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Czech Republic: No permanent establishment of German entity, independent agent found

Czech Republic: Permanent establishment

The Supreme Administrative Court looked to features defining the status of a dependent agent for purposes of determining whether a Czech agent was a permanent establishment of a German entity in the Czech Republic.

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Background

At issue was whether activities conducted by a Czech company (an agent) in the Czech Republic for a company having a tax residence in Germany satisfied the characteristics of a dependent agent’s activity, therefore giving rise to a permanent establishment, or were independent activities indicating no permanent establishment in the Czech Republic.

The German company claimed that all its business activities were managed and carried out in Germany, and that the activities of the Czech company (the agent) were solely of a preparatory or auxiliary nature. Therefore, it asserted that under the Czech tax law and under provisions of the income tax treaty between the Czech Republic and Germany, no permanent establishment had arisen in the Czech Republic.

However, the tax administration and subsequently a regional court disagreed, concluding that the extent of the matters arranged by the Czech agent on behalf of the German company was such that the Czech agent in fact was a substitute for the German company with regard to its own activity and that there was a permanent establishment in the Czech Republic as a result of this dependent agent’s activity.

Supreme Administrative Court’s

The Supreme Administrative Court disagreed with the regional court’s decision. The high court looked to the provisions of income tax treaty (that explicitly state that one of the conditions qualifying a person as a dependent agent is that the same person cannot simultaneously be an independent agent). The court turned to examine what are the defining characteristics of an independent agent, and in answering this question, referred to the Commentaries on the OECD Model Tax Convention (identified by the court as suitable interpretation guidelines, provided the language of the specific tax treaty was identical to that of the model convention).

The Supreme Administrative Court explained that an agent is independent if the agent is independent of the enterprise both legally and economically, and if it acts in the ordinary course of its own business when acting on behalf of the enterprise. The court then elaborated on this definition, defining the following features to assess independence:

  • The agent’s activities are not subject to detailed instructions or comprehensive control by the enterprise.
  • The entrepreneurial risk is borne by the enterprise, not the agent.
  • The agent possesses special knowledge and skills (according to the court, this feature may indicate independence).
  • The number of entities the agent represents—independence is less likely when an agent has been conducting activities exclusively, or almost exclusively, for a single enterprise for a long time.
  • Independence is not established if an agent (instead of the enterprise) conducts activities that, in economic terms, fall under the enterprise’s scope of activity.

Based on these criteria, the high court concluded that the activity conducted by the Czech agent for the German company was an activity of “another independent agent” conducting predominantly administrative tasks. Thus, the German company did not have a permanent establishment in the Czech Republic.


Read a June 2019 report prepared by the KPMG member firm in the Czech Republic

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