Tax context of the place of effective management


In my practice, I have recently encountered the efforts of foreign tax administrators to move the tax residence of Czech companies into other tax jurisdictions through the place of effective management.

The place of effective management is understood as the place where an enterprise’s key management and business decisions which cannot be changed at lower levels of management are actually made. The tax administrator frequently cites statutory bodies operating outside the Czech Republic, the signing of business contracts outside the Czech Republic and strategic meetings of top management outside the Czech Republic as signs of place of effective management.

Local Czech management, the business is then designated as company’s permanent establishment. Moving the tax residence leads to tax registration abroad, the obligation to submit tax returns abroad due to unlimited tax liability, the need to allocate the tax base between the permanent establishment and the place of effective management (here I recommend performing a functional and risk analysis). In addition, it may have effects, for example, on the taxation of statutory bonuses, profit shares, dividends and interests; all this in accordance with the relevant contract to avoid double taxation. If you meet one, more or all the above criteria, I recommend conducting a detailed analysis and appropriately modifying your internal/organisational processes to reduce the risk.

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