Taxation of the permanent establishment (PE)

Taxation of the permanent establishment (PE)

Taxation of the permanent establishment (PE)
The basic principle of a permanent establishment is to determine the right of one of the Contracting States to tax income and at the same time to avoid double taxation.

Defining a permanent establishment - Income Tax Act

Permanent establishment means a permanent place or facility for the performance of activities, through which taxpayers with limited tax liability carry out all or part of their activities in the territory of the Slovak Republic.

Permanent establishment may take various forms:

  • classic, i. e. permanent place of business,
  • construction, i. e. construction site, place of execution of construction or assembly projects (creation of PE over time),
  • agent, i. e. carrying out activities through a "dependent representative",
  • “service” - is not defined in the law, but in some Double taxation treaties, e.g. with the Czech Republic, Hungary and other countries.

Prerequisites for the creation of a "classic" permanent establishment

"Location test" - The existence of a place or facility to perform activities

  • geographical stability of the place - the place from which the taxpayer's activity is organized, branch, office, workshop, workplace, place of sale, technical equipment or place of exploration and extraction of natural resources
  • the geographical point does not need to be narrowly limited in space

"Time test" - Permanence (stability) of the place of business

  • if it is used continuously or repeatedly to perform the activity
  • in the case of a one-off activity - if the period of performance of the activity exceeds six months, continuously or in several periods in any period of twelve consecutive months

Article 5 of Double Tax Treaty, defines a permanent establishment as

  • a permanent place of business or establishment through which the undertaking carries out all or part of its activities
  • the location of a part of the business, a branch, an office, a factory, a workshop and a mine, an oil or gas well, a quarry or any other place of extraction of natural resources,
  • the construction site or the construction, assembly or installation project and the supervision associated with it, if such construction site, design or supervision lasts for more than twelve months,
  • the provision of services, including consultancy or management services, to enterprises of one Contracting State or through employees or other personnel hired by enterprises for such purposes, if activities of this nature continue in the territory of the other Contracting State for a period or periods exceeding a total of six months in any 12 months period.

Establishment of a permanent establishment in the case of Contracting States

Article 7 named „Profits of enterprises“ in double tax treaties provides that one of the Contracting States may not tax the income of an enterprise of the other Contracting State unless it carries on business through a permanent establishment situated in that other State.

The country in which the enterprise has its permanent establishment shall be entitled to tax only the income of that permanent establishment situated in the territory of that State. The individual income of a permanent establishment, which the country has the right to tax, is defined in the Income Tax Act in § 16 par. 1 as follows:

  • source of income in the territory of the Slovak Republic,
  • taxpayer with limited tax liability,
  • income from activities carried out through its permanent establishment,
  • income from services, including business, technical or other consultancy, management and brokerage activities, construction and assembly activities and projects and similar activities provided in the territory of the Slovak Republic, even if they are not carried out through a permanent establishment - application of withholding tax

Fulfillment of the conditions defined in the law and at the same time in the double taxation agreement creates an obligation for a permanent establishment to tax income from sources in the territory of another state in this other state.

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