In today’s article we would like to look at the issue of permanent establishments being created from a different angle than previously. We have recently informed you about the separate risk of a permanent establishment being created by providing a home office on our website: https://www.schaffer-partner.cz/en/media/5193-potential-risk-permanent-establishment-being-created-providing-home-office
This time, however, we will focus on a situation where the company that is at risk of creating a permanent establishment in the Czech Republic (even if only theoretically) is not yours.
A taxpayer – resident of the Czech Republic and permanent establishment of non-residents located in the Czech Republic is legally required to immediately notify its local tax administrator if it has concluded a contract with a tax non-resident, on the basis of which this non-resident may have a permanent establishment in the Czech Republic. This obligation to notify (also popularly referred to as “snitching”) was first enshrined in the Tax and Charges Administration Act No. 337/1992 Coll., specifically in Section 34 (17). But because this obligation to notify only applied to income tax, the provision was moved with effect from January 1, 2011 to the Income Tax Act, more precisely to the newly created Section 38t.
In which cases, then, should you be careful?
In practice, you should therefore be particularly careful when concluding lease agreements for office, production, storage, sales or other premises that are used for business with tax non-residents of the Czech Republic. You should also be cautious when concluding long-term contracts for the provision of services (when the duration of such a contract could exceed the time test for the creation of a permanent establishment). In this case, it could involve, for example, the long-term receipt of services from abroad – such as services for repairs, consultation or training services which require the physical presence of foreign workers in the Czech Republic. You can read more about permanent establishments in Section 22 (2) of the Income Tax Act. The issue of permanent establishments is very broad and complicated and therefore it is important to address each particular case separately.
As far as the notification deadline is concerned, the law does not state a specific deadline. However, we can assume from the use of the word “immediately” that the notification should be made without delay, i.e. within days, but not more than weeks, after the contract has been concluded with the non-resident.
The tax administrator can impose material penalties for failure to comply with the notification obligation.