Intra-Group Leases in Czech Tax Audits: Arm’s Length Rent and Risks

JUDr. Jakub Dohnal, Ph.D., LL.M.
JUDr. Jakub Dohnal, Ph.D., LL.M.
22.5.2026 | ARROWS law firm

A properly structured lease between affiliated companies is now one of the most frequent topics of tax audits, especially in the area of transfer pricing. If you cannot credibly substantiate that the rent is at arm’s length, you risk an additional assessment of corporate income tax, late-payment interest, penalties, and VAT disputes. In this article, you will find a practical guide on how to set up intra-group lease relationships from a legal, tax, and commercial perspective so that they withstand scrutiny by the Czech tax authority while still making economic sense for your business.

The photograph shows an attorney consulting on the setup of a lease arrangement between affiliated companies.

Key takeaways:
  • Rent between related companies must comply with the arm’s length principle (arm's length principle); otherwise, additional corporate income tax may be assessed along with related penalties, such as default interest (CNB repo rate + 14 percentage points) and a penalty of 20% of the additionally assessed tax.
  • To defend arm’s length rent, you need a rational and explainable method, ideally a combination of approaches such as the Comparable Uncontrolled Price (CUP) method and the Cost Plus Method.
  • The burden of proof lies with the taxpayer. This is why it is crucial to have a high-quality lease agreement and continuously prepared documentation that includes a description of the chosen method, the inputs used, and a conclusion on the arm’s length price range.
  • Leasing between related parties is a strategic topic that affects not only corporate income tax, but also overlaps with VAT, accounting, impacts cash flow, and the company’s value in transactions.

Why the tax authority scrutinises rent between related companies

Rent between related companies is an attractive topic for the tax authority for one simple reason: it is an easily graspable area where the difference between the actual market price and internally set rent can significantly affect the corporate income tax base. If rent is artificially reduced, costs are reduced for one company while taxable income is simultaneously limited for the other, or profits are shifted to an entity with lower taxation.

Conversely, if rent is set too high, profit is transferred to another link in the group, which may serve aggressive tax optimisation. The tax administrator therefore examines whether the contractual rent between related parties deviates from the amount that would have been agreed between independent entities under normal market conditions.

The basic support for this approach is the arm’s length principle, known in English as the arm's length principle. This is reflected in the rules for adjusting the corporate income tax base in cases where the conditions between related parties differ from those that would apply between independent parties, and where such a difference would reduce the tax base.

The tax adjustment of the corporate income tax base between related parties is regulated in Section 23(7) of Act No. 586/1992 Coll.In practice, it pays to have transfer pricing (including rent) substantiated also from a tax perspective, for which support can be used within tax advisory services., on Income Taxes, as amended. In practice, this means that the tax authority may adjust the tax base as if the rent price corresponded to market rent. If the taxpayer does not prove that the agreed price is close to the market level, they risk an additional tax assessment and related penalties.

This principle is not limited to large multinational groups; it also applies to purely Czech companies, family holdings, and situations where the owner leases real estate to their own company.

Another reason for the increased interest of the tax administrator is the fact that rent for real estate often represents a significant item in costs or income, and on a long-term basis. Incorrectly set rent therefore does not mean a one-off mistake, but a fundamental error multiplied over several tax periods.

At the time of a tax audit, additional assessments for several years may accumulate, and together with default interest and penalties, the resulting amount becomes very painful for the company. To prevent similar impacts, it helps to continuously evaluate risky cost items, as also summarised in the article Risky items in the 2026 tax return: Which corporate costs to watch out for and how to defend them safely. Default interest is set at the CNB repo rate valid on the first day of the relevant calendar half-year, increased by 14 percentage points, and the penalty reaches 20% of the additionally assessed tax. In addition, the tax authority is increasingly using more sophisticated analytical tools that make it possible to compare data from the real estate cadastre, financial statements, or internal rent databases.

We must not forget that in the area of leasing between related parties, tax, commercial and private law overlap. This is precisely why it makes sense to address lease relationships also in the broader context of group settings and relationships between shareholders within corporate law, holdings and structures.It is not only decisive how much related companies charge each other, but also how the relationship is structured under Act No. 89/2012 Coll., the Civil Code (hereinafter the “Civil Code”), how it is reflected in accounting, what impacts it has on VAT, and whether it corresponds to the economic reality of the transaction.

A typical problem is, for example, a situation where the rent hides financing of part of an investment, the provision of services, or the assumption of specific risks, without these elements being transparently separated in the agreement and in the rent calculation. It is precisely in such cases that the lawyers and tax advisors at ARROWS advokátní kancelář often encounter that the client considered the lease setup “trivial”, but the tax authority assessed the situation quite differently.

From an entrepreneur’s perspective, it is essential to realise that rent between related companies is not just an internal number agreed by the owners or management. It is a figure that must stand up to the outside world: the tax authority, an auditor, a financing bank, potential investors, or a buyer of the company. In connection with a company review by an investor or buyer, it may also be useful to go through the typical legal and tax shortcomings described in the text How to prepare a company for sale: Legal and tax defects that most often derail the entire transaction.

Setting rent therefore affects not only the tax position, but also the company’s value, the quality of cash flow, and the negotiating position in transactions. For this reason, it is appropriate to view leasing between related parties as a strategic topic, not merely a technical detail for the accounting department.

