In the remarks that follow, consideration is mainly given to the solutions adopted by existing laws and regulations and in administrative practice. It should be added, however, that some of the conventions concluded with foreign countries, especially those with Austria, contain a number of exceptions to the normal rules of apportionment.

Article 3, paragraph 3, of the Austro-Czechoslovak Convention for the avoidance of double taxation in the matter of direct taxes (Collected Laws and Decrees of 1922, No. 414) provides that enterprises which have establishments in the two countries shall only be taxed in each in proportion to the extent of the operations carried on by the establishment situated in that country. The methods of apportionment must be fixed by agreement between the two Ministers of Finance. In conformity with this agreement, the Minister of Finance issued a Decree on January 29th, 1923 (No. 20, Collected Laws and Decrees of 1923), of which the following is an extract:

“ (1) In assessing taxation in respect of the sales office of a producing establishment situated in the other State, the taxable business profits of the sales offices shall be reckoned as one-third of the total profits accruing to the establishment from the turnover effected through the sales office. Where the sales office also undertakes purchases, its share shall be reckoned as one-half. Where purchases are effected by a branch situated in the one State and sales by an establishment situated in the other State, the total profits accruing from such business transactions shall be divided equally. Profits accruing from joint operations of the two branches and which are to be apportioned between the two States shall be reckoned on the total profits of the undertaking in accordance with the ratio between the turnover resulting from such joint operations and the total business turnover of the undertaking. Where profits accrue exclusively from the operations of one of the two business establishments, they shall be reckoned on the total profits in accordance with the ratio existing between the turnover resulting from such operations and the total turnover of the undertaking. The fiscal authorities of the two States may jointly carry out the apportionment according to closed accounts, where it seems probable that such allocation will not differ appreciably from the estimated results of the application of the aforementioned principles of apportionment.

“ (2) In the calculations provided for in the foregoing paragraph, business turnovers expressed in different currencies shall be reckoned according to the average rate quoted on the Vienna Stock Exchange (average rate of payment on Prague) for the business period in respect of which taxes are payable. The average shall be calculated according to the rates on the 1st, 11th and 21st of each month of the period in question. In the event of no quotation being made on one of the specified days, the next quotation following this date shall be regarded as valid. Both parties agree that profits expressed in various currencies shall as a rule be converted at the rate of exchange current on the day when the balance-sheet was drawn up; where any other rate of conversion is adopted as a basis, the sanction of the two financial administrations shall in every case be required.

“ (3) Where an establishment in circumstances other than those already mentioned engages in business transactions on behalf of an establishment situated in the territory of the other State, the customary commission shall be regarded in the State in which these transactions are effected as the profits accruing from such transactions.

“ (4) If the results obtained by the application of the foregoing principles are in obvious contradiction with the actual situation in regard to profits, the two financial administrations may agree upon another method of apportionment; in such case the taxpayer shall previously be heard by the financial administrations of either party.”

Another special agreement has been concluded with Austria concerning credit institutions and insurance companies. The profits of the former are allocated on the basis of the ratio between the staff expenses (Personallasten) of the establishment situated in the one country and those of the whole enterprise.

As between insurance companies, allocation is based on the ratio between the net annual premiums (after deducting bonuses) of the establishment situated in the one country and the total net premiums paid to the whole enterprise.

Further, the double-taxation convention concerning direct taxes concluded with Poland lays down that, when an enterprise has establishments in the territories of the two States, the joint receipts of these establishments shall as a rule be allocated according to the funds and capital employed by, or invested in, these establishments, and expenses in proportion to receipts. In some cases, the Ministers of Finance of the two States may agree upon another method of allocation. The receipts which one State earns from the sale of goods bought in another country, and the expenses corresponding to these receipts, shall, as a general rule, be apportioned equally between the establishments concerned in the operation.


The law on direct taxation does not prescribe the keeping of books and accounts by taxpayers, but it offers many advantages to those who do in fact keep regular accounts. The executive regulations for applying the law in question lay down that taxpayers who regularly keep the books prescribed by Articles 28 et seq. of the Commercial Code must base their profits on the results of the accounts and balance-sheet data for the taxable period.

Article 28 of the Commercial Code requires every trader and trading company to keep books in which are entered all their business operations and a statement of their property. Each operation must be entered separately. The law does not, however, prescribe the form of these entries. In practice, traders employ the usual methods of accountancy — that is to say, double-entry book-keeping, but large enterprises use the American or other methods. Commercial books must be kept in a living language. Traders are required to keep their books, letters received and copies of outgoing letters for ten years. They must draw up an inventory on opening business and, after that, annually. The inventory must contain an exact and classified statement of all the taxpayer’s property and of his debts, owing both to him and by him. The balance-sheet must show the composition and nature of the taxpayer’s assets and liabilities. Material used in the business must be entered at its utility value — i.e., at the price which it would cost to replace it. Goods for sale must be entered at their sale price at the time of preparing the balance-sheet. Debts are recorded at their actual figure at the same time.

The provisions relating to the special tax on companies’ profits (see Part I) are based on the presumption that these companies use double-entry book-keeping.


