This ruling addresses an appeal filed by the Appellate Financial Directorate (the "Appellant") against a regional court ruling that favoured Astemo Czech in a case involving the reassessment of corporate income tax loss.
The Supreme Administrative Court (SAC) of the Czech Republic has issued a ruling on 12 November 2025, concerning a tax dispute involving the company Astemo Czech, s. r. o., and the Appellate Financial Directorate. The ruling includes informal instructions from a parent company that the line conversion of a manufacturing subsidiary may be considered a controlled transaction under transfer pricing regulations.
This ruling addresses an appeal filed by the Appellate Financial Directorate (the “Appellant”) against a regional court ruling that favoured Astemo Czech in a case involving the reassessment of corporate income tax loss.
At the core of the dispute is whether a parent company’s directive to its subsidiary, Astemo Czech, to start a new line of automotive parts manufacturing without compensating the subsidiary for the initial startup costs constitutes a “related-party transaction” that violates the arm’s length principle under Czech tax law and the OECD Transfer Pricing Guidelines.
Their central argument was that Astemo Czech is a contract manufacturer with a limited functional and risk profile.
As the parent company made the strategic decision to change production, the parent company was required, under the arm’s length principle, to compensate the subsidiary for the start-up costs incurred. An independent enterprise would not have agreed to initiate entirely new production, incurring significant expenses, without being compensated by the strategic decision-maker during the period the costs were incurred. The tax authorities viewed the amount of the uncompensated start-up costs as the necessary compensation that should have been paid by the parent company.
The Supreme Administrative Court ultimately ruled in favour of the Appellate Financial Directorate, annulling the regional court’s judgment and remanding the case, holding that the financial consequences of a parent company’s strategic order should be considered a taxable business relationship subject to transfer pricing rules.