When companies are considered related and which rents are risky

For the lease to be subject to the rules for related parties, it is crucial whether, from the perspective of tax regulations, the landlord and the tenant are considered related. The definition of related parties can be found in Section 23(7) of the Income Taxes Act.

Typically, these are relationships between companies within the same group, between a parent and a subsidiary, between sister companies controlled by the same owner, or between a company and an individual– an owner who leases real estate to it. However, the category of related parties may also include relationships where there is no direct equity interest, but there is significant influence over management or control, for example through contracts, personal links (so-called otherwise related parties), or other arrangements.

Typically, this will be a situation where the same person is an executive director or a member of the governing bodies of several companies that trade with each other, or where one person participates directly or indirectly in the management or control of another person.

A lease monitored by the Czech tax authority does not have to relate only to real estate. Leases of movable assets also come under scrutiny, for example machinery, production lines, vehicles, or IT equipment, as well as leases of rights, such as a software licence or the use of trademarks.

In all of these cases, the agreed rent must correspond to what would be customary between independent parties. For real estate, the question of whether it is a lease of residential premises, offices, warehouses, production halls, or specialised properties is also important, because market rent differs significantly across segments and a layperson can easily rely on unsuitable comparisons.

Particularly risky are leases between related parties that are significantly higher or lower than the rent customary in the given locality, time, and segment, while at the same time there is no documentation available explaining the reasons for this difference. A typical situation is, for example, an owner leasing property to their own company for a symbolic rent, while the company bears all maintenance costs and claims them for tax purposes. 

At the other end of the spectrum, there may be a lease of an administrative building between companies within a multinational group at a rent that is higher than market level in order to artificially shift profit to another jurisdiction. In both cases, the tax administrator will ask for the economic and legal justification of the set price.

A specific category consists of situations where a lease is formally agreed between independent entities, but in reality there are hidden links that mean these partners are not truly independent. This may involve, for example, a relationship between two companies whose executive directors are close relatives or long-term business partners acting in concert.

In such cases, the Czech tax authority may conclude that these are otherwise related parties and apply transfer pricing rules even where the taxpayer believes they are dealing with an independent third party. For managers, it is therefore important to have an overview not only of equity links, but also of personal and factual connections within the business circle. For in-house counsel and CFOs, it is practical to create an internal map of related parties within the group and update it regularly. This map should include not only formal shareholdings, but also other links that may be relevant for Czech tax law.

In practice, the attorneys at ARROWS, a Prague-based law firm, often start with this analysis, because only after the circle of related parties is precisely defined is it possible to correctly set up internal lease relationships, transfer pricing, and documentation. During expansion or acquisitions, this part is often underestimated, which later becomes apparent during tax audits when the tax administrator uncovers “hidden” links that the client believed were irrelevant from a tax perspective.

Most common questions about related parties and tax relationships between them 

1. Is it sufficient to assess relatedness by looking only at the formal ownership structure?
In practice, it is not sufficient, because Czech tax law also works with the concept of otherwise related parties under Section 23(7) of the Income Taxes Act, where the connection may arise, for example, through a control agreement, identical management, or an agreement on coordinated action. In these situations, it is worth consulting the specific structure with the attorneys at ARROWS, a Prague-based law firm, at office@arws.cz, so that all relevant risks are properly assessed.

2. Is a lease between an individual owner and their own company always considered a lease between related parties?
In most cases, yes, because the owner has decisive influence over the company and is generally considered a related person within the meaning of Section 23(7) of the Income Taxes Act. This means that the rent should correspond to market conditions and be substantiated; otherwise, there is a risk of an additional tax assessment for both the company and the individual. If you are not sure whether your specific relationship falls under the related-party regime, it is advisable to contact the attorneys at ARROWS, a Prague-based law firm, via office@arws.cz.

3. How does relatedness work in a joint venture where different investors hold smaller stakes?
The assessment depends on whether someone gains decisive influence or whether there are agreements that lead to coordinated action in voting or management. Even a minority stake may be associated with significant influence and thus with related-party status. In more complex ownership and contractual structures, it is therefore more practical not to improvise and to have a tailored legal and tax analysis prepared by specialists at ARROWS, a Prague-based law firm; you can contact them at office@arws.cz.

Legal framework for setting the rent price between related parties

Setting rent between related companies under Czech law is based on several key regulations that need to be considered together. The foundation is the tax regime, i.e., the income tax rules, specifically Section 23(7) of Act No. 586/1992 Coll., on Income Taxes, as amended, which allows the tax administrator to adjust the tax base if the prices of transactions between related parties do not correspond to prices customary between independent entities.

The rules on so-called transfer pricing also come into play. Although they are not regulated in a separate act, they build on the general arm’s length principle and on international standards, in particular the OECD Transfer Pricing Guidelines. If the lease relationship between related parties is part of a broader chain of transactions within the group, the tax administrator assesses this whole precisely through the lens of transfer pricing.

The legal framework also includes the Civil Code, specifically its provisions on lease (Section 2201 et seq.) and lease of premises serving business purposes (Section 2302 et seq.). The civil-law aspect is essential, because a properly drafted lease agreement is the first step in defending the true substance of the relationship.

If the agreement does not reflect reality or is too general, there is room for the tax administrator to argue that it is in fact a different type of transaction—for example, hidden financing, services, or unjust enrichment. The attorneys at ARROWS, a Prague-based law firm, therefore always combine the tax perspective with careful contractual documentation when setting the rent price between related companies, so that the transaction is legally and economically consistent.

