Oznámení o možnosti vzniku stálé provozovny

Notification of the possibility of the creation of a permanent establishment

Today we will focus on the concept of a "permanent establishment" in the Czech Republic ("CR") from the income tax perspective.

The definition of a permanent establishment is contained in Section 22 of the Income Tax Act ("ITA") as well as in the relevant double tax treaties. The creation and existence of a permanent establishment is decisive in determining which state will have the right to tax profits attributable to the permanent establishment.

According to the ITA, a permanent establishment is created, inter alia, if (it is not a complete list of all situations):

1. there is a place in the territory of the CR where the taxpayer (a Czech tax non-resident) carries out its activities (e.g. a workshop, office, place of sale or construction site) ("fixed permanent establishment");
2. services are provided in the territory of the CR by the Czech tax non-resident or by employees or persons working for him for a period exceeding six months in any period of 12 consecutive calendar months; ("service permanent establishment"); or
3. in the territory of the CR, a person acts on behalf of a Czech tax non-resident and has and habitually exercises in the CR the authority to enter into contracts which are binding for that Czech tax non-resident (a "dependent agent").

A taxpayer (a Czech tax non-resident) who has created a permanent establishment in the CR is obliged to file the registration to income tax, submit tax returns and tax the relevant part of the profit in the CR.

In practice, it is often forgotten that Czech tax residents (and permanent establishments of Czech tax non-residents) are obliged to immediately notify their local tax authorities of the conclusion of a contract with a Czech tax non-resident, which may (but may not) result in the creation of a permanent establishment.

The word "may" indicates that this is a very "broad" provision (while the conclusion of such contracts is quite common in practice). It may be, for example, the conclusion of a contract for

1. provision of services, on the basis of which services are received from abroad with the physical presence of foreign workers in the territory of the CR - these are typically various visits of experts from the headquarters (consulting services) or services of repair of production machines or
2. renting office, warehouse or production premises in the territory of the CR to a foreign person.

The tax administrator may impose material penalties for non-compliance with the above obligations.

The matter of the creation and taxation of permanent establishments is a very complex area which requires a detailed assessment of the specific situation. We will be happy to assist you with the related tax and legal obligations.

If you have any questions, please contact the authors of this article or the EY tax team with whom you regularly work.

Authors:

Vladislav Pejchal

Marek Sloup