Doing business through a facility in another country

Service Business

In the era of globalization and virtually unlimited access to the world market, enterprises more and more often decide to expand beyond the territory of the country. In order to create a network of retail outlets, it is necessary to open new plants in other countries. Therefore, the question arises, how should the income obtained by a plant located in another country be accounted for, when the company's seat is in Poland?

What is a bet?

Generally speaking, a plant is understood as a form of conducting business activity outside Poland, in the form of an organisationally separated part of an enterprise. A more detailed definition can be found in the OECD Model Convention. This convention is the basic model of all agreements on the avoidance of double taxation and the mutual settlement of income earned by the taxpayer in different countries. Pursuant to Art. 5 of the said Convention, an establishment is a fixed place of business through which the enterprise's business activity is wholly or partially carried out.

From the above, there are certain obligatory conditions that must be met in order for us to be able to talk about a bet. First of all, a plant should be understood as a foreign institution. It must therefore be a separate place with a specific geographic location. It is worth noting at this point that the legal title to this place is irrelevant, as well, a foreign establishment may be a rented or leased space. Next, it was indicated that the plant must be permanent. This means that the economic activity must be carried out on a continuous basis, with the intention and orientation towards its permanent conduct through the plant.

Example 1.

Employees of the Polish company were delegated to Berlin to supervise a long-term construction project. In the course of their activity, they use rented office space. In this case, it should be considered that we are dealing with a plant.

Example 2.

The Polish company owns an office in Paris. The office has been unused for a long time. In 2017, one of the employees used the office for a few days while performing a single order for a French contractor. In this situation, the facility is not used on a permanent basis, which means that we cannot consider it a facility.

The Model Convention also includes an exemplary catalog of establishments that, in the light of the regulations, may be considered a facility. In particular, these will be:

  • place of management;

  • branch;

  • office;

  • factory plant;

  • workshop;

  • a mine, an oil or gas well, a quarry or any other place of extraction of natural resources.

Establishment in another country - taxation rules

When we determine that a given facility is in fact an establishment, we should consider how to account for the income obtained from the performance of business activities by the enterprise. Deeper considerations on this issue will also lead to the content of the OECD Model Convention. Well, in the light of Art. 7 of the Convention, if the enterprise carries on economic activity through a permanent establishment located abroad, the enterprise's profits may be taxed in the country where the permanent establishment is located - but only to the extent that they are attributable to that permanent establishment. In such a case, it is necessary to attribute to that permanent establishment the profits which it would have achieved had it pursued the same or similar activities under the same or similar conditions as an independent enterprise and had been completely independent in relation to the enterprise of which it is the establishment.

From the above, we can therefore conclude that the income obtained by a permanent establishment in another country may be taxed by the authorities of that country. Of course, apart from that, there is an obligation to settle the entire profit made by a taxpayer established in Poland, an entity having its registered office or place of residence in the territory of the Republic of Poland is subject to tax liability on all its income (revenues), regardless of the location of the sources of income. This situation can therefore lead to the emergence of double taxation. In order to avoid such a situation, the OECD Convention provides for the possibility of applying one of the methods of avoiding double taxation. These methods are exclusion with progression and proportional deduction.

Under the first rule, income in the source country is exempt in the country where the company is established, but is taken into account for determining the tax payable. In the second case, the income from abroad is added to the income in the country, and the tax paid abroad is deducted proportionally from the tax on the total income. Which of these methods should be used in a particular case depends on the provisions between individual countries and the rules adopted in mutual agreements.

Finally, it is also worth noting that when determining the profits of a plant, it is allowed to deduct the inputs incurred for the plant, including management costs and general administrative costs, regardless of whether they arose in the country of the plant or elsewhere.