In the post-pandemic era and because of the war in Ukraine, people are increasingly moving between countries without stopping their professional work. Modern technology and the nature of many professions make working remotely possible from anywhere in the world more popular than ever before, provided there is Internet access,. On the one hand, this increases work flexibility and can improve the quality of life, but on the other hand, it represents a new reality in which employers must find their way.

One important aspect of this new reality is tax issues. Employees performing work outside of the employer’s place of business (or any other place specified in the employment contract) can generate a number of tax consequences, both for the employee and the employer, especially when it involves work outside of Poland, or in Poland but for an employer from another country. An important piece of the tax puzzle in such a situation becomes the possibility of a so-called foreign permanent establishment. In the case of Polish entrepreneurs for whom employees work abroad, this establishment may be established in the target country. On the other hand, for foreign entrepreneurs with employees in Poland, the permanent establishment may arise in Poland, with all the consequences, including, above all, the possibility of taxation of income attributable to the permanent establishment in the country in which the permanent establishment is located. In view of this, in the situation of a non-Polish entrepreneur, the question arises as to whether the presence of a particular employee in Poland can result in the establishment in Poland of a foreign permanent establishment. We will address such a situation in the article

What do the regulations say about this?

According to Article 3(3)(1) of the CIT Law, in the case of foreign taxpayers, income from any type of activity conducted in Poland, including through a foreign permanent establishment located in Poland, is also subject to income tax in Poland.

At the same time, according to Article 4a(11) of the Act, a foreign permanent establishment may be considered to be:

• a permanent establishment through which an entity having its registered office or management in the territory of one country performs wholly or partially its activities in the territory of another country, in particular a branch, representative office, office, factory, workshop or place of extraction of natural resources,
• construction site, construction, assembly or installation, carried out in the territory of one state by an entity having its registered office or management in the territory of another state,
• a person who, on behalf of and for the benefit of an entity having its seat or management in the territory of one state, operates in the territory of another state, if that person has the power of attorney to enter into contracts on its behalf and actually exercises that power of attorney.

The law also indicates that the above definition may be modified in the case of a different inclusion of a foreign permanent establishment in the relevant double taxation treaty concluded by Poland.

Analogous provisions are also found in the Personal Income Tax Law.

In this context, each double taxation treaty concluded by Poland also includes a definition of a foreign permanent establishment. In most cases, it is defined as a permanent establishment through which the business of an enterprise is conducted in whole or in part. An establishment also means a production site, a place of management, a subsidiary, an office, a factory, a workshop and a mine, an oil or gas source, a quarry or other place where natural resources are extracted.

Each contract additionally has specific regulations.

From a mere reading of the regulations, one can see that they do not specify all situations of potential presence of a given company in Poland. Instead, they leave the door open to interpretation as to whether a given degree of presence in Poland, such as the presence of an employee working remotely with only a company laptop, constitutes an establishment of the foreign entrepreneur in Poland or not.

How do the authorities interpret this?

Some guidance on how the tax authorities will approach the issue of a foreign permanent establishment in such situations may be provided by individual interpretations of tax law issued in similar situations. Although they are only binding in the individual cases of taxpayers who have requested them, tax authorities often try to replicate a given view also when issuing other interpretations or when conducting tax audits, especially if the line of interpretation is fairly uniform.

Recently, the tax authorities have issued several tax interpretations on the question of whether working remotely from Poland via laptop only, for a foreign entrepreneur, can be considered a foreign permanent establishment established in Poland. One of them, an individual interpretation dated February 16, 2023 (mark 0113-KDIPT2-3.4011.897.2022.2.NM), was issued in a similar case, on the subject regarding personal income tax.

The interpretation concerned the situation of an IT specialist who had a registered business in Ukraine, who left for Poland due to the outbreak of war in Ukraine. However, he did not stop his business and provided remote services to a Ukrainian contractor first from a hotel in Poland and later from a rented apartment. In June 2022, he registered his business in Poland, and in July of the same year, he received the last income from his business registered in Ukraine. Accordingly, he applied to the Head of the National Tax Information Service to ask how to tax his income for 2022. The authority considered that the activity carried out under a Ukrainian company from the territory of Poland meets the conditions of a foreign permanent establishment, as stipulated in the double taxation treaty between the Republic of Poland and the Government of Ukraine. Consequently, all of the applicant’s income that was earned while working remotely from Poland should be taxed in Poland as income of a permanent establishment of an entrepreneur from Ukraine located here.

The applicant appealed the interpretation to the Provincial Administrative Court in Wrocław. The court, by its ruling of October 10, 2023 (ref. I SA/Wr 261/23), upheld the complaint, pointing out that the IT specialist did not have any premises in Poland that could be considered an office, factory or workshop. The very nature of the services indicated makes it possible to provide them from anywhere in the world, making it impossible to point to a specific space in which activities of a permanent nature would be carried out. In addition, the short period (from April to July) of conducting the aforementioned activities contradicts the permanent nature of the establishment.

Practical implications for taxpayers

The discussed case shows that in each case of a change or risk of a change of tax residence, an appropriate analysis should be made in the context of taxation as well as taxation rules. Work from abroad, although highly desirable for employees, in practice can cause significant doubts for employers. The situation is similar for the self-employed.

The court ruling discussed above can be considered a landmark in similar cases and favorable to taxpayers. However, at the same time, it is not seen that the tax authorities are changing their approach on this issue. Hence, one should expect that our case may be reviewed unfavorably at first instance. Nevertheless, a positive court ruling provides some hope for a change in the authorities’ approach. Therefore, it is sometimes worth applying for an interpretation in the full knowledge that it will be negative, but that we will win in court.