Can a foreign entity be subject to Polish income tax, as well as VAT? It can – as long as the scale and nature of the business activity fulfil certain criteria.
When operating in our country (or cooperating with Polish service providers) be sure to check out the definition of a permanent and fixed establishment and get to know special tax obligations that may be imposed on a foreign entity in Poland.
Permanent establishment, fixed establishment and when they arise
What tax risks may be associated with operating in Poland? The answer to this question is more complex than one might expect – mostly due to the Polish definitions of a permanent establishment and fixed establishment.
The creation of a permanent establishment is not a result of submitting any formal applications. This is rather a classification of the factual circumstances, pointing to the fact that a foreign entity runs a business of a sufficiently “permanent” nature to be required to pay Polish income tax.
A permanent establishment may take the following forms:
- A physical establishment is created when the entity holds a place and technical resources allowing for the business activity to be conducted there. This may be, e.g., an office, a facility, a warehouse or a construction site.
- Another form of a permanent establishment may arise as a result of a cooperation with a “dependent agent”. This term stands for a natural person or a company operating in Poland on behalf a foreign entity. Thus, a permanent establishment may be for example a sales representative.
If a foreign entity operates in a manner resulting in the creation of a permanent establishment in Poland, the company’s profits derived through it are subject to Polish income tax.
Such business activity entails the need to pay Polish CIT/PIT (including monthly advances) and to comply with the formalities – e.g. to get Polish tax ID and to submit annual returns or keep relevant tax records. If the business fails to meet these requirements, it may be exposed to the risk of paying overdue taxes together with interest or fiscal and penal sanctions.
Holding a fixed establishment for VAT purposes is not equal to holding a permanent establishment. Fixed establishment for VAT and permanent establishment for CIT are different terms.
In order for the fixed establishment for VAT to be created, it is necessary to meet jointly the following conditions:
- holding the establishment for a specified time (to fulfil the fixity criterion),
- holding technical resources and personnel there,
- being able to use services for the fixed establishment’s activity purposes or using this place for service provision.
The said resources do not necessarily have to constitute the possession of a foreign taxpayer – technically, they may be owned by a Polish contractor (service provider) closely cooperating with the foreign entity.
Permanent establishment triggers a number of tax consequences. Its existence is key when determining where and how services performed by a foreign entity (and provided to it) should be taxed for VAT. The permanent establishment for VAT purposes directly affects the right to deduct input VAT from invoices issued by Polish contractors.
Failure to identify in advance the creation a permanent establishment – or an incorrect assumption that such an establishment in Poland really exists – may result in outstanding VAT due, contesting of the right to deduct VAT as well as certain fiscal and penal sanctions.
Polish service providers of a foreign entity may also be negatively affected (due to incorrect taxation of transactions in which they were involved), which may undermine business relationships.
See what we can do for you
Let RSM Poland experts support you
RSM Poland professionals have practical experience in advising on the risk of holding a permanent establishment for CIT purposes and fixed establishment for VAT. Thus, we may offer you comprehensive support, involving the analysis of your business to determine if the conditions for the creation of a permanent and fixed establishment are met, and will help you plan actions designed to minimise the risks that have been identified.
Additionally, if the nature of your business activity conducted in Poland entails the imposition of certain obligations, we are able to offer you comprehensive support to ensure CIT and VAT compliance.
Complete this form and an RSM representative will be in touch.