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Whether a home office can create a permanent establishment?

Home office, a system that allows people to work from home, is an increasingly common work model offered. The provisions of the Labor Code, amended on December 1st, 2022, definitely open up more opportunities for both employers and employees, due to the definition of the conditions for remote work, which can support the introduction of home office permanently into the operating structures of companies.

The popularization of remote working brings with it opportunities to hire qualified people from different countries. As a result of these developments, it is becoming increasingly common for Polish employees to find employment opportunities through foreign companies, which often offer them financially more favorable employment conditions, while also allowing them to work where they live. As a result of such employment, doubts have arisen as to the obligation of a company employing employees in Poland to settle CIT in Poland.

Permanent establishment – legal basis and conditions of creation

In the Corporate Income Tax Act (hereafter: „CIT Act”), Article 4a (11), and in the double taxation tax treaties (hereafter: „DTT”), is included the definition of a permanent establishment and it is indicated how such an establishment may be created i.e.: through the existence of a fixed place, a construction site or a dependent agent.

The issue of the avoidance of double taxation of permanent establishment income is also described in the OECD Model Tax Convention on Income and on Capital and in the Commentary to that Convention. (hereafter: “OECD Commentary“) which identifies the prerequisites for the creating of permanent establishment, indicating that a PE may be created when:

  • there is a place where the business of the company is carried out;
  • there is a permanent nature of such an establishment;
  • the business activities of the enterprise is carried out through another establishment.

A foreign establishment is considered to be a fixed place, through which an entity with its headquarters or management in the territory of one country carries out wholly, or partly its activities in the territory of another country, in particular a branch, representative office, office, factory, workshop or place of exploitation of natural resources.

It is also relevant in the present case to point out that an establishment may also constituted a person who acts in the territory of another state in the name and behalf of an entity having its registered office or management in the territory of one state, if this person has the power of attorney to enter into contracts on its behalf and actually exercises that power of attorney.

Referring to the above-mentioned premises from the OECD Commentary, the term “facility” includes any premises, means or equipment used for the conduct of an enterprise, regardless of whether they are used exclusively for that purpose. The sole fact that an enterprise has some space available for its business activities is sufficient for the existence of a fixed business place (a fixed place may also exist if there are no premises). In such a case, it is irrelevant whether the enterprise owns or leases the premises, resources or equipment, or disposes of them in some other way. The company is not required to have the formal right to dispose of such an establishment. While this concept is broad, it should not be understood solely in the legal sense. This means that not every case will result in a fixed place – what is important here is that active business activities are performed there. An example to recognize the creation of a fixed place is the authorization of an employee by a company to use the office of a contractor, e.g. to supervise the contractor’s performance of a contract. Placing an office at the employee’s disposal in this way may, in light of the OECD Commentary, constitute the creation of a fixed place.

Ancillary and preparatory activities

According to the DTT, the term of ‘establishment’ does not include the maintenance of a fixed place for the sole purpose of carrying out any other activity of a preparatory or auxiliary nature for the enterprise. The decisive factor in distinguishing core activities from those of a preparatory or auxiliary nature is to determine whether the activities of the fixed place constitute a substantial and significant part of the activities of the enterprise as a whole. If the activities in question will be different from the principal activities, support such activities and do not constitute a substantial or significant part of the activities of the enterprise as a whole, they may be deemed to constitute preparatory or auxiliary activities.

Thus, if a Polish employee hired by a foreign company performs activities of a preparatory or auxiliary nature in relation to the foreign company’s core business, this will not amount to the creation of a permanent establishment in Poland. However, it is important to keep in mind situations where the employee plays a key role in concluding contracts that are formally concluded by the foreign company. In such cases, the activities undertaken by the employee cannot be considered to be of an auxiliary or preparatory nature and may consequently lead to the establishment of a permanent establishment in Poland. It is worth emphasizing that the employee does not have to lead to the direct signing of the contract, it is sufficient that his indirect activities (e.g. contacting potential customers, influencing the price offer, determining discounts), finally lead to the conclusion of the contract.

As indicated in the tax ruling dated January 7th, 2019. (ref. 0114-KDIP2-1.4010.502.2018.1.AJ):‘The condition for the application of the Article 5 (5) of the DTT is that the person acts ‘on behalf of the company’, i.e. acts as a representative, and has and customarily exercised the power of attorney to conclude contracts in the contracting state. This is the case if this person’s statement of intent creates a binding state of affairs for the represented company. It is sufficient that the represented person agrees to the performance of civil law acts by the legal representative. In order to assess whether a person has a power of attorney to conclude contracts, the totality of the circumstances and behavior of the persons participating in the performance of legal acts is more decisive than the civil law authorization. (…) 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 way that binds the company, have a power of attorney to conclude contracts withing the meaning of Article 5 (5) of the DTT. In this case, it is irrelevant who ultimately signs the contract: the person acting on behalf of the company or the company. The decisive criterion is the legal binding of the enterprise by the action of the representative.’

Home office and the creation of a permanent establishment

Taking into account the current position of the authorities, as well as the above-mentioned circumstances, there is a risk that in certain circumstances the home office of an employee may give rise to the establishment of the foreign company that is the employer The construction of a foreign permanent establishment is aimed at determining whether a particular part of the income should be taxed in the country where the income arises, so that the permanent establishment should be treated as a separate entity for tax purposes under the OECD Convention. If it is determined that the permanent establishment arose in Poland, the income generated by the home office employee will be taxed.

To minimize the risk of a establishment, it is necessary to monitor the activities performed by the employee. Indeed, an employee’s professional responsibilities, such as acquiring clients, influencing price offers, setting contractual terms or offering promotions/bonuses to clients, involve an establishment risk. In addition, such a risk also exists if the nature of his work is not limited to preparatory or auxiliary activities and his work carries the characteristics of permanence. There are also justifications of the courts indicating that a foreign company deciding to employ an employee in Poland under the home office system may lead to the existence of a permanent establishment even without the use of a separate premises. As the main argument of such a position, the scope of activities is indicated, which is identical to the purpose of the foreign company as a whole. For example, the judgement of the WSA in Gliwice on January 31st, 2022. (ref. I SA/Gl 1340/21).

The position of the tax authorities in recent times suggests that even the simple transfer of computer equipment to an employee may already give rise to an fixed place. This position, although recently challenged by administrative courts, should be taken into account when planning the development of employment in Poland.

Thus, if a foreign company plans to hire a Polish employee to perform remote work from home, it is important to analyze whether the scope of his activities will lead him being recognized by the authorities as a dependent agent, as well as whether the place where the work is performed will lead to a fixed place for the foreign company.