No less important is the issue of VAT. Under Section 56a of Act No. 235/2004 Coll., on Value Added Tax (the “VAT Act”), the lease of immovable property is generally exempt from VAT without entitlement to input VAT deduction. However, VAT payers who lease immovable property to another VAT payer for the purposes of carrying out an economic activity may opt to tax the rent. This has a direct impact on cash flow and the deductibility of input VAT.

For leases between related parties, it is necessary to ensure that the rent setting and VAT treatment are aligned, especially where one company leases part of a property to multiple entities, some of which have a full right to deduct VAT and others do not. Errors in this area may lead not only to an additional VAT assessment, but also to serious disputes over the correct amount of the claimed deduction and over adjustments to deductions over time.

The legal framework is also affected by international double taxation treaties (DTTs) where cross-border rent is involved, in particular for movable assets or intangible property. In some cases, rent may be treated as royalties or other income, which affects withholding tax and the allocation of taxing rights between states.

If the lessor or the lessee is a foreign entity, it is necessary to verify whether the lease structure gives rise to a permanent establishment in the Czech Republic or abroad. In this area, legal and tax rules are evolving rapidly, and without specialised advice there is a significant risk of incorrect conclusions.

The legal framework also includes the general anti-abuse clause and rules against aggressive tax planning. These principles are set out in the Czech Tax Code and are further developed by the case law of the administrative courts. If the tax authority concludes that a lease relationship between related parties was structured primarily to obtain a tax advantage that is contrary to the purpose of the law, it may deny that advantage.

In practice, this means that even a formally flawless lease agreement and well-calculated rent may not withstand scrutiny if the transaction lacks a genuine economic rationale. We therefore recommend always considering not only the “letter of the law”, but also how the tax administrator will view the structure in the context of the group’s overall business. This is precisely where attorneys from ARROWS, a Prague-based law firm, help clients assess the risks of planned steps before they are implemented.

How to determine arm’s length rent between related companies in practice

Determining arm’s length rent between related companies is not just a matter of a quick look at a real estate website or asking a broker you know. The arm’s length principle requires that the method used to set the rent is rational, repeatable and explainable, especially in the event of a tax audit.

In practice, various methods are used, based either on comparisons with comparable market transactions or on a cost-based or income-based approach. For small and medium-sized companies, a combination of several approaches is often suitable, providing sufficiently robust support without turning into an excessively costly expert valuation or economic project.

Comparable market rent (comparables)

The most common and intuitively closest approach is the so-called Comparable Uncontrolled Price (CUP) method. In practice, this means looking for lease agreements between independent parties that are as similar as possible to the assessed lease between related entities.

For real estate, this mainly involves a similar location, building type, size and layout of the leased area, technical condition, fit-out, lease term and other conditions such as indexation clauses, guarantees, scope of services or repair obligations. For the lease of machinery or IT equipment, comparable commercial offers from leasing companies, manufacturers or specialised equipment lessors are sought.

The key concept here is comparability. In practice, you will rarely find a lease that is completely identical, and therefore adjustments are needed to reflect differences between the compared transactions.

For example, if you compare the rent of modern offices in the centre of a large city with rent in an older building on the outskirts, it is not sufficient merely to recalculate the price per square metre; you must also take into account differences in quality, access to services or parking. Similarly, it is necessary to consider whether the lease includes fit-out, parking spaces, reception services, security or other benefits that are typically invoiced separately in the market.

For smaller leases, a well-prepared overview of comparable offers and concluded contracts, supplemented by reasonable adjustments and justification of differences, may be sufficient. For more significant transactions, it is worth using an expert valuation report or a market study that takes into account a broader context, such as trends in rent development in the relevant segment.

Attorneys and tax advisers from ARROWS, a Prague-based law firm, often help clients define the scope of work for valuers or consulting firms so that the output genuinely supports the argumentation in a tax audit and is not merely a formal document for the file. The advantage of the comparable price method is that it is well understood by the tax authorities, auditors and management alike. Its weakness, however, is often a lack of high-quality and detailed data, especially for specific or very large leases.

In recent years, the availability of real estate statistics and price maps has improved, but these often do not capture all relevant parameters of the lease relationship. It is therefore advisable to work with such data as one of the supporting materials, not as the only decisive source. In practice, the combination of market data, contract templates and expert judgement is the most defensible solution.

Cost method and mark-up (cost plus)

For certain types of leases between related companies, it is difficult or practically impossible to find a good comparable market price. This typically concerns unique properties, specialised production equipment, or intra-group leasing of assets acquired primarily for the needs of a specific company within the group.

In these situations, the Cost Plus Method is used, based on the lessor’s costs associated with acquiring and operating the asset, to which an appropriate mark-up is added reflecting the standard in the relevant industry.

In practice, this means a detailed analysis of acquisition costs, depreciation, financing, operating costs (repairs, maintenance, insurance, real estate tax, energy to the extent appropriate for the lease) and other related items. From these costs, a “base” is calculated and a mark-up is applied to ensure a return on investment and an appropriate profit for the lessor. This mark-up should be supported either by market data (for example, typical yields for real estate in the relevant segment) or by the group’s internal policy applied consistently across similar transactions.

The cost method is particularly popular with groups that have a broader portfolio of leased assets and implement an internal calculation model that automates the rent calculation. The advantage is transparency and repeatability; the disadvantage may be the burden of data collection and the risk that some costs will not be correctly allocated or taken into account.

