Czech Republic: Binding rulings, allocation of profits to permanent establishments

Czech Republic: Binding rulings, allocation of profits

An amendment to the income tax law expands the applicability of binding rulings, to apply also to the method in which profits are allocated to a permanent establishment of a foreign entity.

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Background

When a tax non-resident conducts 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 law prescribes that the permanent establishment’s tax base cannot be lower (or tax losses greater) 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.

In practice, however, it may not be apparent whether this requirement has been fulfilled or will be considered satisfied 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, from the Supreme Administrative Court, in which the tax authority and subsequently relevant courts evaluated transactions between a foreign entity and its permanent establishment.

Binding rulings

Under the new measures, tax non-residents may ask the tax authority for a binding ruling as to how to determine the tax base of a tax non-resident who performs activities through a permanent establishment. This binding ruling amendment has an effective date of 1 April 2017, but the process will be available to foreign entities with permanent establishments in the Czech Republic after 1 January 2018. 

KPMG observation

The preparation of such a ruling request may not be technically easy, and taxpayers may want to consider starting with the preparation of the request immediately after the amendment’s effective date on 1 April 2017.

 

Read a February 2017 report [PDF 249 KB] prepared by the KPMG member firm in the Czech Republic

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