Court decision

Court decisions concerning the establishment of a permanent establishment

Author: Jiří Šindelář
Court decision
The work of a tax advisor very often includes an assessment of the establishment of a so-called permanent establishment in the light of our Czech Income Tax Act, or within the relevant double taxation treaty. One of the client's frequently asked questions is whether the subsidiary (typically in the form of a branch of a foreign company) meets the attributes of a permanent establishment. If we come to the conclusion that yes, we must begin to assess how we will allocate revenues and costs to this branch. 

In today's newsletter update, I would like to inform you about the decision of the Supreme Administrative Court precisely in the matter of the establishment of a permanent establishment for a branch, the founder of which was a company based in the United Kingdom of Great Britain and Northern Ireland.

By a decision of the tax office, the branch office located in the Czech Republic was registered ex officio as a taxpayer of corporate income tax. The tax subject appealed against the decision of the tax administrator with the Municipal Court in Prague, which annulled the decision and returned it for further proceedings. The Municipal Court stated that the financial administration authorities based their conclusion on the fact that the plaintiff's branch carried out economic activities for third parties in the Czech Republic, which the financial administration inferred from the plaintiff's branch issuing invoices for delivery of goods to domestic companies and these invoices were paid to his bank account.

According to the court, it was not excluded that the premises used by the branch in the Czech Republic could be used only for storage, display, or delivery of goods, and could thus meet the negative definition of permanent establishment contained in Article 5 par. 3 double taxation treaty.

The tax administrator disagreed with the conclusions of the municipal court and filed a cassation complaint with the Supreme Administrative Court. However, the Supreme Administrative Court ruled that the cassation complaint was unfounded, and its main arguments can be summarized as follows. It is not sufficient to conclude whether a permanent establishment has been established within the meaning of the relevant double taxation treaty that the purchase contracts and related invoices for the sale of goods and that the payments for the goods in question are remitted to the plaintiff's Czech bank account. The same applies to agreements on future business cooperation, they do not show how the plaintiff's business in the Czech Republic participates in its subsidiary. The Supreme Administrative Court also added that the fact that the plaintiff in the submitted value added tax returns acknowledged the domestic transactions carried out or that the branch requested authentication data for electronic records of sales did not say anything about the actual nature of the company's activities. Therefore, the tax administrator will now have to supplement its findings and reassess the nature of the taxpayer's activities.


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Jiri Sindelar
Jiří Šindelář
Tax Director

Tax Advisory