Creation of a service-related permanent establishment
Our briefing at the close of summer is about an interesting judgment of the Supreme Administrative Court file No. 2 Afs 103/2018-46 on the creation of a service-related permanent establishment arising from the activities of a dependent agent.
Many foreign companies operating in the Czech Republic perceive the risk of creating a permanent establishment. One of the factors that trigger a permanent establishment is the activity of a dependent agent of a foreign company in the Czech Republic.
In this particular case, the tax administration and, subsequently, the Regional Court, decided that the activity of a German tax resident gave rise to a permanent establishment in the Czech Republic due to the existence of a contractual relationship with an unrelated Czech company rendering various administrative services.
Affirmation of this approach by the Supreme Administrative Court (“SAC“) would have created thousands of permanent establishments of foreign tax residents in the Czech Republic that use administrative and other services provided by Czech companies in this country.
However, the SAC completely disagreed with the view of the tax administration and the subordinate Regional Court and ruled that the Czech company is an independent (not dependent) agent of the German tax resident.
In this context, the SAC made a reference to the OECD Model Tax Convention, setting out the most important criteria for assessing whether or not an agent is independent:
- As a rule, an independent agent is not subject to significant control as regards the way in which the agent has performed the work for the company.
- An independent agent is not subject to detailed instructions from the company with respect to the manner in which the work is carried out.
- The fact that the principal relies on the special skills and knowledge (e.g. language skills) of the agent is also an indication of independence.
- Another criteria is whether the business risk is borne by the agent or by the company. If, for example, the agent’s remuneration is determined according to individual services and invoiced on a regular basis, the agent may be considered to be independent.
- Another factor is the number of entities represented by an agent. It is less likely that the agent is independent if the activities are performed exclusively, or almost exclusively, for a single company.
The SAC stressed that when deciding whether or not an agent is independent, all facts and circumstances need to be taken into account.
We hope that you have found our briefing useful. Should you require any further assistance, please feel free to contact us. We will be glad to assist you in assessing the level of permanent establishment risk in the Czech Republic arising in connection with a dependent agent or otherwise.