In view of the end of the 2022 financial year and the approaching deadline for filing corporate income tax returns for the 2022 tax year, we would like to point out to you the potential risk of a permanent establishment being created in the Czech Republic in the context of corporate income tax.
Under the Czech Corporate Income Tax Act and double taxation agreements, a permanent establishment is created according to the Corporate Income Tax Act if a foreign person has a permanent place of business in the Czech Republic. According to the interpretation of the financial authorities and the Czech courts, a permanent place of business is, for example, a law firm or, as is widely used nowadays, a home office.
The following conditions should be met in order for a permanent establishment to be created:
- The permanence of the fixed place, which means that this place must be used continuously. This condition does not mean that the fixed place must be used every day, but that it must be available long term (in principle for more than 6 months);
- the existence of an agreement between the employer and the employee to carry out activities in this place (for example, the use of the office / home office is stipulated in the employment contract or other document); and
- the activity that is carried out in this place in the Czech Republic is not merely preparatory or supplementary in nature, where “preparatory or supplementary in nature” needs to be interpretated very narrowly.
At the same time, we would also like to point out that a permanent establishment can also be formed in other cases, i.e. without the existence of a permanent workplace. If an employee is authorized to act on behalf of the company and negotiate or conclude business contracts or sign agreements, the foreign company also therefore has a permanent establishment in the Czech Republic.
A permanent establishment must be registered with the tax office and corporate income tax must be filed by the statutory deadline, which for 2022 is April 1, 2023, or July 1, 2023 (if a company’s tax return is filed by a tax advisor).
If you suspect that your company may have a permanent establishment in the Czech Republic, we will be happy to advise you on this issue and investigate your company’s situation.
