SUPERCEDED

XXI.   Branches of Foreign Corporations

Foreign entities undertaking business in the Czech Republic through a permanent establishment will be taxed in the Czech Republic.

A permanent establishment basically means a facility in the Czech Republic. It includes consulting, managerial and other services performed in the Czech Republic, where such activities continue for a cumulative period of more than 6 months.

With effect from 1/1/98 Income Tax Act No. 586/92 - section 22 (2) defines a permanent establishment as follows:

"A permanent establishment shall mean a facility located in the territory of the Czech Republic where taxpayers, otherwise having their seat or a permanent address (domicile) abroad, perform their activities in this country. A permanent establishment shall for example be understood to be: workshop, office, mine for the extraction of natural resources, place of sale, building site. A building site, construction and installation work (including repairs), the rendering of activities and services specified in subsection 1/c by taxpayer or employees of the taxpayer, or by persons working for the taxpayer, shall be regarded as a permanent establishment only if their duration exceeds six months (regardless of the term of the tax period )."

According to the Commercial Code, branches of foreign companies undertaking business in Czech Republic have to be registered in the Company's Register. From the date of registration the branch is allowed to undertake business in the Czech Republic. A branch of foreign company is not exactly defined, and may not be the same as the definition of permanent establishment under the Income Tax Law.

Under the Tax Collection Act, all entrepreneurs and legal entities domiciled in the Czech Republic including registered branches of foreign corporations and permanent establishments are required to notify the Tax Office about each contract they sign with an entity domiciled abroad which might result in a permanent establishment, of that foreign entity, in the Czech Republic.

The taxable profits of a permanent establishment should not be lower than the profits of a domestic entity undertaking a similar activity. For this purpose, the ratio of profits to total expenses or to gross income of comparable taxpayers, activities, or other data, may be used. Sounds like the American authorities had a hand in writing this section!