SHORT ANSWER TO THE MAIN QUESTION

A Cost Sharing Agreement is not a specific named contract type under the Czech Civil Code. The parties may therefore structure it as an innominate agreement under the general principle of contractual freedom.

What matters, however, is not the title of the document but the actual substance of the relationship.

The agreement should typically define:

• which costs are shared,
• who contracts with the external supplier,
• who actually benefits from the relevant goods or services,
• which allocation key applies,
• how costs are documented,
• whether any fee or internal overhead is added,
• how regular settlement works,
• what happens when actual use changes.

Tax treatment must also be checked.

The fact that one party recharges only actual costs without a margin does not by itself determine whether the transaction is outside the scope of VAT.

YOU MAY BE THINKING…

“If I make no profit on the recharge, why would VAT matter?”

“Can we simply split every invoice in half?”

“Do we need a separate calculation for each invoice?”

“Can one company order the service and recharge half to the other?”

“What if the companies belong to the same group?”

“Can we share employee costs?”

“What is the correct allocation key?”

“Is it enough to state that actual costs are shared without a margin?”

“What if the final amount is only known at year-end?”

That last question is common.

For many shared costs, it is not difficult to determine that they should be allocated.

The real difficulty is determining:

who actually benefited from them and in what proportion.

CLIENTS OFTEN ASK…

Can a Cost Sharing Agreement be an innominate agreement?

Yes.

Under Czech law, parties may enter into agreements that are not specifically regulated as a named contract type.

That does not mean that simply calling the document a “Cost Sharing Agreement” determines its legal nature.

The actual rights and obligations agreed between the parties remain decisive.

Can we simply split costs 50/50?

Yes, if that allocation reasonably reflects the actual relationship and both parties intend to use it.

For some costs, however, a 50/50 split may be difficult to justify.

For example:

• one company occupies 80% of the office,
• one has 25 employees and the other has three,
• one generates most of the consumption,
• a particular software licence is used almost exclusively by one party.

The best allocation key is not necessarily the simplest one. It should reasonably reflect who actually benefits from the relevant cost.

If I only recharge the exact cost without a margin, is it automatically outside VAT?

No.

Czech VAT law does recognise situations in which an amount received as reimbursement of an expense is excluded from the taxable amount.

But this concerns a relatively narrow situation where the expense was incurred in the name and on behalf of another person, subject to further statutory conditions.

That is different from a general situation where:

“The supplier invoiced me, I bought the service myself, and now I recharge half of it to another company.”

The VAT treatment therefore depends on the actual structure of the transaction and the specific underlying supply.

What if both companies belong to the same group?

Then transfer pricing rules may also become relevant.

Where related parties are involved, tax authorities may examine whether the agreed conditions correspond to those that would have been agreed between independent parties.

That does not mean that cost sharing within a corporate group is inherently problematic.

It means that there should be a rational explanation for why a particular cost is borne by a particular company and why it is allocated in that specific proportion.

Is the agreement itself enough, or do we also need supporting documents?

The agreement alone may not be enough if the parties cannot later demonstrate that the costs actually arose and were connected with the relevant activities.

In practice, supporting documentation may include:

• supplier invoices,
• calculations,
• allocation worksheets,
• employee numbers,
• floor-area records,
• usage data,
• time records,
• other evidence supporting the selected allocation key.

A good agreement explains the methodology. Good documentation proves that the methodology was actually followed.

WHAT THE LAW SAYS VS. WHAT HAPPENS IN PRACTICE

Czech law allows parties considerable contractual freedom.

So in principle, the parties may create their own cost-sharing mechanism.

In practice, however, it is not enough to write:

“The parties shall bear all common costs equally.”

The first question is:

What are “common costs”?

Rent?

Utilities?

Internet?

Cleaning?

Reception?

Marketing?

Accounting?

Legal services?

Software?

Vehicles?

Administrative staff?

Management?

Insurance?

Bank fees?

If the scope is unclear, the boundary of “shared costs” may effectively be determined later by whoever happens to receive the invoice.

Second question: who actually purchases the supply?

This matters both contractually and for tax purposes.

There is an important difference between:

A. one company paying an expense in the name and on behalf of another company,

and:

B. one company purchasing a service itself and then recharging part of that service or cost to another company.

For VAT purposes, these situations may be treated differently.

The Czech VAT rules for amounts incurred in the name and on behalf of another person are subject to specific statutory requirements.

Third question: why this particular allocation?

If two companies share an office and each occupies half the space, a 50/50 rent allocation is easy to understand.

If one occupies ten rooms and the other one room, the same allocation looks different.

Different categories of costs may therefore require different allocation keys.

For example:

There is no universal allocation key.

A good allocation key is one that can still be rationally explained several years later to someone who was not involved when it was created.

Fourth question: are we sharing costs or providing services?

This is an important boundary.

Imagine a parent company employing:

• an accountant,
• an HR specialist,
• an IT technician,
• an in-house lawyer.

