Tax 

Ex officio registration of a ‘permanent establishment’ is not possible without finding out the facts of the case

At the beginning of January 2021, the Supreme Administrative Court ruled in favour of the plaintiff (foreign legal entity – the founder of a branch in the Czech Republic) in case 7 Afs 173/2020-27 relating to their ex officio registration for corporate income tax in the Czech Republic.

Based on the facts and evidence established, the tax administrator concluded that the plaintiff has a permanent establishment in the territory of the Czech Republic and its branch is indeed representing this permanent establishment. However, during the course of the dispute, the plaintiff repeatedly emphasised that they did not perform an economic activity through this branch in the Czech Republic and used the leased non-residential premises, for which they have concluded corresponding lease and sublease contracts through this branch, only for the purpose of storing, displaying and delivering goods in their possession. Pursuant to the double taxation convention (in this particular case the double taxation convention concluded between the government of the Czech and Slovak Federal Republic and the government of the United Kingdom of Great Britain and Northern Ireland) and the commentary on the model double taxation convention of the Organisation for Economic Cooperation and Development these activities can be considered activities that meet the negative definition (i.e. exceptions) of the creation of a permanent establishment under the relevant double taxation convention. The plaintiff also supported their claim by the fact that they have no employees or other material equipment in the Czech Republic outside the aforementioned leased premises.

The tax administrator’s argument in the dispute in question was based mainly on the fact that the plaintiff’s branch issued invoices for the supply of goods to domestic companies and these invoices were paid in favour of this branch (to a Czech bank account). The fact that the plaintiff performs an economic activity in the Czech Republic through their branch was also derived by the tax administrator from the fact that in the related value added tax return, where the plaintiff reported the supply of goods and services with the place of performance in the Czech Republic, as well as the fact that the plaintiff requested authentication data for the electronic registration of sales. Let us add that all evidence was produced only in a hard copy and did not explain in any way the nature of the activity carried out by the branch in the Czech Republic, which was also pointed out by the Supreme Administrative Court in its conclusion.

It was precisely because of the insufficient assessment of the facts of the case that the Supreme Administrative Court agreed with the plaintiff, stating that it is not possible to register the taxable entity for corporate income tax ex officio without an adequate assessment of the tax entity’s activities, as well as a reasonable rebuttal of their claim that the activities carried out by them in the Czech Republic do not lead to the creation of a permanent establishment.

However, the Supreme Administrative Court pointed out that the ruling issued by it was without prejudice to the result of the assessment of the facts of the case.

Subsequent conclusions can be crucial in assessing what activities may (not) lead to the creation of a permanent establishment. We continue to monitor the case and will inform you of its outcome.

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