FOREIGN COMPANY’S TAX ESTABLISHMENT IN POLAND

According to Polish tax law, foreign companies operating in Poland may be considered as having a tax establishment, which results in the obligation to pay CIT tax. A tax establishment is a term used in international tax law that refers to the permanent place of business of a foreign company in a given country. The definition of a tax establishment is contained in Article 5a(22) of the PIT Act, Article 4a(11) of the CIT Act and Article 5(2). 1 of the OECD Model Convention. For foreign companies, the key challenge is to correctly determine whether their activity in Poland meets the criteria of a tax establishment.

According to the provisions of the PIT and CIT Acts, a foreign establishment means (unless otherwise provided by a double taxation agreement) a permanent establishment through which a foreign entity carries out its activities (e. g. a branch, representative office, office, factory), as well as a construction site, construction, assembly or installation carried out by a foreign entity, as well as a person who acts on behalf of a foreign entity on the basis of a power of attorney to conclude contracts on its behalf.

When determining whether a given entity has the status of a tax establishment in Poland, the relevant double taxation treaties that Poland has concluded with other countries and the OECD Model Convention on which the said agreements are based should first be taken into account. These provisions take precedence over the provisions of income tax laws. In accordance with the Convention, the establishment must meet together the following conditions: the existence of the establishment, the permanence of the establishment and the conduct of all or part of the activities through the establishment.

The emergence of the tax establishment does not involve the submission of any formal applications. Rather, it is a classification of the factual situation, indicating that a foreign entity conducts business in Poland of a sufficiently permanent nature to be subject to the obligation to pay Polish income tax. It should be borne in mind that a fixed place of business for VAT is one thing, and a tax establishment for the purpose of avoiding double taxation in income tax is another thing. Therefore, having a tax establishment in a given country does not always mean having to account for VAT in that country.

There are several legal forms discussed in the previous article in which a foreign company can operate in Poland. Each of these forms has different implications in the context of the tax establishment. A branch in Poland may constitute a tax permanent establishment if it meets the aforementioned conditions of fixed location and business operations. Due to its structure, the branch is often considered a tax establishment in Poland. Due to the limited scope of activity, the representative office usually does not meet the conditions for recognition as a tax establishment because it does not carry out full business activities. In turn, the subsidiary company is a separate legal entity, is not considered a tax establishment of the parent company, but is itself an entity subject to Polish tax law.

The tax establishment of a foreign company in Poland is a concept of crucial importance for international tax law, which determines when a foreign company can be taxed in Poland. The existence of a tax establishment depends on the fulfillment of certain conditions, such as the permanence of the place of business and the conduct of actual economic activity. In the case of various legal forms of doing business by foreign companies, the branch is most often considered a tax establishment, the representative office usually does not meet these conditions, and the subsidiary company is treated as a separate legal and tax entity.

Understanding these nuances is crucial for foreign companies to navigate their tax obligations effectively in Poland, ensuring compliance while optimizing their business strategies.

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