Those employees also work for other group companies.

Is that merely “sharing employee costs”?

Or is the parent company actually providing accounting, HR, IT or administrative services to the other companies?

The title of the agreement does not answer that question.

The actual substance of the arrangement does.

BIGGEST RISKS AND COMMON MISTAKES

❌ Mistake: “We split everything 50/50.”

Consequence

Some costs may be allocated in a way that does not reflect actual use or economic benefit.

For related companies, transfer pricing issues may also arise.

Better approach

Divide costs into categories and assign a rational allocation key to each category.

❌ Mistake: it is unclear which costs are shared

Consequence

One party starts requesting reimbursement of expenses that the other party never expected to bear.

For example:

“Rent, yes. But why should I pay half of your external legal fees?”

Better approach

Define:

• included costs,
• excluded costs,
• a mechanism for adding new categories.

❌ Mistake: one party decides on the cost and the other automatically pays

Consequence

Company A signs a new annual contract for CZK 400,000.

Company B only learns from the next settlement that it is expected to pay half.

Better approach

For material expenses, define:

• budgets,
• thresholds,
• prior approval,
• or a right not to participate in a specific cost.

❌ Mistake: “There is no margin, so VAT is irrelevant.”

Consequence

The parties confuse the economic fact that no profit is made with the tax question of whether goods or services are being supplied.

Better approach

Determine in advance:

• who orders the supply,
• in whose name,
• on whose behalf,
• who actually receives the supply.

Then assess VAT treatment based on that structure.

The special rule for pass-through amounts incurred in the name and on behalf of another person is relatively narrow and does not automatically apply to every cost recharge without a margin.

❌ Mistake: the allocation key exists only “in the accountant’s head”

Consequence

Three years later, nobody remembers:

• why rent was allocated 60/40,
• why IT was 70/30,
• why marketing was 50/50.

Better approach

Describe the allocation methodology in the agreement or in an annex.

❌ Mistake: no year-end true-up

The parties pay monthly advances based on a budget.

Actual costs are different.

Consequence

At year-end, it is unclear:

• who owes what,
• when final settlement must be made,
• how the calculation can be reviewed.

Better approach

Use interim advances plus a regular final settlement mechanism.

❌ Mistake: the Cost Sharing Agreement permits something that the underlying agreement does not

A common example is shared office space.

One company is the tenant and allows another company to use the premises.

But the lease may restrict:

• subletting,
• use by third parties,
• permitted use,
• number of users.

Consequence

The Cost Sharing Agreement does not solve the underlying right to use the premises.

A Cost Sharing Agreement cannot create a right that the primary contracting party does not itself have or is not permitted to pass on.

HOW TO APPROACH IT – REALITY, NOT THEORY

I would not start with the sentence:

“The parties shall share costs.”

I would start by mapping how the arrangement actually works.

1. What do the parties use together?

List the relevant categories:

• premises,
• utilities,
• software,
• employees,
• vehicles,
• marketing,
• administration,
• external suppliers,
• infrastructure.

Each category may require a different legal analysis.

2. Who has the contract with the external supplier?

Take internet services.

Company A has the contract.

The invoice is addressed to A.

A pays it.

Company B also uses the connection.

That is different from a situation where A merely paid an invoice issued directly to B.

3. Who actually benefits from the supply?

This is the starting point for selecting an appropriate allocation key.

Where benefits are genuinely equal, 50/50 may work.

Where they are not, a better key may be:

• floor area,
• number of employees,
• number of users,
• number of licences,
• time spent,
• turnover,
• number of transactions,
• actual consumption,
• actual use.

4. Who may approve the shared expense?

Small recurring expenses may be ordered by one party independently.

Larger expenses may require joint approval.

For example:

up to CZK 10,000 per month → administrator may decide independently

above CZK 10,000 → prior approval by both parties

The correct mechanism depends on the commercial relationship.

5. How will settlement work?

The agreement should address at least:

• frequency,
• supporting documents,
• settlement deadline,
• payment due date,
• review rights,
• objections to the calculation,
• correction of mistakes.

6. What happens when actual use changes?

Company B hires another 20 employees.

Should it continue paying only 20% of the internet, office and reception costs?

Possibly not.

The agreement may therefore provide for:

• periodic review of allocation keys,
• automatic adjustment based on objective data,
• extraordinary review after a material operational change.

7. Finally, check the tax and accounting logic

Only once it is clear what is actually happening should the parties determine:

• VAT treatment,
• deductibility,
• transfer pricing,
• invoicing and tax documents,
• accounting treatment.

Tax treatment should not define the commercial reality. It should correctly reflect the reality the parties have actually created.

PRACTICAL EXAMPLES

The following are model examples.

👉 Two companies in one office

Company A leases 200 m².

Company B actually uses 40 m².

The parties nevertheless split every cost equally.

For rent, allocation by floor area may be more rational.

For internet, another method may be better.

For cleaning, the right key may depend on both area and intensity of use.

