The precise delimitation of transactions based on the actual conduct of the parties is now a standard required by global authorities. A recent ruling by the Regional Court of the Czech Republic (Case No. 15 Af 10/2023 – 128, January 2026), following a referral from the Supreme Administrative Court, emphasizes that the absence of a formal contract does not exempt companies from complying with the Arm’s Length Principle.
Challenges in the Consistency of Price Adjustments
In restructuring processes or changes in the operating model, companies often implement instructions from the parent company that alter their functions and risks. The challenge arises when these decisions do not translate into adequate compensation. For tax authorities, any profit transferred or risk assumed without market compensation will lead to a transfer pricing adjustment.
The Hitachi Astemo Case: Actual Conduct and Compensation
The litigation assessed how an instruction from the parent company led the Czech subsidiary to invest in new production for the group with no compensation. The Supreme Administrative Court determined that, regardless of a written contract, the actual behavior created a de facto agreement that an independent company would not have accepted without guarantees of return or immediate compensation. The Regional Court rejected the initial offset in its referral ruling, considering the tax authority’s evidence of such compensation and comparable data insufficient.
Burden of Proof and Assessment Criteria
The ruling contributes to methodological rigor: Although the transaction was recognized based on the behavior of the parties, the tax administration had to quantify the adjustment based on a solid benchmark price. Identifying a deviation is not sufficient; the authority must select and support a valuation method and make the necessary comparability adjustments before pricing administratively.
Evolution of International Taxation
This case reinforces the application of Chapter IX of the OECD Guidelines on Business Restructuring. Tax administrations are focusing not only on paperwork, but on analyzing actual economic flows. The Czech courts have established that the analysis must be comprehensive, identifying the transaction based on both behavioral and technical evaluations.
Recommendations for Multinational Companies
To manage the risks arising from operational changes, it is advisable to:
- Delineate transactions: Identify the functions and risks actually assumed, beyond what the contracts say.
- Support commercial rationality: Document why an independent company would accept the conditions imposed by the group.
- Robust comparability tests: Keep relevant data to support any investment decisions or changes to the profitability model.
- Specialized advice: Experts who validate the economic substance of intercompany transactions before detecting them in an audit.
Conclusion
“Substance over form” is not just a theoretical concept; it is the basis of modern auditing. The Hitachi case in the Czech Republic shows that while behavior defines the transaction, the tax authority must demonstrate market value using comparable data and supported methods. Operational transparency and sound technical valuation are the best defenses against double taxation.
TPC Group, as a specialized Transfer Pricing firm, advises multinational groups on assessing their restructuring processes and technically defending their intercompany operations, ensuring that the economic substance of their arrangements prevails in international audits and aligns with the OECD global standards.
Source: TPcases