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| September 11, 2018

Dependent Agent and Permanent Establishment

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The regional court in České Budějovice was discussing a case pertaining to the emergence of a permanent establishment represented by a dependent agent. The court’s verdict confirmed that a foreign tax subject can have a permanent establishment in the Czech Republic not only on the basis of a permanent site of business but also in cases where the activity conducted in the Czech Republic by the depended agent of the foreign agent is an essential part of the subject’s business activity. Whether the agent holds their post based on a procuration or conducts the activity for more subjects are not the only decisive things.

In the mentioned court case, the plaintiff was a Czech company which was considered a German tax resident, based on a convention between the Czech Republic and German for the avoidance of double taxation, because the actual HQ was located in Germany. The plaintiff’s activity was sale of work aids and clothing  and had no employees in the Czech Republic during the considered period. Another Czech company (further only “agent”) provided selected services to the plaintiff on the basis of a contract.

The core of the dispute was whether activities conducted by this agent in the Czech Republic are of a nature compliant with activities of the so called dependent agent and thus lead to the emergence of a permanent establishment of the plaintiff in the Czech Republic.

According to the plaintiff, the activities conducted in the Czech Republic were only those of auxiliary or preparatory nature (administrative activity, call center facilitation etc.), the agent did not have a procuration, was not authorized to close commissions, or conclude contracts on sale of goods acting in place of the plaintiff and at the same time the agent provided their services to other subjects as well. In this case there would not be a permanent establishment arising in the Czech Republic.

The tax administration, however, was not content with this statement and opened a local review of the plaintiff. The review showed that the agent arranges for client services for the plaintiff in the form of a contract between companies, specifically the agent handles phone calls with customers in the Czech Republic, accepts electronic mail and consignments, sends out catalogues and also goods to final customers, handles warranty claims, replacement of goods, and issues invoices. Based on this review, the tax administration reached the conclusion that activities conducted by the agent in the Czech Republic basically substitute the plaintiff’s own activity and are indispensable.

The regional court confirmed this statement in their verdict and supplied that, in simplified terms, the entrepreneurial activities of the plaintiff in the Czech Republic were realized through an agent and that without the involvement of this company one can hardly imagine that the plaintiff would be able to ensure their entrepreneurial activity to such degree. The agent’s services were conducted on the basis of a contract and to the extent requested by the plaintiff, therefore the agent cannot be seen as the so called independent agent through which no permanent establishment arises in the Czech Republic.

The above mentioned facts lead to the conclusion that in order for the permanent establishment to arise there does not need to be a procuration. It is sufficient if the relations between the companies work based on a contract.

The plaintiff did not agree with the decision of the regional court and appealed to the Supreme Administrative Court, which is where the case lies now.