Tax establishment

Permanent establishment

A permanent establishment (PE) is a fixed place of business through which an entity with its registered office or management in one country conducts its activities in the territory of another country.

The creation of such a PE implies that its profits must be taxed in the country where it operates. For this purpose, a legal fiction is applied whereby the profits are attributed to the PE as if it had carried out similar activities as an independent enterprise and was completely independent in its relations with the parent company.

A PE may arise from the existence of a fixed place of business, such as a branch, office, factory, workshop or raw material extraction site. A PE can also be created by a person acts on behalf of a foreign company if they hold and actually exercise a power of attorney to conclude contracts. Recently, growing attention has been given to whether remote work performed by employees abroad may lead to the creation of a tax PE.

The issue may concern both the foreign activity of Polish taxpayers and the activity of foreign entities in Poland.

Construction permanent establishment

A type of foreign permanent establishment is the so-called construction permanent establishment, which arises when a foreign entity carries out long-term construction, assembly, or installation work. When determining the tax treatment of a construction permanent establishment the provisions of the relevant double taxation treaty [DTA] should be taken into account.

The creation of a construction permanent establishment entails a number of income tax consequences. As a general rule, most DTAs stipulated that the period after which the aforementioned construction activity can be considered a permanent establishment is 12 months. However, in order to correctly determine whether the construction work in question has given rise to a tax permanent establishment, issues such as:

the timing of the works in terms of the provisions of the relevant DTA – it is worth noting that even the commencement of works related to the organisation of the construction site can influence the start of this period;
the type of work carried out – a construction permanent establishment can arise not only in the case of erecting buildings, but also for the construction of roads, bridges or canals, their renovation (going beyond mere maintenance or refreshing) and more;
the economic and geographical interconnectedness of construction, assembly, and installation works carried out in one country under several contracts.

Although the taxpayer and its permanent establishment are not formally separate entities and do not conclude contracts with each other (e.g. for provision of services or for the purchase/sale of goods) – they are considered related entities under the CIT Act. Therefore, transactions between the parent company and its permanent establishment are subject to transfer pricing regulations. The key is to attribute arm’s length profits to the permanent establishment as if it was operating as an independent enterprise. Since the taxpayer and its foreign permanent establishment are therefore related parties, the attribution of income (loss) to the foreign permanent establishment constitutes a controlled transaction and is subject to transfer pricing rules, which is also important to note.

Permanent place of business

For VAT purposes, it is important to be able to establish a so-called “fixed establishment” (FE) in a given country, which is any place other than the place of establishment of the taxable person, which is characterised by sufficient permanence and an appropriate structure in terms of personnel (e.g. employees residing permanently or temporarily in a given country) and technical facilities (e.g. an office, a warehouse) to enable that taxable person to receive and use the services provided for his own purposes from that fixed establishment.

The interpretation of the above concept has been the subject of a number of judgments of the Court of Justice of the European Union, which have had a significant impact on the way FE is understood in all EU Member States. What is particularly important is that the ‘fixed place of business’ of an entity may be created by using the personnel and technical facilities of another entity. Thus, in order to recognise ‘FE’, it is not necessary to have the taxpayer’s own resources, i.e. only control over the personnel and technical facilities of another entity comparable only to control over one’s own facilities may be sufficient.

The issue of a permanent place of business may be important both for formal obligations and for the manner of VAT taxation of specific transactions. Well, the main (but not the only!) issue related to the foreign entity’s holding of FE in Poland is how to determine the place of VAT taxation of the services it purchases. For if the foreign taxpayer holds FE in Poland, the services it purchases will (as a rule) be taxed in Poland. Consequently, Polish service providers will have to add VAT to their invoices issued to such a foreign entity if the services were provided to the FE.

Thus, determining whether a foreign entity has an FE in Poland is crucial for both it and its counterparties in the context of determining the VAT consequences and ensuring a correct and efficient VAT settlement model. We will be happy to provide you with comprehensive and professional support in this regard.

Foreign establishment and employer's obligations

Employees employed by Polish employers are not obliged to pay personal income tax advances or social security contributions themselves – these obligations rest with the employer as payer.

However, the situation is different when a person working on the territory of Poland is employed by a foreign employer who does not operate through a branch or representative office in Poland. In such a case, it may be the employee who is obliged to pay the PIT advances and, in certain situations, also social security contributions.

This may change, however, in the case where the foreign employer conducts its activity in the territory of Poland through the place of establishment within the meaning of the provisions of double tax treaties. Then, if the employee performs work for such an establishment, the obligations of a PIT payer for remuneration due for work performed in Poland are transferred to the foreign entity – this is the position presented by the Director of the National Fiscal Information in issued tax interpretations.

It is worth emphasising that acting as a PIT payer does not automatically result in the foreign entity becoming a payer of social security contributions. Issues related to social security are governed by separate regulations. Therefore, each situation should be assessed individually, taking into account its specific circumstances.

Settlement between the foreign establishment and the parent company

A taxpayer and its foreign permanent establishment (or foreign construction plant) constitute related parties within the meaning of the CIT Act. The allocation of income (or loss) to a foreign permanent establishment of a company constitutes a controlled transaction, which means that it is subject to transfer pricing regulations. In practice, this means that the arm’s length principle must be applied, according to which the profits of the permanent establishment should be set at the level that could be achieved by an independently operating entity in comparable conditions, without affiliation with the parent company. It is important to note that if the documentation thresholds are exceeded, transfer pricing documentation must be prepared and a market comparability analysis must be carried out.

How can we help?

We will verify whether, under the law or the relevant double taxation treaty, the conduct of activities abroad, including the execution of a construction contract, gives rise to a tax permanent establishment.
We will analyse whether hiring a remote worker or working with a foreign representative can lead to an establishment.
We will verify on whom the obligations of the payer of advance PIT and social security contributions will fall in relation to the performance of work for a foreign employer.
If such an establishment has been created, we will pay attention to the correctness of the tax accounts, including where they are taxed and the correct allocation of income and expenses.
We will verify whether the profits of the permanent establishment have been allocated/determined on an arm’s length basis.
We will develop a revenue and cost allocation model in accordance with the arm’s length principle.
We will prepare benchmarking studies / compliance analyses to determine whether the results of the permanent establishment are in line with market conditions.
We will review which transfer pricing obligations must be fulfilled for the given tax year (preparation of Local File documentation, TPR filing, etc.).
We will prepare the transfer pricing documentation (Local File) and assist in preparing and submitting the TPR form.
We will develop or update a transfer pricing policy concerning the head office–permanent establishment relationship.
We will prepare a group Master File if the permanent establishment is part of a larger structure subject to such an obligation.
We will help safeguard the taxpayer’s position by obtaining an individual tax ruling.

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