Tax Treaty Case Law around the Globe 2016

S. 161Chapter 12 Czech Republic: Case 2 Afs 8/2014-174

Danuse Nerudová

12.1. Introduction

Case no. 2 Afs 8/2014-174 belongs to the category of the Czech case law – which does not comprise many cases – dealing with international taxation. The reason for such a categorization is that except for the procedural issues which the judgment addressed, it also addressed the issue of the interpretation of article 7 of the double tax treaty concluded between the Czech Republic and Germany, and consequently the issue of proving the consultancy costs within the group.

12.2. Facts of the case

The tax subject Johnson Controls Fabrics Strakonice, s.r.o., resident in the Czech Republic, has a permanent establishment (PE) in Germany since 2003. The functions of the PE is to deal with the current customers, gain new contracts and eventually acquisition of the new customers. The accounting books were kept for the whole unit (i.e. the Czech entity as well as the PE situated in Germany). Based on article 7(1)(2) of the double tax treaty concluded between the Czech Republic and Germany, the tax subject allocated the profits to the PE in Germany by the application of the indirect profit allocation method with the c...