Permanent establishment (PE) for foreign businesses
2024-07-25 12:40

Foreign entrepreneurs conducting business activities in Poland should be aware of potential tax implications. Different business models can lead to establishing a foreign permanent establishment (PE). In such cases, the Polish tax office may claim taxes on income earned within Poland.

Understanding tax residency and Double Tax Treaties (DTTs):

The general rule for settling taxes is based on unlimited tax liability, or tax residence. Simply put, taxes are paid in the country of residence. For companies, this is the country of their registered office. International double tax treaties (DTTs) exist to prevent companies from being taxed twice on the same income.

However, if a taxpayer has a PE in another country, that country can tax the income earned by that PE.

What constitutes a permanent establishment?

The definitions of a PE are found in DTTs and Polish legislation. Typically, a foreign PE includes:

1. A fixed place of business through which an entity conducts all or part of its activities in Poland (e.g., branch, subsidiary, representative office, factory, workshop, farm, or place of natural resource extraction).
2. A construction, assembly, or installation project lasting longer than a year.
3. Another person or company acting on the foreign entity’s behalf with a power of attorney to enter into contracts and who actually exercises that power.

Polish income tax laws prioritize DTTs in determining the existence of a PE. Polish regulations apply mainly when there’s no DTT between the foreign taxpayer’s country of residence and Poland.

Therefore, a foreign PE can arise in various situations. It’s not just about conducting full-scale business activity in Poland (like a branch or subsidiary). The definition also includes specific business parts (factories or workshops), performing commissioned work (construction sites, assembly), or cooperation with another business entity (representative for concluding and negotiating contracts).

Specific type of PE: Representative:

The OECD Model Convention adds significant details regarding a PE arising from a contractual representative. According to the OECD Model Convention, if a person regularly enters into contracts or plays a central role leading to contracts routinely entered into by the enterprise without significant modifications, and those contracts are:

1. Made on behalf of the enterprise,
2. Related to transferring ownership or granting rights to use property owned by the enterprise, or
3. For providing services by the enterprise,

then that undertaking will be considered to have a PE for any activity undertaken for that enterprise.

Activities that don’t create a PE:

Fortunately, international treaties, following the OECD Model Convention, have limitations on applying PE provisions. A PE won’t be established if a facility is used or maintained for:

1. Storing, displaying, or issuing goods belonging to the enterprise.
2. Storing goods solely for storage, display, or delivery.
3. Storing goods solely for processing by another undertaking.
4. Purchasing goods or collecting information for the enterprise.
5. Carrying out any other preparatory or auxiliary activity for the enterprise.

Additionally, OECD Model Conventions and international agreements state that working with a professional representative acting in the ordinary course of business (e.g., broker, commission agent) does not create a PE.

Analysis and practice about PE:

As you can see, the risk of creating a PE exists in many situations when starting a foreign business. Therefore, it’s crucial to verify if the tax office in the country you’re entering will be interested in your income. Analyze your actual activity in that country to assess whether conditions exist that exclude creating a PE.

The Polish tax authorities have considered the following activities to create a PE:

1. An employee of a foreign company working from home in Poland.
2. An office in Poland developing software for a foreign company.
3. A manager acquiring clients for a foreign company.
4. A contract manufacturer.

Future articles will detail situations where Polish tax authorities found a PE, the tax consequences, and the challenges faced.

How we can help you?

If your company conducts or plans business in Poland, we can assist you with:

1. Analyzing whether a PE has been established in Poland and advising on minimizing such risks.
2. Registering for tax purposes in Poland.
3. Preparing relevant documents for establishing and recording income in Poland.
4. Filing the relevant tax returns.