Case law
10 May 2018

Dependent agent permanent establishment

The Regional Court in České Budejovice held that if an agent’s activity forms a separate and essential part of a non-resident taxpayer’s activity, it gives rise to the taxpayer’s permanent establishment in the Czech Republic. The activity does not necessarily have to be carried out under a power of attorney. It is also irrelevant whether the agent carries out the activity for multiple entities.

Tomáš Kroupa
Hana Čuříková

At the heart of the dispute was the question of whether activities carried out by a Czech company in the Czech Republic for a company tax-residing in Germany met the criteria of a dependent agent’s activity, giving rise to a permanent establishment. The German company’s scope of business was the sale of working apparel and tools. It 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. The company also argued that the Czech agent was not authorised to conclude contracts or orders for sale of goods in its name, nor did it have any power of attorney, and only provided administrative and call centre services for the company. At the same time, the Czech agent also provided services to other entities. The company thus believed that under the Income Tax Act and the Double Tax Treaty between the Czech Republic and Germany, no permanent establishment had arisen in the Czech Republic.

The tax administrator disagreed. In an on-site investigation, it ascertained that the Czech agent accepted shipments, dispatched ordered goods to customers, arranged for goods replacement, dealt with customer complaints, and invoiced on behalf of the company. Based on this, the tax administrator concluded that the extent of matters arranged by the agent on behalf of the company was such that it in fact replaced the company’s own activity. According to the tax administrator, the foreign taxpayer’s permanent establishment had thus arisen, as the agent’s activity formed a separate essential part of its business; it was irrelevant that the Czech agent did not have a power of attorney. The regional court confirmed the tax administrator’s approach.  

The above conclusions of the court indicate that the existence of a permanent establishment may also be deduced from the factual content of the relationship between the contractual parties, regardless of the Czech agent not having the legal basis for the activity in the form of a power of attorney. In the rationale of the judgement, the regional court stated that the authorisation to conclude contracts or orders was deduced from the factual nature of the contractual relationship between the company and its Czech agent. The taxpayer has appealed, so the case will be dealt with by the Supreme Administrative Court.  

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