Assessing agent’s dependence in the context of permanent establishment
The Supreme Administrative Court (SAC) has described the key defining features of a dependent agent for the purpose of assessing whether a permanent establishment of a foreign entity has started to exist in the Czech Republic. Among its conclusions, the SAC stated that the Commentaries on the OECD Model Tax Convention on Income and on Capital were an appropriate guideline for the interpretation of double tax treaties.
The case is a continuation of a dispute we wrote about in May of last year. At the heart of the dispute was the question of whether activities carried out by a Czech company (an agent) in the Czech Republic for a company tax-residing in Germany met the characteristics of a dependent agent’s activity, therefore giving rise to a permanent establishment. 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 believed that under the Income Tax Act and under the Double Tax Treaty between the Czech Republic and Germany, no permanent establishment had arisen in the Czech Republic. The tax administrator and the regional court disagreed, arguing that the extent of the matters arranged by the agent on behalf of the company was such that it in fact substituted the company’s own activity. The judgement thus concluded that a permanent establishment had indeed arisen in the Czech Republic as a result of the dependent agent’s activity.
The SAC disagreed with the regional court’s opinion, citing the provisions of the applicable double tax treaty which explicitly state that one of the conditions qualifying a person as a dependent agent is that the same person not be an independent agent at the same time. In other words, the person shall be assessed as a dependent agent unless they are at the same time an independent agent. What are thus the defining features of an independent agent? According to the SAC, to answer this question, it is appropriate to refer to the Commentaries on the OECD Model Tax Convention, which the court identified as a suitable interpretation guideline. The only limitation of using the commentaries is that the wording of the specific double tax treaty must be identical with the model convention.
SAC held that an agent is independent if they are independent of the enterprise both legally and economically, and acting in the ordinary course of their business when acting on behalf of the enterprise. The court then elaborates 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 SAC, this feature may indicate independence).
- The number of entities the agent represents, as according to the SAC, independence is less likely where an agent has been carrying out activities exclusively or almost exclusively for a single enterprise for a long time.
- Independence is not established if an agent carries activities instead of the enterprise which in economic terms fall under the enterprise’s scope of activity.
Based on the above, the court concluded that, in the case in question, the activity carried out by the agent (the Czech company) for the foreign tax resident was an activity of “another independent agent” carrying out predominantly administrative tasks. The foreign tax resident’s permanent establishment in the Czech Republic therefore did not originate.