For real estate, it is also necessary to ensure that the profitability implied by the rent is not in direct contradiction with what is customary in the real estate market; otherwise, the tax administrator may argue that the resulting price is outside the arm’s length range.

In practice, attorneys from ARROWS, a Prague-based law firm, often encounter situations where a cost model has been prepared but is not documented contractually or internally. In the event of a tax audit, an explanation is then missing as to why the particular mark-up was chosen and whether it is applied consistently.

Timely preparation of internal documentation, including a description of the method, the inputs used and approval processes, is therefore key to defending rent determined using the cost method.

 

Income-based and combined approaches

For certain types of leases, especially for commercial real estate or the leasing of assets that generate direct income cash flows, an income-based approach is also used in practice. This approach is based on the return that the given asset achieves or should achieve in the relevant market segment.

Based on discounted cash flows or expected return parameters, rent is derived that is economically reasonable. In practice, the income method is often combined with market data; for example, for shopping centres or logistics parks, rent is determined both by the investor’s return expectations and by prices in the given location and segment.

For smaller entrepreneurs and mid-sized companies, a purely income-based model may be too complex. Nevertheless, a number of principles from this approach can also be used in a simpler form, for example as a cross-check calculation.

If, for example, rent between related parties results in an extremely low or, conversely, very high effective investment yield compared to the market, it is a signal that the rent may need to be reset. For investors and holding companies owning real estate portfolios, this perspective is essential because it links the tax and legal aspects with a long-term investment strategy.

In practice, a combined approach therefore often emerges: the basic rent framework is based on market comparisons, verified by a cost model and, where appropriate, checked from a yield perspective.

Such a procedure is usually very defensible before the Czech tax authority, because it shows that management did not adopt the first “gut-feel” price, but systematically sought a market-appropriate solution. The attorneys and tax advisors at ARROWS, a Prague-based law firm, can play the role of coordinator in these processes between the business, financial and legal sides of the matter.

Most common questions on substantiating arm’s length rent and its documentation 

1. Are a few printed listings from a real estate portal sufficient evidence of arm’s length rent?
Typically, this is not sufficient, because advertised prices may not correspond to agreed rents, other contractual terms are not taken into account, and adjustments for differences in quality, services or location are missing. Listings can serve as supporting material, but it is advisable to supplement them with additional data and commentary; our attorneys in Prague at ARROWS, a Prague-based law firm, can help you prepare such an argument after you contact office@arws.cz.

2. Do we need an expert valuation report for every lease?
Not always, but for significant or atypical leases, an expert valuation report can significantly strengthen your position in the event of a tax audit. For smaller transactions, a well-documented internal analysis proportionate to the significance and amount of the rent is often sufficient. If you are unsure when an expert valuation report is appropriate and when it is an unnecessary cost, it is sensible to consult the experts at ARROWS, a Prague-based law firm, via office@arws.cz.

3. How often should we reassess arm’s length rent?
It depends on the term of the lease agreement, market dynamics and the importance of the rent for your business, but in general at least a periodic review is recommended, which may be triggered by an inflation clause, a building refurbishment or a significant market change. For leases between related parties, it is also advisable to monitor whether the settings still comply with the arm’s length principle. ARROWS, a Prague-based law firm, can help you set practical rules for rent reviews—just contact office@arws.cz.

Documentation and burden of proof for leases between related parties

One of the most underestimated aspects of leasing between related companies is documentation. From a legal and tax perspective, it is not enough to have the lease set correctly in fact; the key is to be able to prove this setup during a tax audit or a dispute.

The burden of proof in the area of transfer pricing, under Section 92 of Act No. 280/2009 Coll., the Tax Code, as amended, largely lies with the taxpayer, which in practice means that if you do not document how and why you set the rent, the tax administrator may apply its own estimate and adjust the tax base according to its view of the market price.

The foundation of the documentation is a high-quality lease agreement that clearly describes the subject of the lease, the amount of rent, the conditions for its changes, the scope of services provided, repair obligations, technical improvements, penalties and other key parameters.

For leases between related parties, it is particularly important that the agreement reflects the actual course of the transaction and does not contain “paper” terms that are not complied with in practice. The Czech tax authority often compares the agreement with invoicing, accounting records, construction documentation and other materials; any inconsistency may be used as an argument that the declared price does not correspond to the true substance of the transaction.

Another layer is documentation of the method used to determine the rent. This should include a description of the chosen method (market comparison, cost model, combination), the inputs used (data on comparable rents, costs, depreciation schedules, investments, market statistics) and the conclusion as to what range of arm’s length rent was identified.

For medium-sized and larger groups, it is often appropriate to prepare concise transfer pricing documentation for lease relationships, which summarises the main arguments in a structured way and is easy to update. Our attorneys in Prague at ARROWS, a Prague-based law firm, can prepare such documentation in a format that meets the expectations of tax administrators and auditors.

Internal policies and decisions of the company’s governing bodies play a specific role. For example, if a holding company adopts a group rent policy setting out principles for rent calculation, indexation, allocation of investments into technical improvements and recharging of services, it is advisable to record this policy in writing and have it approved by the relevant body (board of directors, managing directors).

In the event of an audit, it is then possible to demonstrate that the rent setting was not ad hoc, but part of the group’s systematic approach. This strengthens the argument that the transactions have economic rationale and are not primarily motivated by tax optimisation.

