What the new methodological guidance on the establishment of a permanent establishment highlights – Part 1

How is the existence of a permanent establishment assessed?

The establishment of a permanent establishment by a non-resident in the Slovak Republic is assessed in two ways:

• solely under the Income Tax Act (Section 16(2)) in the case of a resident of a country with which the Slovak Republic has not concluded a double taxation agreement,
• in accordance with both the Act and the international treaty (Article 5 – Permanent Establishment), where the resident is from a country with which the Slovak Republic has concluded an international treaty.

An international treaty takes precedence over domestic law to the extent provided for by the Constitution. In practice, this means that even if the domestic conditions for the establishment of a permanent establishment are met, the decisive factor is whether the existence of a permanent establishment follows from the relevant article of the treaty (often Article 5 in conjunction with Article 7 – Business Profits).

Under Section 16(2) of the Income Tax Act, a permanent establishment is deemed to be a fixed place or facility for the performance of activities through which taxpayers with limited tax liability carry out all or part of their activities within the territory of the Slovak Republic.

The Act sets out an illustrative (not exhaustive) list of permanent establishments: the place from which the business is organised, a branch, an office, a workshop, a place of work, a point of sale, technical facilities, a site for the exploration and extraction of natural resources, and so on. The key point is that it must be a specific place or facility available to the entrepreneur for the purpose of carrying out their business activities.

A place or facility is considered permanent if:

• it is used on a continuous or recurring basis, or
• in the case of a one-off activity, the duration of the activity exceeds six months (six months and one day), either continuously or in several periods within any 12-month period.

The time condition is assessed in relation to a specific location; where there are transfers between locations, it must be examined whether these constitute a single commercial and geographical unit or separate locations.

An international treaty (Article 5) is typically based on the OECD Model Tax Convention:

Article 5(1) – general definition

• ‘permanent establishment’ means a fixed place of business or facility through which an enterprise carries on its business, in whole or in part.

Article 5(2) – ‘positive list’ of typical permanent establishments

• head office, branch, office, factory, workshop, mine, oil or gas field, quarry, or any other site where natural resources are extracted.

The positive list is merely illustrative. It is not sufficient for a place to be called a ‘branch’ or ‘office’ – the general conditions set out in paragraph 1 (location, permanence, performance of activities) must always be met.

Basic conditions for the existence of a permanent establishment

Article 5(1) of the OECD Model Tax Convention and the Commentary define the so-called ‘classic permanent establishment’ through three cumulative conditions:

• The existence of a place or facility for the conduct of business
• The permanence of the place of business
• The actual carrying out of activities through this premises

The existence of a place or facility for carrying out activities

The term ‘place or facility for carrying out the activity’ is interpreted very broadly:

• it may refer to immovable property, part of immovable property, physical premises, equipment, machinery, technology, or even underground facilities;
• the business need not be the owner or tenant – it is sufficient that it actually has the place at its disposal and uses it,
• the occasional presence of persons without control over the premises is not sufficient to establish a fixed establishment.

The following, for example, are not considered to be a ‘place of business’:

• purely financial assets (securities, bank accounts),
• a postbox, an email address,
• the website itself without physical infrastructure (server).

Conversely, unmanned facilities (vending machines, aerials, cables, transformer stations, servers) may also be regarded as a place of business if they are used by the undertaking for its activities.

The place must be linked to a specific geographical location. It does not always have to be a single room; the decisive factor is whether the activities in the given area form a single commercial and geographical unit.

• if the activity takes place within a single contiguous site (e.g. a complex, a building, a forest, a mine), it may be regarded as a single site;
• if the activity is carried out at clearly separate sites with no geographical connection, each site is assessed individually.

Some installations (e.g. pipelines, railway lines, underground facilities) may satisfy the localisation test even if they are not ‘typical’ operations.

Mobile facilities (vans, caravans, ships, aircraft) are assessed with caution – if they are regularly moved and are not tied to a single geographical point, the location test may not be met.