Potential risk of establishing a permanent establishment based on the provision of a home office

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With regard to the end of the accounting year 2022 and the approaching deadline for filing corporate income tax returns for the 2022 taxation period, we would like to draw your attention to the potential risk of establishing a permanent establishment in the Czech Republic precisely in the context of corporate income tax.

According to the Czech Corporate Income Tax Act and double taxation treaties, a permanent establishment is established under 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 tax authorities and the Czech courts, a permanent place of business is, for example, a law firm or, even nowadays, a widespread home office.

The following conditions should be met for the establishment of a permanent establishment:

  1. Permanence of a fixed location, meaning that location must be used continuously. This condition does not mean that the fixed place must be used every day, but that it must be available for a long time (in principle more than 6 months);
  2. The existence of an agreement between the employer and the employee on the performance of activities at this location (e.g. the use of the office / home office is stipulated in the employment contract or another document); and
  3. the activity that is carried out in the Czech Republic at this location is not only of a preparatory or supporting nature, while the preparatory or supporting nature must be interpreted very narrowly.

At the same time, we would like to point out that a permanent establishment can also be established in other cases, i.e. even without the existence of a permanent job. In the event that the employee is authorized to act on behalf of the company and negotiate or conclude business contracts or sign contracts, the foreign company also has a permanent establishment in the Czech Republic.

The permanent establishment must be registered at the tax office and the corporate income tax return must be submitted within the legal deadline, which for 2022 is set by 1 April 2023, or until 1 July 2023 (if a tax advisor files the tax return for the company).

If you suspect that your company could establish a permanent establishment in the Czech Republic, we will be happy to advise you on the issue and examine your company’s situation.