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Creating a permanent establishment in Poland – Polish jurisprudence and BEPS 7

Considering the fact that tax laws often fail to keep pace with changing economies, OECD has pursued an initiative whose aim is to eliminate base erosion and profit shifting. As a result, a list of fifteen action points, commonly referred to as BEPS, has been drawn up.

Action 7 of the BEPS Action Plan specifies conditions for the creation of a foreign permanent establishment in the following forms provided by  Article 5 of the OECD Model Tax Convention: a dependent agent, a fixed place of business, and construction and installation works. Further to the recommendations in question, entities constituting a single capital group will face greater probability of permanent establishments (PE) being created. Due to additional factors (definitions) being specified, the risk of having a PE will increase in the following areas:

  1. A dependent agent
    1. participating in the negotiating process and carrying out any actions leading to the conclusion of a given transaction
    2. belonging to a capital group (at least 50 per cent of the aggregate vote or equity interest)
    3. performing commissioned works solely or almost exclusively for one company despite being legally and organizationally independent from a formal point of view.
  2. A fixed place of business
    1. preparatory and auxiliary activities – exemptions from Article 5 Paragraph 4 will be contingent on a test on preparatory and auxiliary activities
    2. preventing artificial fragmentation of company activities and splitting up con-tracts between different related entities so as to bypass the time limit for the creation of a permanent establishment.

It is worth noting that OECD recommendations do not give rise to generally applicable legislation. They do, however, serve as an important interpretative guidelines for both multinationals and tax authorities. Although the abovementioned definition of a permanent establishment has not been adopted by individual countries yet, it seems that it is taken into consideration in the process of giving individual tax rulings, as evidenced by the ruling of 22 January 2018.

The claimant (a German company) manufactured and distributed bathroom fittings. Following a change in their business model, in order to carry out distribution activities in Poland, the Claimant intended to purchase the current auxiliary sales services that were to include storage of goods, packaging, shipping, quality control, customer service (e.g. complaints, returns), maintaining customer relationships, advisory services on running a business, and management, including planning the supply chain and reporting for VAT in Poland. These were to be purchased from the Company (a British entity being part of the group)  pursuant to a framework agreement concluded for an indefinite period. Based on the description of a future event, the Head of National Revenue Information, deemed that the Claimant would have a permanent establishment in Poland, due to the fact that insofar as the services performed for the Claimant are concerned, the Company should be classified as a dependent agent. The dependent agent status stemmed from the following factors:

  • The Company displayed an intention to act on behalf of the Claimant, not on its own behalf
  • The business activities of the Company were equivalent to the activities of the Claimant’s business in Poland
  • The Company was economically dependent on the Claimant.

Considering the above, it is recommended that companies should re-examine their business models, taking account of BEPS 7, not only in the cases where cooperation with the entities of the same capital group takes place. Particular attention should be paid to warehousing and sales activities performed by means of commissionaire arrangements. It is also worth checking whether split-up activities do not constitute cohesive business operations.

Monika Smaga
Senior tax specialist

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