Czech Republic: Tax base of permanent establishments | KPMG | GLOBAL

Czech Republic: Binding rulings, determining tax base of permanent establishments

Czech Republic: Tax base of permanent establishments

Beginning 1 January 2018, taxpayers may ask the 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.

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Up to now, taxpayers have not had this opportunity for a binding ruling. Historically, foreign entities agreed to the manner of determining the tax base with the appropriate tax administrator via a protocol (usually as a percentage of expenses or revenues). The binding ruling process, thus, could be expected to bring legal certainty to foreign entities because such binding rulings would represent the tax authority’s official standpoints on the method of determining the tax base of a permanent establishment.

Binding rulings expected to clarify certain issues

Determining the tax base of a permanent establishment can be ambiguous in many cases, complicated mainly by the fact that a permanent establishment is not a separate entity, and intra-company revenue and expense 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. 

In other instances, there is a question as to whether a permanent establishment is entitled to a margin on sold goods or gains from other activities or functions performed for the entity that has established the permanent establishment. 

Binding rulings are typically issued for three subsequent tax periods. Applications for binding rulings are subject to an administrative user fee of CZK 10,000 and must satisfy certain formal requirements such as the appropriate documentation proving that the selected method of profit allocation (for determining the tax base) of a permanent establishment reflects the functions, assets, and risks borne by the permanent establishment in the relevant transactions. Such binding rulings will be subject to the information exchange requirements between EU Member States in compliance with the Council Directive 2011/16/EU, on administrative cooperation in the field of taxation (similarly to advance pricing agreements).

 

Read a December 2017 report prepared by the KPMG member firm in the Czech Republic 

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