Tax Deductibility of Expenses of Foreign Tax Payers’ Permanent Establishments
14.07.2015Company: Deloitte
In late May 2015, the Supreme Administrative Court (SAC) issued a ruling addressing the relation between the Double Tax Treaty and the application of local tax laws.
The substance of the dispute involved bonus payments made to members of the statutory body of a Polish company in 2007 and 2008 which were eliminated from tax deductible expenses by the tax administrator in accordance with Section 25 (1) (d) of Act No. 586/1992 Coll., on Income Taxes (ITA), in the wording effective in that period. However, the plaintiff proposed that the costs should be treated as tax deductible with reference to Article 7 (3) of the Double Tax Treaty between the Czech Republic and the Polish Republic.
The SAC stated that if the tax deductibility of expenses is governed by the local tax law at the place of profit taxation, the foreign persons incur no detriment that would arise from their foreign domicile, i.e. the type of detriment that the double tax treaties seek to prevent. Since the treaty does not contain an express statement designed to align tax systems in this area (in this specific case the determination of tax deductibility of bonuses paid to members of statutory bodies that would take precedence over the limitation arising from Section 25 (1) (d) of ITA), it appears rational to interpret its text in line with the customary purpose of double tax treaties and the commentary to the OECD model tax convention. The outcome is that the costs incurred in generating income of a permanent establishment in the territory of the Czech Republic can be deductible in the Czech Republic, but the conditions for their tax deductibility shall be assessed in terms of the Czech legal regulation.