(1) Method of Separate Accounting

The general tax on profits, the income tax and the special tax on profits, payable by foreign enterprises, are assessed exclusively on the results of the establishments situated in the country and the business they do in that country. The taxpayer or his representative is therefore required to submit a return accompanied by the balance-sheet and profit-and-loss account of the Czechoslovak establishment. The taxable profits, however, must not be less than the minima stipulated by the law (see No. (3) below). For purposes of computing these minima, no account is taken of operations of the foreign enterprise in which the Czechoslovak establishment takes no part.

The administration then checks the return and documents submitted in support thereof and compares them with any information at its disposal, such as statistics, particulars of similar enterprises, expert opinions, witnesses’ testimonies, etc., and, if necessary, asks the taxpayer to furnish additional information. It may also call upon its experts to examine the taxpayer’s books. If the enterprise does not comply with the requests of the administration or answer its questions, or if it does not produce the necessary evidence in support of its statements, the authorities may assess tax ex officio on the basis of whatever information they possess.

(2) Empirical Methods

Taxable income is, in principle, determined by the method just described, and recourse is only had to the turnover in order to check the results shown in the accounts. Under the convention with Austria, however, profits are apportioned on the basis of turnover.

(3) Method of Fractional Apportionment

The principle that the profits of the Czechoslovak establishment of a foreign enterprise shall be determined on the basis of the establishment’s accounts is subject to certain exceptions. But, as regards the special tax on profits, the law lays down a number of additional rules; if a foreign enterprise has an establishment in Czechoslovakia which sells or buys goods bought or intended for sale abroad, at least half of the total profit from these buying and selling transactions shall be taxable: should the establishment manufacture goods which are sold abroad, at least two-thirds of the total profits from these operations of manufacture and sale will be taxable.

The convention concluded with Austria, however, contains other rules of apportionment (see pages 113 and 114).

(4) Requirements for Selection of Methods and Value of the Various Methods

Apart from the conventions concluded with Austria and Poland, there is no law or treaty clause which prescribes the methods of apportionment to be used. In practice, therefore, the method is adapted to the circumstances of the case. The position of an enterprise is determined as accurately as possible on the basis of the actual circumstances peculiar to each of them. Although this method has undoubted advantages, its application obviously involves many difficulties. Some of these are of a general character, due to the complexity and variety of the methods and forms of commercial organisation, so that it is not always easy to ascertain the exact facts on which taxation is to be based. Other difficulties arise from the accounts, for foreign enterprises frequently try to escape local taxation by recourse to fictitious accountancy. It is also difficult sometimes to avoid double taxation owing to the numerous and substantial divergencies between national legislation and the laws of foreign countries.

It was thought at one time that the so-called “schematic” method—i.e., the method of taxing a certain fraction or percentage of the total profits of the enterprises as adopted under the Austro-Czechoslovak convention — would avoid these difficulties; but experience has shown that the main purpose — the avoidance of double taxation — has not been achieved. The two countries do not apply the same rules for assessing taxable income — i.e., computing the gross income and fixing the charges and expenses deductible therefrom. Hence, long negotiations are required in order to agree on the sum to be apportioned fractionally; or, if each country applies the apportionment fraction to a different sum, a certain measure of double taxation is inevitable.

It therefore still remains to be decided whether any method can be devised which will be at the same time more convenient and more exact. This is true, not only of branches of foreign enterprises, but of subsidiary companies which, if in law independent, in fact form a single economic unit with their parent company.


(1) Apportionment of Gross Profit of Local Branch to Real Centre of Management abroad

No profits of a branch in Czechoslovakia are ascribed either in law or in fact to the enterprise’s real centre of management abroad.

(2) Apportionment of Expenses of Real Centre of Management to Branch

Interest Charges

Interest on debts contracted by a foreign enterprise is not deducted from the profits of the Czechoslovak branch, unless it is shown that the debt is economically connected with that establishment. Such deduction is commonest when the debt is a mortgage debt secured on immovable property belonging to the branch in Czechoslovakia. Mostly, however, this deduction is a question to be determined in each separate case, and there are no general rules for the allocation of these interest charges.

As regards, however, the special tax on profits, the law provides that legally deductible expenses, which include interest charges, must be allocated in proportion to gross income, except when it is possible to determine exactly and directly the receipts to which these expenses correspond.

General Overhead

What has been said about interest charges applies also to general overhead, and there are no fixed rules of apportionment except in the cases mentioned above.

(3) Apportionment of Net Profit

Of Branch to Deficitary Parent

Except in so far as the law and the treaties make provision for taxable minima in connection with operations conducted by the foreign enterprise and its Czechoslovak establishment, the latter is taxed without reference to any loss sustained by the parent enterprise. The reason for this is that, from the fiscal point of view, the establishment in Czechoslovakia is an independent national enterprise.

Of Parent to Deficitary Branch

Subject, again, to the provisions in the law and the treaties concerning taxable minima, the fiscal authorities are only interested in the results of the Czechoslovak establishment. If the accounts of the branch show a loss, there is either no tax or tax is assessed at the minimum figure, as the case may be.


