The defensibility of losses for entities with a limited functional profile from the point of view of transfer pricing

Following the new decision of the Supreme Administrative Court, transactions carried out by the tax entity with unrelated entities, provided that these transactions are affected by the group’s decision, are also subject to the arm’s length principle.

In such a case, in the decision (7 AFS 398/2019 – 49) of the Supreme Administrative Court (SAC), the tax entity bears the risks to the benefit of the group. Since the entity cannot influence these risks, it is entitled to the appropriate compensation. Moreover, if such transactions result in a loss for the tax entity, it is the opinion of the SAC that the tax entity should be compensated for its hypothetical service consisting in the realisation of loss-making production for the benefit of the group. In the opinion of the SAC, it is not necessary to examine the individual transactions for the (limited) functional profile of the tax entity, but only its overall profitability is important.

Thus, in transfer pricing practice, it will be necessary to face new challenges in the form of the correct valuation of “hypothetical services” provided between members of the group and the defence of the arm´s length nature of profits (losses) achieved by related companies in relation to transactions with unrelated parties, if they were conducted on the basis of the so‑called parent company order [1].

If you have any questions about the information given above, we are ready to discuss your particular situation.


[1] The parent company's order is generally meant to be any influencing of the independent transaction by the parent company (or by another related entity).

Vít Fritzsche, Tax Manager