Author:
Ewa Suwińska – Licensed Tax Advisor
INDEPENDENT TAX ADVISERS
Warsaw, Poland
E: [email protected]
Edited by:
Grant Gilmour, B.SC., MBA, CPA BC, CA, CPA AZ
Integra Tax World Newsletter Editor
E: [email protected]
Polish Judgement of the Voivodship Administrative Court Dated 11 June 2024
The Polish Voivodship Administrative Court (in Gliwice), in its judgment of 11 June 2024, (ref. no. I SA/Gl 914/23), addressed the issue of creation of a permanent establishment [PE] when employing staff in a home office.
The case concerned whether a German company (Company) had or did not have its Poland registered office and management at the home office of its employees in Poland. The Company has employment contracts with two Polish tax residents. They were employed as a customer a support engineer and a product manager. These employees worked from their private apartments in a form of home office. German company had no office in Poland nor there were plans to rent one. The employees hired in Poland did not have nor did they exercise the power of attorney to conclude contracts on behalf of the Company, and their activity was preparatory and auxiliary in nature in relation to the Company’s main business activity.
The case considered by the Administrative Court was an appeal of a negative tax interpretation received by the Company. The tax authority had stated that although the Company had no office in Poland nor there were plans to rent it, the fact that employees work remotely (home office) in Poland indicates the permanence of the Company’s location, which may be, for example, the employee’s apartment. Moreover, the tax authority stated that the facility established in Poland will not be of a preparatory or auxiliary nature, but will perform a significant part of the Company’s business. Both the activities of the two employees in Poland and the Company’s overall activity come down to providing service and marketing support for the Group. Thus, in the opinion of the tax authority, the hired employees will be persons who will act on behalf of the enterprise. Due to the fact that the employees will remain in an employment contract with the Company and therefore will perform the tasks entrusted to them under the management of the employer (the Company), they will be dependent representatives (dependent agents) of the Company and therefore their activity should be considered as creating a PE of the Company in Poland.
The Administrative Court presented an opposite opinion. The Administrative Court stated that in these circumstances, a foreign PE will not be created for the German company. This is due to the fact that the Company does not meet any of the conditions of article 5 section 2 letters a to f of the Polish-German Double Tax Treaty. The Company does not have any premises in Poland where it would run an office, factory, workshop or where a branch of the Company or its place of management would be located. It also does not run a mine or extract any natural resources. The Company does not rent any office or other space or premises in Poland, nor is it the owner of any real estate. It also does not have (neither in legal nor in factual sense) any other area in Poland in which its business activity would be conducted.
Additionally, employee’s apartment is not at the disposal of the Company and the latter cannot conduct any visits or inspections there. Employees are not obliged to use their own apartments to conduct business for the Company or to hold meetings with clients there. They also do not have the power of attorney to conclude contracts on behalf of the Company and are not authorized to make any decisions on its behalf.
Summing up, in the opinion of the Administrative Court, hiring the employees in a form of remote work (home office) does not lead to the creation of a PE in Poland. This judgment is not yet binding. The final conclusions will be presented by Polish Supreme Administrative Court (the last instance in tax cases).
This issue of a home office being used for remote work has become one of the main concerns relating the issue of PE is the remote work. In that respect OECD, Polish Administrative Courts as well as Polish tax authorities have expressed their views on this matter.
The OECD has issued its clarifications in this regard[1], where it referred to Paragraph 18 of the Commentary on Article 5 of the OECD Model Tax Convention on Income and Capital [the Commentary] according to which even though part of the business of an enterprise may be carried on at a location such as an individual’s home office, that should not lead to the conclusion that that location is at the disposal of that enterprise simply because that location is used by an individual (e.g. an employee) who works for the enterprise. The carrying on of intermittent business activities at the home of an employee does not make that home a place at the disposal of the enterprise. A home office may be a PE for an enterprise if it is used on a continuous basis for carrying on business of that enterprise and the enterprise generally has required the individual to use that location to carry on the enterprise’s business. That means that OECD confirms and accepts that working from home may (in some particular circumstances) result in creation of a PE.