One Cost Sharing Agreement does not necessarily mean one allocation key for every category of cost.

👉 One company buys software for the whole group

Company A buys 100 licences.

A uses 20.

B uses 50.

C uses 30.

A split of:

33/33/34

is administratively easy.

A split of:

20/50/30

better reflects actual use.

If user numbers change regularly, the agreement can provide for automatic recalculation.

👉 “We share an accountant”

The accountant is employed by Company A.

Approximately half of her working time is spent on Company B’s accounting.

The companies call the arrangement:

“Employee Cost Sharing Agreement.”

That title alone does not answer what Company A is actually providing to Company B.

The arrangement may require consideration of:

• the factual setup,
• employment-law implications,
• the nature of the activity,
• tax treatment.

👉 “We will calculate everything at the end of the year”

A group of companies shares IT, marketing, legal and administrative expenses throughout the year.

At year-end, the parent company issues one large recharge:

“Share of costs for 2026.”

No breakdown.

No allocation key.

No supporting schedule.

At that point, the issue is not only contractual.

It also becomes an evidential question:

What exactly did the other company receive, and why should it bear this particular amount?

A contract alone may not be sufficient if the underlying supplies and allocation cannot be demonstrated.

WHY YOU SHOULD BE CAREFUL WITH “I’LL DO IT MYSELF”

A Cost Sharing Agreement may look very simple at first.

For example:

Company A pays the shared costs and Company B reimburses 50%.

A template or generative AI can produce such a clause in seconds.

But it does not know:

• which costs are genuinely shared,
• who legally purchases the supply,
• who is the actual recipient,
• whether the supply may be passed on,
• whether third-party consent is required,
• which allocation key reflects reality,
• whether different costs require different keys,
• whether one party is actually providing a service,
• whether internal labour is included,
• whether the companies are related,
• how VAT applies,
• whether transfer pricing must be considered,
• how factual use will be demonstrated,
• what happens when circumstances change.

AI can draft a general structure.

It cannot determine what is actually happening economically and legally between two specific companies unless that reality is first identified correctly.

And that legal classification often determines the result.

LAWYER’S RECOMMENDATION + CHECKLIST

Before signing, I would ask one main question:

For every material cost, can I explain why this particular party bears this particular amount?

If not, the mechanism is not finished.

Checklist

• The purpose of the agreement is clearly defined.

• Categories of shared costs are identified.

• Excluded costs are identified.

• It is clear who contracts with external suppliers.

• The actual beneficiary of each supply is identified.

• Underlying contracts have been checked to confirm that sharing is permitted.

• Each category has an appropriate allocation key.

• The calculation method is described.

• Supporting documents for settlement are defined.

• The other party can review the calculation.

• Settlement frequency is defined.

• Advance payments are addressed.

• Final true-up is regulated.

• A mechanism exists for changing allocation keys.

• Material new costs require appropriate approval.

• VAT treatment has been checked.

• Accounting treatment has been checked.

• Transfer pricing has been considered for related parties.

• Supporting evidence will be retained.

• Termination of the cost-sharing arrangement is addressed.

FAQ

What is a Cost Sharing Agreement?

It is generally an agreement under which two or more parties determine how they will allocate costs connected with jointly used services, assets or activities.

Under Czech law, it is not a separate named contract type.

Depending on the substance of the arrangement, it may operate as an innominate agreement or overlap with another legal relationship.

Is a cost recharge without a margin automatically outside VAT?

No.

The fact that only actual costs are recharged without a mark-up does not itself determine VAT treatment.

Czech VAT law contains a specific rule for certain expenses incurred in the name and on behalf of another person, but the statutory conditions must be met.

Must all shared costs use the same allocation percentage?

No.

Different categories may use different allocation keys.

For example, rent may be allocated by floor area, while software may be allocated by number of users.

Can a Cost Sharing Agreement be used between related companies?

Yes.

However, transfer pricing rules may also need to be considered.

Conditions agreed between related companies may be compared with conditions that would have applied between independent parties.

Can companies share employee costs?

Yes, but this requires particular care.

The key question is whether the companies are genuinely allocating a shared cost or whether one company is actually providing personnel capacity or services to another.

Employment-law and tax issues may therefore arise.

Can the agreement contain only percentages?

It can be short, but percentages alone are usually not enough.

The parties should know at least:

• what the percentage applies to,
• which costs are included,
• how costs are evidenced,
• when settlement takes place,
• when the percentage changes.

Does a Cost Sharing Agreement have to be in writing?

Czech law does not generally require a special written form merely because the arrangement concerns cost sharing.

In practice, however, a written agreement is highly advisable because it provides evidence of:

• scope,
• allocation methodology,
• approval rules,
• settlement,
• review rights.

Is cost sharing the same as recharging costs?

Not necessarily.

Cost sharing describes the economic arrangement between the parties.

Recharging costs describes the financial mechanism used to allocate a particular amount.

The legal and tax treatment must still be determined from the actual substance of the relationship.