When planning an engagement of employees or contractors in a country other than the one in which the company is registered it is necessary to be aware not only of local regulations connected with employment law, but also of other potential tax and legal implications. Our clients often wonder, for example, if it is necessary to establish a separate company in the country where the persons performing the tasks for the company are located. In this article we aim to address one of the possible tax consequences of such company structure, namely the constitution of a tax establishment. In the last few years, the Polish courts have litigated such cases, and despite the fact that the case law in this area is still developing, it is worth following their new “guidelines”.
Legal basis for the recognition of a company as a tax establishment
On 31 January 2022, a decision was issued by the Voivodeship Administrative Court in Gliwice (case no. I SA/GI 1340/21), in which it was indicated that engagement of employees located in Poland on the basis of remote work by foreign entities can be considered to be a tax establishment. This ruling is particularly relevant for all companies operating internationally. For example, if you recruit employees working in Poland on a remote basis through a UK company, there is a risk that you will be required to pay tax in Poland on the income earned by these employees.
In the aforementioned ruling, the court indicated that a company structure will be considered a tax establishment if it meets the following criteria:
- There is a branch office in Poland, i. e. a place where business is conducted,
- The branch office is permanent,
- The activities carried out by the branch office are not ancillary or preparatory in nature,
In order to properly understand the content of this ruling it is necessary to understand each of the criteria set out above.
When are we dealing with a branch office?
It is important to note, that in accordance with the court ruling, engagement of employees under an employment contract who can carry out their tasks anywhere, on a home-office basis, results in the designation of the employee’s specific workspace for the benefit of the company for its own disposal. It is not required for the company to have a formal right to use such a facility – the mere presence of the company at a specific location is sufficient for the purpose of these provisions. This implies that, the place in which the employee provides work for a foreign employer (whether at home or any other place) can be deemed as a separate branch office of that company.
When is the branch office permanent?
A branch office will be considered permanent when “the employment of staff under a contract of employment is long-term and not temporary”. The ruling also states that a short-term branch office can be deemed permanent as well, as long as it has been set up with the intention of permanent use. Any change in this state of affairs, e.g. due to unprofitable operations or random events, will not change the qualification of a branch office as permanent. This means that the foreign entity’s intentions are decisive for the classification as permanent.
It is important to note that the ruling does not indicate specific situations when a branch office is bound to be deemed as permanent or temporary. This means that the totality of the facts will be taken into account when determining the nature of a particular branch office, for example, the duration of contracts with employees, the expenses made to employees, the contracts concluded with contractors.
When the activities carried out by the branch office are not ancillary or preparatory in nature?
The activities carried out by the branch office are not ancillary or preparatory in nature, if those activities do not constitute substantial and significant activities of the company, and the profits of the company cannot be directly allocated to those activities (although those activities may contribute to the improved productivity of the company), and those activities are carried out by the permanent branch office solely for the benefit of that company.
Additionally, a branch office will not be considered ancillary or preparatory in nature in particular when activities carried out do not constitute substantial and significant activities of the company as a whole (or if the aim of the work carried out by polish employees is not identical to the aim of the company as a whole).
It is worth bearing in mind that the mere fact that a company contributes to the productivity of a company will not create a tax establishment under the condition that the services provided by the branch office are too distant from the current generation of profits by the company to attribute any specific part of those profits to such a permanent branch office.
The court has indicated that, according to the Commentary, activity of ancillary nature are those which, form the perspective of the company, do not constitute an activity in their own right but are subordinate to the core activity, i. e. they only make economic sense in connection with the other activities of the company. This indicates, among other things, the activities of the branch office do not constitute ancillary or preparatory nature when they constitute a substantial and significant part of the activities of the company as a whole, when there is a significant connection between the activities carried out by the establishment and the income earned by the company.
I run a company abroad and employ Polish workers on a remote working basis – what should I do?
If you operate in the above mentioned way there is a risk that the branch office may deem your Polish employees as a tax establishment run by your company. In that case you will be obliged to pay tax in Poland on the profit generated by the Polish company (which causes numerous complications, for example in the calculation of the appropriate amount of profit) and to offset tax arrears with interest.
In order to avoid a risk of a tax establishment, there are two options:
- to formulate contracts and employee responsibilities in such a way that (as far as possible) would indicate the ancillary nature of their work,
- recruit Polish employees via a Polish subsidiary company.
If the aforementioned court ruling may have an effect on your company and you are interested in correcting its legal and tax situation, we warmly encourage you to contact us. We will be happy to learn about your situation to help you decide how best to protect your business in the context of the changing economic reality and the court ruling invoked.