If the employer has expressly stipulated that the employee has to work from his home, such premises may be considered as a facility at the disposal of the foreign employer. In such a case, in particular if the employee is also provided with some technical resources (e.g. a laptop computer), the entity employing a person working remotely from another country may meet the requirement to have a PE in the territory of a given country.
OECD referred also in this respect to paragraph 19 of the Commentary which notes that where a cross-border employees perform most of their work from their homes situated in one jurisdiction rather than from the office made available to them in the other jurisdiction, one should not consider that such particular home is at the disposal of the enterprise because the enterprise did not require that the home must be used for its business activities.
Needless to say, in order to minimize the risk of home office as a PE, it is also necessary to monitor the activities performed by the employees. This is because the employee’s professional duties, such as acquiring customers, influencing price offers, establishing contract terms or offering promotions (bonuses) to customers, are associated with the risk of a PE.
Such a risk exists when the nature of the employee’s work is not limited to preparatory or auxiliary activities and his work has the characteristics of permanence. In order to assess whether the activity carried out is of an auxiliary or preparatory nature, it should be related to the overall activity of the foreign enterprise.
Quite important issue is that Polish Administrative Courts were already stating that there is a risk of PE for a foreign company hiring an employee in Poland in a home office system. In this however statement, the main arguments were the scope of activities, being identical to those of the foreign company as a whole. In other words, a PE will exist if, in addition to preparatory or auxiliary activities, the employee will perform tasks that fall into scope of the employer’s business activity even to a relatively small extent.
The background of the Administrative Court statements is extremely restrictive – Polish tax authorities position regarding considering in practice each home office as a PE. It was even suggested that the mere transfer of computer equipment to an employee may already result in the creation of a PE in Poland. This position, although recently questioned by the Polish Administrative Courts, should be taken into account when planning any employment in Poland.
Bearing in mind the above, it should be emphasized that any business plans related to structuring cross border employment and business in Poland but not only here may create PE risk. Thus, to avoid such considerable tax risks each case should be subject to in depth analysis which will allow for minimization of such risks.
As mentioned above, the issue of home office as a potential PE concerns not only Poland. It is therefore highly advisable that this issue to be clarified in the OECD Commentary. One of the problems that may arise in the analysis of home office as a PE and which should be reflected in the respective regulations is the issue of financial settlements between the employer and the employee for the provision of work from a place other than the employer’s office, i.e. the settlements for costs incurred by the employee that would be reimbursed by the employer, such as part of the costs related to the employee’s use of his apartment – costs of energy, payments of a rent, internet costs, etc. Currently, without direct regulations, this question cannot be clearly answered – do such settlements between the employer and the employee lead to the creation of a PE even if the employer has not obliged the employee to perform work in his apartment?
Please contact the author Ewa Suwińska – Licensed Tax Advisor with your questions
© 2024 Integra International & © 2024 Independent Tax Advisors. All rights reserved. This Article is not intended to provide legal or other advice and you should not take, or refrain from taking, action based on its content. Prior results do not guarantee a similar outcome.
[1] Updated guidance on tax treaties and the impact of the COVID-19 crisis (published 21 January 2021); an initial set of guidelines was issued in April 2020, but were subsequently revised in January 2021.
About the Author:
Ewa Suwińska – Licensed Tax Advisor
INDEPENDENT TAX ADVISERS
Ewa is an economist and a lawyer, a licensed tax advisor with over 18 years of experience in taxes, gained in domestic and international tax advisory companies. During her professional career, she focused mainly on the area of corporate income tax, personal income tax and international tax law. She has participated in many tax reviews and due diligence reviews of the largest companies in Poland. She has been involved in numerous and diverse tax projects for both Polish and foreign entities, including entities operating within international capital groups. Ewa’s main specialization is ongoing tax consultancy focused on securing the tax position, with particular emphasis on issues related to corporate income tax. On a daily basis, she works closely with statutory auditors and representatives of accounting and financial departments, supporting them at the design, implementation and tax settlement stages of both non-standard and repetitive transactions.
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https://www.itadp.pl/en/main-page/
