Extended Background

In the Czech industrial sector, RR Donnelley’s local operations made frequent intercompany purchases from group entities. Authorities, amid a regional clampdown on profit shifting, began treating these payment terms as loans, applying LIBOR interest benchmarks—a trend growing across Central and Eastern Europe pre-OECD BEPS financial reforms.

Detailed Arguments

Taxpayer

• Maintained these were standard procurement payables, not credit-risk transactions or disguised loans.

• Cited routine commercial behavior, arguing comparability analyses showed third parties would not impute LIBOR-based interest here.

Tax Authority

• Characterized payment delays as risk-free loans, imposing notional interest and penalties.

• Relied on the argument that any “free” capital in the group should be priced as a financial transaction.

Court Reasoning

• Both appellate and supreme courts agreed with RR Donnelley: lacking economic comparability and no real lending function, these payables could not just be recharacterized as loans.

Procedural Journey

• Tax adjustment and penalty imposed, challenged by appeals, resolved with full exoneration by the Czech Supreme Administrative Court.

Implications Beyond the Case

• Reinforces that intercompany terms must be benchmarked against real, arm’s-length business practice—not just assumed financial instruments.

• MNEs should thoroughly document commercial rationale for payment terms, especially where working capital liquidity is at issue.

Original Case Link:

TP Cases English translation