Advicero Nexia
Home / Blog / Can an employee’s negotiation of the terms of an offer of discounts and maintaining relations with potential Polish customers create an PE?

Can an employee’s negotiation of the terms of an offer of discounts and maintaining relations with potential Polish customers create an PE?

The scope of responsibilities of persons working for a foreign company that includes the authority to negotiate or influence even indirectly the final signing of a contract with clients in Poland, may result not only in new business opportunities, but also in tax consequences, such as the creation of a permanent establishment within the meaning of the Corporate Income Tax Act (hereinafter: ‘CIT Act’) or the Double Taxation Treaty (hereinafter: ‘DTT‘).

When considering the issue of the creation of a permanent establishment, it is worth bearing in mind that the consent to perform remote work abroad may also result to the creation of a permanent establishment by, i.a., considering that a so-called ‘dependent agent’ is operating in the country. Such a risk may be particularly noticeable in the case of the profession of sales representatives or sales managers, i.e. persons who maintain the relationship with Polish clients or indirectly lead the company to conclude a contract. This all depends on the conditions and practice spread by judicial or tax authorities.

The answer to the question contained in the title of this article will be provided in the form of an explanation of the concept of a dependent agent, as well as the analysed opinions of the tax authorities.

Permanent establishment vs dependent agent

Pursuant to Article 4a (11) (c) of the CIT Act, a foreign permanent establishment is understood to be, i.a., a person who, on behalf of and for the benefit of an entity having the registered office or management in the territory of one country, acts in the territory of another country, if that person has the power of attorney to conclude contracts on its behalf and actually performs that power of attorney. These provisions apply taking into account the DTT agreements.

It is worth mentioning the indications mentioned by the OECD Model Convention and referred to by both tax authorities and case law when issuing their justifications. The Convention refers here to the conditions determining the creation of a permanent establishment when identifying the activities of a dependent agent. This definition, according to the provision, will be met if the agent acts on behalf of the company and has and customarily exercises the power of attorney to conclude contracts with another and meets the conditions by which a ‘dependent agent’ is defined. The activities performed by him should not be auxiliary or preparatory in nature, in which case there is an exception that eliminates the risk of a tax establishment.

It should be emphasised that it is irrelevant whether the agent has a residence or legal entity (nor does it have to have links with the country, e.g. of a personal nature).

In the context of determining whether the notion of dependent agent will apply in the present case, or whether it should be distinguished from the definition of independent agent, it will depend on the activities performed by the person performing the work on the territory of Poland.

The Model Convention and the risk of creation PE

Under Article 5 (5) of the OECD Model Convention, the possession and exercise of power of attorney to conclude contracts on behalf of a foreign enterprise may result in the creation of a foreign permanent establishment.

According to the wording of paragraph 32.1 of the Commentary to Article 5 of the OECD Model Convention, the term “authority to conclude contracts on behalf of the enterprise” should not be limited to a agent concluding contracts that literally involve the enterprise in question, and its application should also find support when contracts are not actually concluded on behalf of the company. The mere fact that the company is not actively involved in the transactions may mean that such powers have been delegated to the representative. For example, a representative may have actual authority to collect orders (but, for example, does not formally execute). Thus, such an argument leads to the conclusion that even persons who do not have a power of attorney in the civil law sense, but who have the authority to negotiate all elements of a contract in a manner binding on the company, have an “indirect” power of attorney to conclude contracts. It should be emphasised, however, that it is irrelevant here who ultimately signs the contract (whether the person acting on behalf of the company or the company itself). The key factor here is the legal connection between the company and the representative’s operation in the territory of the country concerned.

Although the authority to take actions leading to the conclusion of a contract may arise from a formally granted power of attorney, the authority of a person who has taken such actions by implication cannot be excluded either.

Negotiation of offer conditions and customer relations

With reference to the exemplary duties of a sales representative or sales manager, this certainly includes building up a customer base for sales. In addition, a person in this position also focuses on informing the foreign entity about the market situation in the country. Due to the specific form of their activities, their tasks also include maintaining customer relations and sometimes even negotiating the terms of the offer and being able to influence the final content of the contract. Although the form of employment of a sales representative is characterised by a lack of permanence and the nature of a permanent attachment to a particular country (Poland), even in the absence of a premises to be rented by a foreign employer, it could, in the light of the authorities’ positions, identify the risk of establishment. However, where is the distinction between dependence and independence of the employee? At what stage of the activity might the risk of establishment be higher?