During a tax audit focused on leases between related parties, the tax administrator typically requests the submission of agreements, amendments, invoicing, accounting records, cost documents, and possibly expert valuation reports and internal analyses. It may also request information on comparable rents, photographs or documentation of the technical condition of the property, a description of the use of the leased assets and other supporting materials.

It is therefore advantageous to have the documentation prepared on an ongoing basis, rather than searching for it only when a notice of audit arrives. ARROWS, a Prague-based law firm, regularly represents clients in tax audits and assists with communication with the tax administrator so that information is provided factually, while at the same time avoiding unnecessarily increasing the risk of a dispute.

Risks in lease relationships between related parties

Potential issues

How ARROWS helps (office@arws.cz)

Incorrectly set rent: there is no clear method, the rent is “gut-feel” and does not stand up to market comparison

Review of lease agreements and calculations: attorneys from ARROWS, a Prague-based law firm, will analyse the existing lease arrangements, propose a price adjustment, and prepare clear documentation supporting the arm’s length principle.

Insufficient documentation for the tax authority: supporting materials for the rent calculation method and comparable transactions are missing

Setting up and preparing documentation: ARROWS, a Prague-based law firm, will prepare clear documentation for your lease arrangements, including transfer pricing arguments and recommendations for future updates.

Tax audit focused on rent between related parties: risk of additional tax assessment, late-payment interest and penalties, and a lengthy dispute

Representation in audits and disputes: attorneys from ARROWS, a Prague-based law firm, will represent you in dealings with the Czech tax authority (Financial Administration), help you respond to requests, and, if necessary, handle an appeal or court proceedings.

Planned restructuring or sale of the company: existing intra-group lease arrangements complicate the transaction and reduce the company’s value

Structuring lease arrangements before a transaction: ARROWS, a Prague-based law firm, will help set up or amend lease agreements so that they are transparent, arm’s length, and do not present an obstacle for investors or financing banks.

Cross-border intra-group lease: uncertainties regarding taxation, permanent establishment and withholding taxes

International tax and legal advice: thanks to the ARROWS International network, ARROWS, a Prague-based law firm, will ensure a coordinated solution with local advisors abroad and set up lease arrangements in line with international standards.

Specific aspects of leasing real estate between related companies

Leasing real estate between related companies is one of the most sensitive areas from the perspective of the Czech tax administration. Real estate is high-value, rent is often long-term, and it fundamentally affects the group’s financial performance.

A typical model is a situation where the property is owned by a special purpose real estate vehicle (SPV) and the operating activity is carried out in another company that leases the premises. This model has rational reasons—risk separation, financing, a potential future sale of the property or the business separately—but it also raises questions as to whether the rent reflects market level and whether the rent conceals an unreasonable redistribution of profit within the group.

When setting rent for real estate between related parties, a wide range of factors must be taken into account. These include the location and type of property (office, warehouse, manufacturing, retail, specialised premises), technical condition and fit-out, the extent of tenant improvements, lease term, extension options, occupancy guarantees, the amount and structure of services, service charges and other items that are commonly either included in the rent or invoiced separately in the market.

If, for example, the landlord invests in extensive tenant-specific technical improvements, it is entirely legitimate for that investment to be reflected in the rent level or in a separate repayment mechanism. From the Czech tax authority’s perspective, however, it is important that this relationship is transparent and economically explainable.

A major topic is the allocation of investments and repairs between the owner and the tenant. If the tenant—a related party—makes an investment into another party’s asset that is, for tax purposes, considered technical improvement under Section 33 of the Czech Income Taxes Act, it is necessary to address how this investment will be recognised in accounting and for tax purposes and how it will affect the rent.

In some cases, it is appropriate to reduce the base rent and introduce a special payment mechanism for the technical improvement; in other cases, the investment is reflected in the lease term or in the owner’s commitment not to sell the property for a certain period. The key is that the setup makes economic sense for both parties and is consistent with what independent parties would agree under comparable circumstances. Attorneys from ARROWS, a Prague-based law firm, often help clients structure these investments so that they comply with both the Czech Civil Code and tax rules.

Equally important is the choice of VAT regime. As stated above, under Section 56a of the Czech VAT Act, the lease of immovable property is generally exempt from VAT. However, a VAT payer leasing immovable property for the purposes of the economic activity of another VAT payer may opt to tax the lease.

If the landlord charges VAT on the rent of commercial premises, they generally have the right to deduct input VAT on investments and operating costs, but at the same time must correctly determine the tax base and remit VAT on the rent. In the case of leases between related parties, it is therefore necessary to ensure that VAT is applied in accordance with the law and is not used purely for tax optimisation within the group. In the case of mixed use of the property (part of the lease to VAT payers with full deduction entitlement, part to non-payers or exempt entities), it is necessary to monitor the coefficients and make input VAT adjustment corrections under Section 78a of the Czech VAT Act, which in practice is often a source of errors.

Special attention should be paid to situations where a lease between related parties is used as a tool to prepare for the sale of a company or real estate. If, for example, shortly before a sale there is a significant increase in rent between the SPV and the operating company, or a transfer of the property at a price that differs significantly from market value, this may raise suspicion of purposeful manipulation of asset values or the company’s profitability.

In such cases, it is advisable to have carefully reasoned arguments, expert valuations and consistent contractual documentation available in order to explain the economic rationale for these steps. ARROWS, a Prague-based law firm, has extensive experience with these situations from due diligence and transactional practice and can help set up lease arrangements so that they do not block the transaction.

