13 December 2017

Binding rulings for permanent establishments

From 1 January 2018, taxpayers may ask tax administrators for binding rulings on the manner of determining the tax base of a permanent establishment (or a registered branch of a foreign entity) located in the Czech Republic.

Václav Baňka
Zdeněk Řehák

Binding rulings should bring legal certainty to foreign entities, as binding rulings represent the tax authority’s official standpoints on the method of determining the tax bases of permanent establishments. Taxpayers have not yet officially had this chance. Historically, foreign entities agreed the manner of determining the tax base with the appropriate tax administrator via a protocol (usually as a percentage of expenses or revenues). 

Determining the tax base of a permanent establishment is ambiguous in many cases, complicated mainly by the fact that a permanent establishment is not a separate entity and intra-company flows without existing contracts must be considered. The most problematic situations arise when supplies are delivered between the head office and the permanent establishment (e.g. various support services or the transfer of goods for the purpose of their sale by the permanent establishment) or when the permanent establishment deals with customers, suppliers and business partners but does not issue any invoices to third parties. Many times, another question must also be answered: whether a permanent establishment should be entitled to a margin on sold goods or gains from other activities/functions performed in favour of the entity that has established the permanent establishment. 

Binding rulings are usually issued for three subsequent taxable periods. Applications for binding rulings are subject to an administrative fee of CZK 10 thousand and should in addition to the formal essentials include appropriate documentation proving that the selected method of profit allocation (determining the tax base) of a permanent establishment reflects the functions, assets and risks borne by the permanent establishment in the relevant transactions. We also draw attention to the fact that binding rulings issued in this area will be subject to the information exchange duty between individual member states in compliance with the Council Directive 2011/16/EU, on administrative cooperation in the field of taxation, similarly to advanced pricing agreements.

We recommend considering applying for a binding ruling even where foreign entities had previously entered into agreements with their tax administrators on determining the tax base of their Czech permanent establishments.

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