In response to the above question, it is necessary to point, for example, to the facts and the position of the authority in the tax ruling dated of 16th December 2021  (ref. 0111-KDIB1-2.4010.476.2021.2.MS), where the employee was not authorised to make declarations of intent on behalf of the company and also did not conduct commercial negotiations with clients on its behalf, as well as did not conclude contracts, but the authority considered that a PE would arise due to the features determining a fixed place. Justifying its position, the authority pointed out that the range of duties possessed by the employee, i.e. the preparation and processing data of potential fuel card customers, including the search for companies that carry out shipping orders in Germany and the search for customer contact persons, the support of fuel card customers in case of problems during refuelling and other questions concerning the network of petrol stations and fuel cards, could not be regarded as preparatory or auxiliary activities. It was considered that, in fact, the activities are in part identical to those of the parent company and the purpose of the permanent establishment is identical to that of the company as a whole, such activities carried out in an independent capacity cannot be considered.

A similar position, however, in the different duties of the employee, i.e. presenting to the customer possible general terms and conditions of the transaction (such as the price or the amount of the discount) top-down by the group, as well as collecting and forwarding the customer’s applications to appropriate persons and informing him about the case and the decisions made, the authority found that the employee’s actions fulfil the disposition of Article 5 (5) of the DTT and thus the company has an establishment in Poland. It should be noted that in this case the employee did not have the authority to make independent decisions on changes concerning the scope of the agreement or the order and yet the authority indicated the existence of an establishment. In justifying its position, the authority indicated that: “(…) in the opinion of the Interpretive Authority, this means that the Employee “solicits and gathers orders” within the meaning of paragraph 32.1 of the Commentary to Article 5. Furthermore, you explicitly indicate that the tasks of the Country Manager also include setting and negotiating the terms and conditions of the transaction (…) which is undoubtedly crucial for the acquisition and retention of the client. In the present case, the offer is made by the Country Manager (employed by the Applicant), who is in charge of sales. He thus brings about the conclusion of the contract, which is formally signed without his involvement. Consequently, without the involvement of the Country Manager, a contractual relationship in the civil law sense would not be created.” (tax ruling dated 9th January 2023, ref. 0111-KDIB2-1.4010.632.2022.2.BJ).

This is also confirmed by the authority’s position in the tax ruling of 30 September 2021 (ref. 0111-KDIB1-2.4010.291.2021.2.MS), where the authority clearly indicated that the role of the employee will play a key role for the conclusion of the contract and should therefore be considered as a dependent agent: ‘(…) this employee will be required to contact clients by means of visits made at the clients’ premises or places designated by them, or by means of the remote communication. The above clearly indicates that this employee will play a key role in bringing about the conclusion of contracts, which will only be formally concluded by the Company. Thus, it must be considered that Article 5 (5) of the DTT will be applicable in the case at hand, as the employee employed as Sales Manager will be the person who will act on behalf of the company and customarily exercise the power of attorney to conclude contracts in the Contracting State on behalf of the Company within the meaning of that Article’.

Although the scope of the employees’ duties, which includes negotiating the terms of the discount offers and maintaining close relations with potential Polish customers, may lead to the creation of a permanent establishment, one should also be taken into account the fact that they perform their work remotely abroad, which may certainly lead to an increased risk of the employees being recognized as so-called dependent agents on the basis of the provisions outlined above. If the employee will have an influence on the overall offer over and has the possibility to grant discounts, the risk of the creation of a permanent establishment is higher.

The foreign employer should particularly analyse the nature of the activities performed by the employee, which do not always of an auxiliary and preparatory nature. This is because the establishment of a PE in Poland will involve, i.a., an obligation to pay income tax on income earned in Poland during the employee’s stay and the foreign company’s registration in Poland for tax purposes.