intra-group transactions, as it reaffirms that the entity must provide specific evidence that each expense contributed to the generation of income and not simply that it was included in the basis for calculating a margin.
Background to the case
The company Eli Lilly ČR, s.r.o., a subsidiary of the multinational group Eli Lilly, provided marketing and commercial support services to related entities. To remunerate these services, a model based on the “cost plus” method was applied, with a margin of 5%.
During an audit process covering the 2013 and 2014 fiscal years, the Czech Republic Tax Administration questioned the deductibility of certain expenses included in the calculation basis, considering that there was no direct and verifiable relationship between those costs and the income derived from the service provision contract.
The company filed an appeal with the Prague Administrative Court, which was dismissed, and subsequently with the Supreme Administrative Court, arguing that the “cost plus” model adequately reflected the economic link between costs and revenues.
However, the Supreme Administrative Court upheld the tax authorities’ decision, concluding that the use of an intra-group remuneration method does not replace the taxpayer’s obligation to demonstrate, with sufficient evidence, the causal relationship between the costs incurred and the income obtained.
Analysis of the ruling
The Court’s decision develops several criteria of particular relevance to tax and transfer pricing practice:
1. The “cost plus” model does not exempt from the burden of proof
The Court held that the use of an intragroup pricing model with a margin on costs does not, in itself, constitute proof of the deductibility of the expenses included in the calculation basis.
In this regard, the ruling states that even if the contract provides for remuneration based on costs plus a margin, this does not automatically demonstrate that each specific cost contributes to the income; that is, the “price logic” derived from the contractual agreement does not replace the documentary and economic evidence required by tax regulations.
The Court warned that accepting pricing logic as sufficient evidence would be equivalent to making the application of Article 24(2)(zc) unlimited without requiring the deductibility rules provided for in Section 25 and others.
2. Requirement of a direct connection between expense and income
Czech law, according to Article 24(2)(zc) of the Czech Income Tax Act, provides that costs must have a direct and verifiable connection to the taxpayer’s income.
The Court reaffirmed that tax deductibility is not presumed, so the taxpayer must substantiate that the specific costs actually contributed to the generation of income.
The ruling adds that a direct link implies that the costs are not only invoiced or included in the contract calculation basis, but that they had the real potential to influence the generation of income, beyond simply being transferred to the price.
3. Burden of proof on the taxpayer
The ruling highlights that when the tax authority makes observations on the appropriateness of certain expenses, it is up to the taxpayer to prove their functional and economic link through appropriate documentation: contracts, management reports, budgets, cost analyses, among others.
In this case, the Court found that the company had submitted contracts, invoices, and accounting summaries, but only late-and after a request from the tax authority-did it offer to prove the links between each expense item and the income. Therefore, it did not meet the burden of proof.
4. Consistency with previous case law
The Court cited previous cases to reaffirm that the deductibility of an expense cannot be based solely on the transfer pricing structure, but on the economic reality that supports its accrual and business purpose.
Implications for transfer pricing management
Although the ruling originated in the context of a cost review, its reasoning has relevant effects on the practical application of transfer pricing methods, especially those based on the cost approach.
In practice, this decision implies that:
- Transfer pricing studies must be accompanied by a detailed accounting and functional analysis of the costs included in the calculation basis.
- Companies must ensure that intra-group shared or allocated costs are supported by evidence demonstrating their link to revenue-generating activities.
- Intragroup contracts must reflect the economic substance of the transactions and allow for clear traceability between the costs recorded and the benefits obtained.
- In audits of intragroup services, tax authorities may question not only the methodology (margin, comparables, discounts) but also the functional justification of the service, its connection to the business, and proof of its contribution to income.
- For multinational groups, it is essential to reinforce consistency between transfer pricing policies, internal evidence of costs and invoicing, and local tax regulations, in order to avoid adjustments or loss of deductibility in future tax reviews.
Consequently, multinational organizations must strengthen the consistency between their transfer pricing policies and local tax regulations in order to avoid adjustments or loss of deductibility in future tax reviews.
Conclusions
The Eli Lilly ČR, s.r.o. case sets an important precedent for international tax practice by establishing that the proper application of an intra-group remuneration model does not, in itself, guarantee the tax deductibility of costs.
The ruling highlights the importance of taxpayers having sufficient economic and functional documentation to prove the direct relationship between the costs incurred and the income generated, in compliance with the principles of causality and tax reasonableness.
Does your company need advice on transfer pricing?
At TPC Group, we provide comprehensive advice in Latin America, the United States, and Spain on transfer pricing, tax compliance, and international tax planning, ensuring regulatory consistency and documentary support in each jurisdiction.
Source: TPCases