New Methodical Guidance on Permanent Establishments

General Financial Directorate issued new comprehensive guidance on the taxation of the income generated by tax non-residents from activities performed by means of a permanent establishment. The new guidance represents a relatively extensive and comprehensive summary (28 pages) of an approach to the taxation of a permanent establishment.

In the introduction, the document defines the terms and confirms the approach, which did not present any controversy from the perspective of the Czech practice, i.e. that the creation of an establishment for VAT purposes does not automatically mean the origination of a permanent establishment (note: this principle is also contained in the latest version of the commentary to the OECD Model Tax Convention) and, similarly, creation of a permanent establishment cannot be automatically deduced from a mere registration of a branch without examining further circumstances.

The document further mentions the significance of the OECD commentary as interpretation guidance, with reference to a recent ruling of the Supreme Administrative Court  (2 Afs 40/2018 – 58, described in our article Supreme Administrative Court on the (in)dependence and (non)creation of a permanent establishment in May 2019). The General Financial Directorate emphasises therein a dynamic interpretation of the commentary, nevertheless, it concedes (with respect to the opinion expressed by the Supreme Administrative Court) that “if the wording of the given article of the agreement in question differed from the text of the effective OECD Model Tax Convention, it is necessary to use for the given article the Commentary to the OECD Tax Convention whose wording corresponds to the text of the analysed agreement.”

The guidance also deals with the individual concepts of permanent establishment and summarises the information that the General Financial Directorate published as part of its other guidance published in the past. In addition to the previously disclosed information, the document analyses, for example, the calculation of deadlines for the provision of services or determining the tax base, providing the conditions for the creation of a permanent establishment in the Czech Republic have been met.

The second part of the document includes a summary of procedural and administrative duties that have to be met if a permanent establishment is created. It points out the relevant notification duties stated in the Czech Income Taxes Act (Section 38t and the new provision of Section 38da), and also summarises the duties of a permanent establishment as a taxpayer in relation to its employees.

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