Leasing movable assets, IT equipment and vehicles between related parties

At first glance, leasing movable assets between related parties is often perceived as less risky than leasing real estate, but in practice it can have similarly significant tax and legal implications. Typically, this involves the lease of company vehicles, production machinery, laboratory or medical equipment, IT hardware or specialised devices that are acquired by one company within the group and then leased to other group companies.

The reasons for such an arrangement are usually rational—centralised purchasing, more efficient financing, better service contracts—but as with real estate, it is still necessary for the rent to reflect market conditions and to be properly documented.

In practice, when setting rent for movable assets, a cost-based method is often used, taking into account acquisition costs, depreciation, financing, insurance, servicing and other operating costs, to which an appropriate margin is added. It is important to choose an appropriate lease term in relation to the useful life of the asset, residual value and the agreed contractual warranties.

For vehicles, for example, the method of financing (leasing, loan, own funds), the planned mileage, service packages and other benefits play a role—benefits that an independent lessee would have to pay for separately. If the rent is set too low, this may lead to part of the costs being disallowed for the lessee and an additional tax assessment; conversely, rent set too high may be assessed as a hidden profit distribution or a shift of profit to another company.

With IT equipment and software, we often encounter a combination of hardware rental and software licence fees. In such cases, it is necessary to carefully distinguish what constitutes the rental of movable assets and what constitutes a licensing service or an intangible right, because the tax and accounting treatment differs.

In cross-border relationships, licence payments are also subject to special rules and may be subject to withholding tax under international treaties. If a group combines central procurement of IT infrastructure in one company with subsequent intra-group rental and re-invoicing of licences, it is advisable to describe these flows transparently in internal transfer pricing documentation. ARROWS, a Prague-based law firm, coordinates the legal, tax and IT perspectives in such cases so that both the contractual setup and the pricing are defensible.

A specific feature of renting movable assets is frequent dynamics—more frequent replacement, various combinations of rentals, leasing and operating financing, and a high number of items. This places higher demands on internal processes and controls.

Without clear rules, it can easily happen that some rental relationships between related parties are set consistently and at arm’s length, while others remain a “historical legacy” without clear economic justification. Regular stocktaking of these relationships, which attorneys and tax advisers from ARROWS, a Prague-based law firm, can carry out in the form of thematic audits, helps identify and remedy these risks in time.

Cross-border rental, permanent establishment and withholding tax

Cross-border rental between related parties brings an additional layer of complexity. As soon as one party to the rental relationship is based abroad, international double taxation treaties (DTTs), permanent establishment rules and often also the regulations of other states come into play, which may have different concepts of rent, licence fees and other income.

An incorrectly structured cross-border rental can lead to double taxation, unexpected withholding taxes, or conversely to the risk that certain income remains untaxed, which may attract the attention of both the Czech tax authority and foreign administrations. The key question is which category of income the rent falls under pursuant to the relevant double taxation treaty. For real estate leases, the situation is relatively clear—typically it is taxed in the country where the property is located, in line with Article 6 of the OECD Model Tax Convention.

However, for the rental of movable assets or intangible property, the rent may be classified as business profits (Article 7 of the OECD Model Tax Convention), royalties (Article 12) or other income (Article 21), and the rules for taxation and withholding tax differ accordingly. Incorrect classification may result in the payer in the Czech Republic being obliged to remit withholding tax unexpectedly, or the lessee abroad being unable to credit the tax properly.

Another risk is the creation of a permanent establishment. If a foreign company leases premises or equipment to a Czech company and at the same time carries out additional activities in the Czech Republic, it is necessary to assess whether the scope of such activities creates a permanent establishment under Article 5 of the relevant DTT.

In such a case, part of the foreign company’s profit would have to be taxed in the Czech Republic, which requires keeping separate records, filing tax returns and often also registration for other taxes. Conversely, a Czech company that leases movable assets or real estate abroad may also create a permanent establishment in that country if its activities are sufficiently intensive and continuous.

Cross-border rental relationships are an area where the international reach of ARROWS, a Prague-based law firm, through the ARROWS International network is particularly valuable. Coordination between the Czech tax and legal environment and the rules in foreign jurisdictions is essential to ensure that the rental structure is efficient while also compliant with the law and international standards.

In practice, this means that when setting rent and contracts, account is taken not only of the Czech tax regime and the arm’s length principle, but also of the impacts in the country of the other party to the rental relationship.

Most common questions on cross-border rentals and related tax issues 

1. Do we always have to deal with withholding tax in cross-border rentals?
It depends on the type of rent and the specific double taxation treaty; however, this issue must always be verified, because an incorrect approach may lead to an additional tax assessment and penalties in the Czech Republic and abroad. When structuring cross-border rentals, it is therefore advisable to involve specialists from ARROWS, a Prague-based law firm, and their foreign colleagues within ARROWS International; you can contact them at office@arws.cz.

2. Can the rental itself create a permanent establishment?
The mere receipt of rent from real estate generally does not create a permanent establishment, but if additional services, personnel or recurring business activities are connected with the rental, the permanent establishment risk increases. Each case must be assessed individually, with regard to the specific contract and the scope of activities—this is exactly the type of analysis ARROWS, a Prague-based law firm, can assist you with after contacting office@arws.cz.

3. How to align the arm’s length principle across different countries?
The best solution is to prepare a consistent transfer pricing policy for the entire group that complies with international standards while also reflecting the local requirements of the individual tax authorities. Lawyers and tax experts from ARROWS advokátní kancelář and the ARROWS International network can coordinate the preparation of such a policy and documentation across countries; you can start with a non-binding consultation at office@arws.cz.