Subsidiaries are regarded, both fiscally and legally, as independent units, and, for purposes of assessing the taxable income of the branch, only the branch’s own profits are taken into account.



(1) Selling Establishments

Local Establishments selling in National Markets

The administration follows no special method in these cases, but determines the branch’s income independently.

The special provisions applying in virtue of the conventions to Czechoslovak establishments of Polish and Austrian enterprises were referred to above. As regards Austria, the profits of the establishment from the sale of the products of the foreign enterprise are deemed to be one-third of the total profit from the establishment’s turnover, or, if it also makes purchases, the taxable proportion of profits is half. The same applies when the enterprise buys in one country and sells in another.

Local Establishments selling abroad

The profits earned by an establishment in Czechoslovakia from sales in a country where the enterprise has no establishment are taxable in Czechoslovakia in their entirety, this being regarded as a case of an enterprise within the country extending its operations to a foreign country without having any establishment there. No part of profits is ascribed to the parent enterprise or to the real centre of management.

(2) Manufacturing Establishments

If a foreign enterprise manufactures goods in its Czechoslovak establishment and sells them in a foreign country where it has no sales office, the total profit from its operations will be taxed in Czechoslovakia. But, if the enterprise has a selling establishment abroad, the share of profits belonging to that establishment will be liable to the general or special profits tax in Czechoslovakia, only if the establishment is liable to no similar tax abroad. (As regards income tax, the exemption is further dependent upon reciprocity.)

Moreover, in the case of enterprises liable to the general tax on profits, at least one-quarter of the total profits from manufacture and sale is held to tax in Czechoslovakia. In the case of enterprises liable to the special tax on profits, the taxable minimum is two-thirds of total profits.

These provisions do not apply to operations carried on in countries with which Czechoslovakia has concluded conventions (the contents of the conventions were indicated on pages 113 and 114).

(3) Processing Establishments

Processing establishments situated in the country are liable to tax. The profits from their activities are assessed according to the method best suited to the particular case.

(4) Buying Establishments

Enterprises which have a buying establishment in Czechoslovakia are liable to tax there. The taxable minimum in the case of enterprises liable to the general tax on profits is one-quarter of the total profit from purchases and sales; in the case of enterprises liable to the special tax on profits, the taxable minimum is half the total profit.

Enterprises belonging to a country with which Czechoslovakia has concluded a double-taxation convention are subject to the provisions of those conventions instead of to the foregoing rules. The convention concluded with Austria stipulates that the total profit from purchase and sales offices is to be allocated equally between the two countries. According to the convention with Poland, the profits made in one country from the sale of goods bought in the other, and the expenses corresponding to that income, are, in principle, to be allocated in equal parts between the establishments concerned in these operations.

(5) Research or Statistical Establishments, Display Rooms, etc

Every establishment or place of business which a foreign enterprise possesses in Czechoslovakia is liable to tax. By “establishment” is to be understood any permanent installation which in any way whatever, directly or indirectly, enables the operations of an enterprise to be conducted in a given place. An establishment, to be taxable, need not be a direct source of profit; it is enough that it serves to further the activities of the enterprise to which it belongs. Thus, permanent installations which are in themselves unproductive, but which render the enterprise certain services, constitute establishments. No special methods, however, are prescribed for assessing their profits.


Czechoslovak law prescribes no special method of determining the income of establishments of banks, insurance companies, transport enterprises, power, light, and gas enterprises, telephone and telegraph companies, mining enterprises, etc., situated in Czechoslovakia.

The convention concluded with Austria, however, has a clause relating to the taxation of credit institutions and insurance companies, the terms of which were indicated above.



As already mentioned in connection with the special and general taxes on profits, national enterprises which do business abroad without having any foreign establishments are liable to tax in respect of the profits from this business in the same way as in respect of all their other profits.

Enterprises with establishments abroad are, in principle, liable in respect of the profits of such establishments, only if the latter are not being required to pay income tax abroad. In the event of taxation, the same rules of apportionment apply to national enterprises as to foreign enterprises with establishments in Czechoslovakia. In all cases, however, a certain minimum percentage of the foreign establishment’s profits will be held to tax in Czechoslovakia.


For purposes of the taxes on profits, the real centre of management is to be considered as an establishment, as it constitutes an organisation which renders services to the business.

As regards enterprises liable to the general tax on profits which have an establishment abroad, the law lays down that at least one-quarter of the enterprise’s total profits shall be held to tax in Czechoslovakia.

In the case of enterprises liable to the special profits tax, the rule is that the minimum taxable in Czechoslovakia shall be one-tenth of total profits. Further, when enterprises buy in Czechoslovakia and sell abroad or vice versa, at least one-half of the profits from these operations shall be taxable in Czechoslovakia. When enterprises manufacture in Czechoslovakia and sell abroad, the taxable minimum is one-third of the profit from these transactions.


There are no special rules for trust and holding companies. Holding companies having their head office in Czechoslovakia and controlling foreign subsidiaries are treated as described under B, I (page 118). Czechoslovak subsidiaries under the control of foreign holding companies are taxed according to the rules described under A (b) (1) (page 115).