Representation abroad: when is it required to organize it?
Are you an entrepreneur, an individual or a legal entity that provides services or sells goods on the territory of another state? Both foreign companies doing business in the Czech Republic and Czech firms trading in other countries under certain conditions must additionally register for the income tax and VAT.
The income tax law lists the income of non-residents that are subject to taxation in the country of receipt. But the main rules govern the agreements on the avoidance of double taxation concluded between the countries. Most often, a foreign company or an individual does not have to register as a taxpayer abroad. A tax resident who pays income to a non-resident of a given country transfers the payment without the income tax, which usually closes the non-resident’s tax obligations. However, there are cases when a permanent representation of a company/entrepreneur arises when services are provided in a foreign country. If a representative office is established in another country, it is required to register with the tax service as a taxpayer.
VAT is also an important issue in this context. The concept of a permanent representation in the scopes of the income tax law and the VAT law has different interpretations and, accordingly, different rules. The fact that a non-resident in the Czech Republic has a permanent representative office and an obligation to register for the income tax does not mean that Czech contractors must issue invoices to the Czech representative office of a foreign company with the Czech VAT. Usually, the VAT regime between Czech companies and non-residents stays in the reverse-charge mode for services and in the export mode for goods.
A few examples
1. Opening a subsidiary in the Czech Republic:
a) a non-resident (for example, a Russian company) opened an office in the Czech Republic where a Czech market oriented sales manager, an assistant and an accountant work. Since the office is engaged in the sale of services (goods) on the territory of the Czech Republic and trade operations are concluded on the territory of the Czech Republic, there is a permanent representation and the obligation to register for the income tax and VAT. Registration of such a “branch” is possible in the commercial register (Odštěpený závod), as a branch without registration in the commercial register (only registration as a taxpayer in the tax service is required);
b) a non-resident (for example, a Russian company) opened an office in the Czech Republic that provides support service for Czech clients of the Russian company. Since the office does not generate revenue, does not sell services (goods) on the territory of the Czech Republic and is only auxiliary to the main company, a permanent representation does not arise and there is no obligation to register for the income tax and VAT.
2. A construction site:
a) a non-resident (for example, a Russian company) signed a contract for the construction of a shopping center in the Czech Republic. The construction project is carried out by the representatives of the Russian company and by subcontractors. The project lasts for more than 12 months. It does not matter if the construction of a shopping center is divided into several parts/projects, the important fact is that it happens in one place, for one customer and the duration is more than 12 months. Since the 12-month time limit has been exceeded (according to an international agreement between the Czech Republic and Russia), a Russian company has a permanent representative office and must register as a taxpayer with the Czech tax service. Registration as a VAT payer is not required. The Czech customer still works with the Russian company in the reverse charge mode.
b) a non-resident (for example, a Russian company) signed a contract for the construction of a residential building in the Czech Republic (the construction project took 8 months), then signed another contract for the construction of a covered parking lot in the Czech Republic with another customer (the construction lasted 7 months). The total time for providing construction services in the Czech Republic exceeded 12 months, but each individual project did not. Since the 12-month time limit was not exceeded (according to the international agreement between the Czech Republic and Russia), a Russian company does not have a permanent representative office and the company should not become a taxpayer in the Czech Republic. The Czech customer still works with the Russian company in the reverse charge mode, i.e. the Russian company does not become a Czech VAT payer.
3. The official representation:
a) a non-resident (for instance, a Russian company) owns a subsidiary on the Czech territory where it sends an employee to ensure the quality control. This employee observes the production process and the quality of products for more than 6 months within a 12-month period (it can be any 1-year period). As the time limit of 6 months is exceeded (according to the international agreement between the Czech Republic and Russian Federation), the Russian company has a permanent representation and the company must register as a taxpayer with the Czech tax office. Registration as a VAT payer is not required. Time limit, in contrast to the “construction site”, includes the provision of services in the Czech Republic for different customers. For example, a tax specialist performs an audit of a company in Prague for 3 months, after this the audit is conducted in Brno for 4 months (both services are held within 12 months), a tax specialist, in this case, has a permanent representation.
b) a non-resident (for instance a Russian engineer) provides consulting and monitoring service on the territory of the Czech Republic when new equipment is put into operation for 5 months, a permanent representation does not arise in the Czech Republic.
The effective tax planning is undoubtedly one of the main components of the successful development of companies with ambitions to enter the international arena. It is extremely important for business to receive timely and relevant information when conducting transactions in a foreign country. We are ready to become your reliable partner who will help you with tax obligations in the Czech Republic and abroad.
Services we offer
DoMyTax company offers the following services:
- consulting and assistance with organizing international business for Czech companies,
- consulting and assistance with the expansion of Czech companies abroad,
- assistance with the tax consequences of abroad projects (construction projects, employment in a foreign country, investment, etc.),
- tax advice and accounting support for permanent representations in the Czech Republic,
- tax audit of the contractual and other documentation and provision of recommendations to minimize tax risks,
- representation of client’s interests in the tax office, in the social department, in the health insurance fund and other departments,
- assistance with obtaining preliminary approval of the taxation regime for the proposed operations of the company with the Czech tax authorities,
- providing recommendations on opportunities for tax planning and improving tax efficiency.
– tax consulting – 3000, – CZK / hour
– registration in the tax office – 1500, – CZK
– registration as an employer in the pension fund and the health insurance fund – 1000, – CZK
– registration of an employee in a pension fund and the health insurance fund – 1000, – CZK
– registration at the labor exchange (in case of employment of a non-Czech citizen) – 500, – CZK
– representing the company interests in the tax, social and medical department – 1000, – CZK / hour (in case of involving a tax consultant – 3000, – CZK / hour)
– preparation and submission of the company’s annual statements – from 4.500, – CZK
– preparation and submission of the annual declaration of an individual – from 1.500, – CZK
– accounting of the company – according to the current tariff plan.
You can find a series of articles on the taxation of non-residents in the Czech Republic in our blog.