Higher fixed establishment risk in Poland

May 02, 2018

Recent tax rulings and judgments of administrative courts in Poland have provided new insight into the concept of fixed establishment in Poland. However, the tax authorities and courts often employ a taxpayer-unfriendly approach.

The issue of fixed establishment is highly important in taxation of services provided by Polish entities to foreign businesses as it affects the place of taxation and VAT obligations. If a foreign company has a fixed establishment in Poland, the services supplied to the company for the purposes of such establishment are subject to Polish VAT. Moreover, the company must register for Polish VAT purposes and charge Polish VAT on its domestic supplies of services, unless the fixed establishment is not involved in the transaction.

Definition of a fixed establishment

A definition of fixed establishment is provided in EU regulations (Article 11 of Council Implementing Regulation (EU) No 282/2011 of March 15 2011, laying down implementing measures for Directive 2006/112/EC on the common system of VAT). As implementing regulations apply as law in each EU country without the need to transfer into national law, the definition implemented by the EU is also applicable in Poland.

According to the definition, for a fixed establishment to be created it is necessary that a company has a sufficient degree of permanence as well as human and technical resources to allow it to receive and use the services supplied to it for its own needs.

What does ‘sufficient human and technical resources’ mean?

It is, however, unclear what human and technical resources qualify as sufficient human and technical resources. Neither Polish nor EU regulations offer an explanation. This leads to the question of what scale of human and technical resources is required for a fixed establishment to exist.

As a difference in opinion across EU countries about what constitutes a fixed establishment could result in double or non-taxation or, at least, time-consuming clarifications, it is important to know how the different member states define a fixed establishment.

Taxpayer-unfriendly approach

The Polish tax authorities and courts recently tend to prefer a taxpayer-unfriendly approach to the issue of fixed establishments for VAT purposes by broadening the scope according to which a company may be viewed as having a fixed establishment in Poland. They are also becoming more and more focused on this issue.

Foreign business presence in Poland has been increasingly considered to meet the conditions of a fixed establishment for VAT purposes, even when not all the related requirements are met. According to some recent tax rulings and court decisions, a foreign entity can be considered to have a fixed establishment in Poland under VAT regulations even if it has no human or technical resources there. It suffices if it transacts in Poland on a permanent basis, using its Polish subcontractors' infrastructure and personnel for this purpose.

The Polish tax authorities’ and administrative courts’ standpoint in this respect is based on the European Court of Justice’s (ECJ’s) standpoint presented in its judgment in Polish case C-605/12 (Welmory Sp. z o.o. vs Director of Gdańsk Tax Chamber). In this judgement the ECJ held that to create a fixed establishment, a firm does not need to have its own human and technical resources, provided third-party resources at the establishment are available to it in a way that is comparable to having its own resources.

The Polish tax authorities, however, tend to interpret this more broadly than the ECJ. In the latest tax ruling issued for a Norwegian company, the Polish tax authorities came to a conclusion that its barge manufacturing contract with a Polish producer creates a fixed establishment for the company even though it does not have its own personnel or infrastructure in Poland. The Polish tax authorities held that for a fixed establishment to exist in Polish territory it is sufficient that the foreign entity conducts business on an organised and permanent basis using some personnel and infrastructure in Poland (beneficial use of people and equipment) and making taxable transactions in course of this business.

Bearing the above in mind, the existence or non-existence of a fixed establishment is critically important and should be taken into consideration when doing business in Poland.