Binding rulings now also on allocation of profits to permanent establishments
Thanks to the budget committee’s amending proposal, the above mentioned amendment to the Income Tax Act (Print No. 873) expands the applicability of binding rulings. These will now also apply to the method in which profits are allocated to a permanent establishment of a foreign entity.
Where a tax non-resident carries out business activities in the Czech Republic through a permanent establishment, they must correctly allocate the revenues generated via the permanent establishment as well as the expenses related to these revenues. The Income Tax Act prescribes that the permanent establishment’s tax base cannot be lower (or tax losses higher) than the tax base reported (or tax losses incurred) from the same or similar business activities performed under similar conditions by a taxpayer residing in the Czech Republic.
The purpose and goal of this legal regulation is apparent; in practice, however, it may not be apparent whether the rule above has been fulfilled or will be considered fulfilled by the tax authority. The taxation of permanent establishments often comes under the tax administration’s scrutiny, as proven by Decision No. 10 Afs 147/2016-45, recently published by the Supreme Administrative Court, in which the tax authority, and subsequently relevant courts evaluated transactions between a foreign entity and its permanent establishment.
Under the new opportunity, tax non-residents in similar circumstances may ask the tax authority for a binding ruling on how to determine the tax base of a tax non-resident who performs activities through a permanent establishment.
Foreign entities with permanent establishments in the CR should get this chance after 1 January 2018. The preparation of such a request will not be technically easy. We recommend taxpayers considering this option start with the preparation of the request immediately after the amendment’s effective date, which is 1 April 2017.