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 economic benefit transferred or risk assumed without market remuneration constitutes a deviation that justifies an adjustment in transfer pricing.
The Hitachi Astemo case: Actual conduct and compensation
The litigation analyzed how a directive 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 the lack of a written contract, the actual conduct created a de facto agreement that an independent company would not have accepted without guarantees of return or immediate compensation. The Regional Court, in its referral judgment, overturned the initial assessment, finding that the tax authority failed to adequately prove the quantification of such compensation and did not use sufficient comparable data.
Burden of proof and valuation criteria
The ruling is a victory for methodological rigor: although it was recognized that the transaction existed based on the conduct of the parties, the tax administration was required to base the quantification of the adjustment on a solid reference price. It is not enough to identify a deviation; the authority must select and justify a valuation method and make the necessary comparability adjustments before determining a price administratively.
Evolution of international taxation
This case reinforces the application of Chapter IX of the OECD Guidelines on business restructuring. Tax administrations are moving away from focusing solely on paperwork to analyzing actual economic flows. The Czech courts have established that the analysis must be comprehensive: identifying the transaction by behavior, but valuing it with technical rigor.
Recommendations for multinational companies
To manage the risks arising from operational changes, it is advisable to:
- Delineation of Transactions: Identify what functions and risks are actually being assumed, beyond what the contracts say.
- Justification of Commercial Rationality: Document why an independent company would accept the conditions imposed by the group.
- Robust Comparability Testing: Maintain data to support any investment decision or change in the profitability model.
- Specialized Advice: Have experts validate the economic substance of intercompany transactions before they are detected 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 demonstrates that while conduct defines the transaction, the tax authority has the burden of proving market value with comparable data and justified methods. Operational transparency and sound technical valuation are the best defenses against double taxation.
TPC Group, as a company specializing in transfer pricing, advises multinational groups on the evaluation of their restructuring processes and the technical defense of their intercompany operations, ensuring that the economic substance of their agreements prevails in international audits and aligns with OECD global standards.
Source: TPcases