SAC on existence of a permanent establishment

In its recent decision, the Supreme Administrative Court (SAC) dealt with selected facts giving rise to a foreign entity’s permanent establishment in the Czech Republic. In particular, the court pointed out 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, ex officio, registered such branch as a permanent establishment for corporate income tax purposes.
The tax administrator based the claim as to 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 VAT return for June 2016.

In its decision, the SAC held that these facts were not sufficient to trigger the existence of a permanent establishment under the double tax treaty between the Czech Republic and the United Kingdom. The main reasons for the SAC’s opinion were as follows:

  • The leases concluded by the UK company concerned storage premises; under the double tax treaty, such activity is not regarded as giving rise to a permanent establishment. Thus, the leases rather refuted the tax administrator’s arguments, in this particular case.
  • The fact that the registered branch was stated as a supplier in the invoices is not in itself relevant. Moreover, the registered branch does 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 SAC, the fact that payments relating to the invoices were credited to the UK company’s Czech account does not say anything about the nature of the branch’s activity, and it is not possible to confirm the existence of a permanent establishment on this basis.

In its decision, the SAC thus sided with the municipal court, recommending that the tax authority substantiate its decision with further evidence to be obtained, for example, in an on-site investigation. The SAC 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, while emphasising that the court does not in any way anticipate the tax administration’s future decisions.

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