Czech Republic: Evidence establishing a foreign entity’s permanent establishment (court decision)
Czech Republic: Establishing a foreign entity’s PE
The Supreme Administrative Court, in a case concerning whether a foreign entity had a permanent establishment in the Czech Republic, held that the tax administrator must produce sufficient evidence proving beyond any doubt the existence of a permanent establishment.
The case involved a dispute between a UK company that had established a registered branch in the Czech Republic and a tax administrator who had registered this branch as a permanent establishment for corporate income tax purposes.
The tax administrator based the existence of a permanent establishment on the following facts:
- The UK company concluded a lease for non-residential premises (a warehouse).
- Agreements on future business cooperation were concluded between the UK company and a number of Czech entities and with a Chinese business company.
- Invoices were issued, stating the UK company’s registered branch as a supplier.
- Payments relating to these invoices were credited to the UK company’s account in the Czech Republic.
- The UK company requested authentication data for the electronic reporting of sales.
- The UK company filed a value added tax (VAT) return for June 2016.
In its decision, the high court held that these facts were not sufficient to trigger the existence of a permanent establishment under the income tax treaty between the Czech Republic and the United Kingdom.
- The leases concluded by the UK company concerned storage premises. Under the income tax treaty, such activity was not regarded as giving rise to a permanent establishment. Thus, the court found the leases refuted the tax administrator’s arguments.
- The fact that the registered branch was stated as a supplier in the invoices was not in itself relevant. Moreover, the registered branch did not have a legal personality in the Czech Republic allowing it to enter into the commercial contracts to which the invoices related.
- According to the court, the fact that payments relating to the invoices were credited to the UK company’s Czech account did not address the nature of the branch’s activity, and it was not possible to confirm the existence of a permanent establishment on this basis.
In conclusion, the high court agreed with the lower municipal court, and recommended that the tax authority substantiate its position with further evidence (for example, by means of an on-site investigation). The high court also recommended that the tax administrator obtain more detailed information on the parameters of the activities carried out by the UK company's registered branch, and stressed that the court did not anticipate the tax administration’s future decisions.
Read a February 2021 report prepared by the KPMG member firm in the Czech Republic
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