The most common mistakes and their consequences in leases between related parties

Based on the practical experience of attorneys from ARROWS advokátní kancelář, several recurring mistakes can be identified that entrepreneurs and managers make in the area of leasing between related companies. The first and most widespread mistake is the absence of a clear method for determining the rent.

The price is often the result of historical practice, an internal agreement between owners, or an effort to “balance out” other transactions within the group, without being supported by market data or a well-thought-out cost model. At a time when the Czech tax authorities are paying increased attention to transfer pricing, such an approach is very risky.

The second common mistake is insufficient contractual documentation. Entrepreneurs sometimes assume that a framework agreement or a “gentlemen’s” arrangement between related parties is sufficient because “everything stays in the family”.

However, once a tax audit occurs, a dispute between shareholders arises, or a transaction with an external investor is planned, the absence of a specific, well-drafted lease agreement becomes a serious problem. An unclear or missing agreement creates room for the tax authority to interpret that the rent is in fact a different type of consideration, or that part of the costs is not tax-deductible.

The third category of mistakes is underestimating the links to other regulations and areas. Setting the rent affects not only corporate income tax, but also VAT, real estate tax, accounting, and potentially obligations under IFRS if the group is required to report under international standards.

For example, incorrect allocation between rent and services may lead to VAT errors, while undervalued rent may distort the presented picture of the company’s financial position. In the event of insolvency or enforcement proceedings, it may then become apparent that intra-group lease relationships were set up in a way that harms other creditors, which opens up additional legal risks.

The consequences of these mistakes are often harsher than entrepreneurs realize. The Czech tax authority may revalue the rent to a market level, assess additional corporate income tax, charge late-payment interest, and impose a penalty.

Late-payment interest is set at the Czech National Bank repo rate applicable on the first day of the relevant calendar half-year, increased by 14 percentage points (pursuant to Section 251f of the Tax Code), and the penalty reaches 20% of the additionally assessed tax (pursuant to Section 251h of the Tax Code). If it turns out that the rent setting led to aggressive tax optimization, there is also a reputational risk and, in extreme cases, potential criminal-law implications (e.g., under Section 240 of Act No. 40/2009 Coll., the Criminal Code, as amended, for tax evasion).

In cross-border leases, it is also necessary to take into account that a similar audit may take place abroad as well, which doubles the potential costs. That is why it makes sense to anticipate mistakes and prevent them through systematic structuring of lease relationships. This includes both legal aspects (contracts, corporate documents, regulatory compliance) and tax and economic aspects (pricing methods, calculations, documentation).

ARROWS advokátní kancelář is, in this respect, a partner that can combine legal, tax, and transactional perspectives and help set up leases between related companies so that they are defensible in the long term and support the group’s strategy. If you need a preventive audit of existing relationships or are dealing with a specific issue with the Czech tax authority, write to office@arws.cz.

Setting internal rules within the group

Individual lease agreements are important, but real stability in the area of leasing between related parties is only achieved through systematic internal rules. A group of companies that has multiple properties, vehicles, or other assets leased within related entities should not rely on ad hoc solutions, but should have a clear policy on how rent is determined, updated, and documented.

Such a policy is usually part of a broader transfer pricing policy framework, which describes the principles for all significant intra-group transactions—including services, financing, licences, and asset leases.

Internal rules should define, for example, which method will be used for a given type of lease, what inputs need to be collected, how often the rent is reviewed, and who is responsible for approving it. It is also advisable to set thresholds indicating from what rent amount or transaction materiality it is necessary to involve legal and tax advisors or prepare formal transfer pricing documentation.

For international groups, it is important to ensure that internal rules comply with the requirements of different tax authorities and correspond to international standards. This is precisely where cooperation with ARROWS advokátní kancelář pays off, as it can help create or review such a policy in a Czech and international context.

However, the role of an external legal advisor does not end with drafting documents. Ongoing support to management in decision-making on new lease relationships, real estate investments, group reorganizations, or preparations for bringing in an investor is equally important.

In these situations, it is useful to have a team at hand that understands both the legal and tax aspects of leases between related companies and the commercial reality of the given industry. Thanks to its broad range of specialisations and its links with tax advisers and other experts, ARROWS advokátní kancelář is able to provide management with a practical and clear view of the implications of different options.

Where issues involve an international element, a significant advantage is provided by the ARROWS International network, which enables a coordinated solution with lawyers and tax advisers abroad, without the client having to search for and manage multiple advisory teams on their own.

Most common questions on an internal rent policy within a group 

1. Is it even worth creating a formal internal rent policy if we only have a few lease agreements within the group?
For smaller groups, the rule may be simpler, but a clearly defined and documented basic policy will still significantly make it easier for you to defend the rent in the event of an inspection and will provide a framework for future development. ARROWS advokátní kancelář can help you draft an appropriate yet practical policy; you can contact them at office@arws.cz.

2. Who within the company should be responsible for compliance with the rules for leases between related parties?
In practice, this involves cooperation between the CFO, the head of the legal department, controlling teams, and often HR or operations as well, if the lease affects the working environment. The key is to clearly assign responsibility for preparing agreements, approving pricing, and updating documentation. ARROWS advokátní kancelář can help you set up responsibilities and processes, as it has experience implementing similar rules for a number of clients; contact them at office@arws.cz.

