Debt capacity analysis under the supervision of the Financial Administration

Debt capacity as a new standard for future tax audits?

The analysis of debt capacity is also gaining importance in Czech tax practice and, according to expert discussions with representatives of the Financial Administration, it is perceived as one of the important areas of interest in transfer pricing controls. The tax administrator’s attention is increasingly focused on the economic substance of intra-group financing, especially on the very existence and extent of debt.

Debt capacity in this context provides an answer to a fundamental question:
How much debt would the entity be able to accept under market conditions from an independent lender?

If the answer is “none” or “significantly lower than the actual amount of funding”, the entire arrangement is at tax risk.

Case law: the economic rationality of debt financing

In its case law from 2025, the Supreme Administrative Court again emphasized that  the tax deductibility of interest on intra-group financing depends on its economic rationality. Interest does not have to be recognized if the financing does not generate or maintain taxable income and its main purpose is to obtain a tax advantage. It is also crucial to assess the debtor’s real ability to repay the debt, which in fact corresponds to the principle of debt capacity.

Which entities should carry out a debt capacity analysis?

Debt capacity analysis is relevant for all companies using intra-group financing – even in a situation where loans from the group are only complementary to bank financing.

How debt capacity can be assessed in practice

In particular, the practical approach to assessing debt capacity can be based on  the February 2020 OECD Transfer Pricing Guidelines for Financial Transactions, which require verification of whether the amount of debt would correspond to financing available from an independent lender and emphasises the analysis of cash flow and the economic sustainability of debt.

Within the framework of debt capacity analysis, it is typically possible to analyze:

• the level of debt in relation to performance (e.g. Net Debt/EBITDA or Net Debt/LTC),
• the level of indebtedness of comparable independent companies in the market (possibly through a benchmarking analysis);
• the debtor’s ability to repay the debt from its own operating cash flows;
• stability and sustainability of the business model;
• the quality of financial plans and realistic cash flow scenarios;
• the existence and importance of group support.

The amount of debt in excess of the debt capacity can be considered equivalent to a contribution to equity.

Why is it worth using our support?

We combine tax law, transfer pricing and financial analysis into one consistent approach. We understand the expectations of the Financial Administration of the Czech Republic and current case law and help clients prepare defensible, understandable and practically applicable documentation that reduces the risk of disputes before the start of the audit.