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Disproportionate utilization of set electricity and gas prices in the group

The Government Regulation on the determination of electricity and gas prices in an emergency market situation sets maximum prices for these commodities. At the same time, it also sets the maximum permissible extent of the material benefit that a participant in the electricity or gas market can obtain by taking electricity and gas at the set price. The maximum permissible material benefit is calculated for the whole group (within the Czech Republic) taken together.

This raises the question whether the potential “disproportionate” utilization of this benefit could have tax implications. Consider, for example, the following situation.

A multinational group has two companies in the Czech Republic. Both companies have such energy-intensive production that they would be able to draw the maximum allowable benefit separately. Therefore, the group decides that, for administrative convenience, only one company will apply for the fixed prices and thus exhaust the entire benefit.

We consider that such a 'voluntary' non-use of the fixed prices in favour of another company in the group is subject to transfer pricing rules and should be compensated at a level such that neither company is worse off after compensation than if both had applied for the fixed prices.

Similarly, in our view, situations where a company applies for the use of the set prices at a later date or in any other way 'artificially' reduces its benefit from the set prices in favour of another group company should be treated similarly.

Similar situations are addressed in Directive D-34 issued by the General Tax Directorate, which states:

"Dependent transaction means any business relationship between related enterprises, where a business relationship may be also a 'parent company order', which means the influence of an independent transaction by a related enterprise. For example, a parent company directs a subsidiary to sell to independent customers at other than normal prices (i.e., the subsidiary would not realize the transaction by its own decision), where the difference so arising is attributable to the 'parent company direction' and the subsidiary is entitled to compensation from the parent in that amount. Often, the parent company's orders are not explicitly contractually captured or accounted for, but nevertheless exist in reality."

In addition to the above, careful consideration should also be given to the VAT treatment of such compensation, as it is typically a transaction between two VAT payers. It is suggested that the compensation should be treated as taxable consideration for the surrender of a right subject to the standard rate of VAT. However, it is always advisable to assess the specific contractual set-up.

If you have any questions, please contact the authors of this article or the EY tax team with whom you regularly work.

Authors:

Stanislav Pokorný

Michal Kašpar