3. How often should we review our internal rent policy?
The policy should be a living document that adapts to changes in Czech legislation, the group’s business, and the market situation. In general, at least a periodic review is recommended, for example once every few years or upon significant changes within the group (acquisitions, restructuring, entry of an investor). ARROWS advokátní kancelář can carry out such a review efficiently and with regard to current tax practice; simply contact them at office@arws.cz.

Final summary

Leases between related companies are not merely an internal accounting operation, but a legally and tax-sensitive area that tax authorities are increasingly focusing on.

Properly set rent must comply with the arm’s length principle, be economically defensible, and at the same time be supported by a specific method and documentation. Entrepreneurs, managers, and investors should view lease relationships within a group as a strategic element that affects not only the current tax burden, but also the company’s value, negotiating position in transactions, and reputation with banks, investors, and public authorities.

In practice, a combination of several methods for determining rent has proven effective—market comparisons, a cost-based approach, and income-based checks—supplemented by high-quality contractual documentation and internal rules for the entire group.

The key is not to underestimate seemingly “simple” situations, such as a property owner leasing premises to their own company or the leasing of company vehicles within a holding structure, because it is precisely in these cases that the tax office often finds room for additional assessments and penalties. Ongoing care for documentation and regular reviews of lease relationships are far cheaper than dealing with the consequences of a tax audit retrospectively after several years.

For entrepreneurs, management, and investors, it is also important to have a partner who understands the legal, tax, and commercial aspects of leases between related companies.

ARROWS advokátní kancelář offers this combination of expertise, is insured for professional liability up to CZK 400,000,000, and, in cooperation with the ARROWS International network, can also handle cross-border structuring of lease relationships. If you do not want to risk errors, losses, delays, or fines, it is safer to entrust the setting of rent and related agreements to experts. If you are interested in a preventive audit, setting internal rules, or resolving a specific dispute, you can contact ARROWS advokátní kancelář at any time by email at office@arws.cz.

FAQ - Questions on transfer pricing, rent, and related parties 

1. How can I tell whether the rent between our related companies is “market-based”?
In principle, the amount of rent should fall within a reasonable range of prices that independent parties would pay or receive for a comparable lease under similar conditions. In practice, this means using market data, a cost model, or a combination of the two, and documenting this approach. If you are not sure whether your current rent corresponds to a market range, it is advisable to obtain an independent review from experts at ARROWS advokátní kancelář, whom you can contact at office@arws.cz.

2. Am I at risk of an additional tax assessment if the rent between related parties is significantly lower than in the surrounding area?
Yes. If the rent differs materially from the market price and you do not have a convincing economic justification, the tax authority may adjust the tax base to the level of market rent under Section 23(7) of the Income Taxes Act. This may result in an additional tax assessment, late-payment interest and potentially a penalty, and possibly further disputes regarding VAT or hidden profit distribution. In such a situation, it is better not to wait for an audit, but to discuss the rent setting with the ARROWS law firm in Prague at office@arws.cz.

3. Do I always need a formal lease agreement for a lease between related companies?
Yes, a high-quality written lease agreement is, in the case of related parties, practically essential—first, to ensure the legal relationship is clear under the Czech Civil Code, and second, as key evidence in a tax audit under the Czech Tax Code. The agreement should reflect the actual course of the lease and include all essential parameters, including the mechanism for setting the rent and changing it. If you do not have an agreement or it is outdated, it is sensible to have it prepared or reviewed by professionals.

4. Does it make sense to address transfer pricing and documentation if we are not a large multinational group?
Yes, the rules for related parties and the arm’s length principle also apply to purely Czech groups, family businesses and smaller holdings. In recent years, the tax authorities have increasingly focused on mid-sized companies as well, where a high share of intra-group transactions, including leases, can significantly affect the tax base. Appropriately scoped documentation and clear internal rules therefore make sense even for smaller structures; the ARROWS law firm in Prague can help you set them up—simply write to office@arws.cz.

5. What should we do if the tax authority challenges our lease between related parties during an audit?
First and foremost, it is important to respond factually and thoughtfully, not to underestimate deadlines, and to start immediately collecting all relevant documentation. It is advisable to involve experienced attorneys and tax advisers who know the tax authority’s arguments and the usual audit process and can develop a defence strategy, or negotiate an acceptable solution.
6. What are the benefits of long-term cooperation with the ARROWS law firm in Prague in this area?
Long-term cooperation allows the attorneys at the ARROWS law firm in Prague to become thoroughly familiar with your business, group structure and the specifics of your industry. This makes it possible to plan lease arrangements, internal rules and documentation in advance, eliminate risks before problems arise, and respond quickly to legislative changes or new requirements of the tax administration. The firm is also insured for professional liability up to CZK 400,000,000 and, thanks to the ARROWS International network, can cover your international needs as well; you can take the first step with a simple email to office@arws.cz.

Notice: The information contained in this article is of a general informational nature only and is intended for basic orientation in the matter based on the legal status as of 2026. Although we take the utmost care to ensure accuracy, legal regulations and their interpretation evolve over time. We are ARROWS advokátní kancelář, an entity registered with the Czech Bar Association (our supervisory authority), and for maximum client security we are insured for professional liability with a limit of CZK 400,000,000. To verify the current wording of regulations and their application to your specific situation, it is necessary to contact ARROWS advokátní kancelář directly (office@arws.cz). We accept no liability for any damages arising from the independent use of the information in this article without prior individual legal consultation.

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