Working from home and taxes: the risk of creating a permanent establishment that gives rise to corporate income tax liability

At present, the tax authorities are becoming increasingly interested in taxable permanent establishments of foreign enterprises in Poland. The tax authorities are taking a close look at them, because it affects the place of taxation of the income earned by a given enterprise.

Permanent establishment and CIT

As a reminder: pursuant to Art. 3.2 and 3.3. of the Corporate Income Tax Act of 15 February 1992 (consolidated text: 2021, item 1800, as amended, hereinafter CIT Act) taxpayers who do not have their registered office or management board on the territory of the Republic of Poland are subject to tax liability in Poland only on income earned on the territory of the Republic of Poland.

This applies in particular to income from any type of activity conducted on the territory of the Republic of Poland, including any income earned through a permanent establishment (PE) located in Poland.

Article 4a item 11 of the CIT Act provides that a permanent establishment is:

Fixed establishment

A permanent establishment is a fixed establishment through which an entity having its registered office or management on the territory of one state performs, in whole or in part, its activities on the territory of another state. This category includes, in particular, a branch, a representative office, an office, a factory, a workshop or a place of extraction of natural resources.

Construction site

Both construction, assembly, and installation carried out on the territory of one state by an entity having its registered office or management on the territory of another state are considered a permanent establishment.

Person

Pursuant to the CIT Act, a permanent establishment is a person who, on behalf and for the benefit of an entity that has its registered office or management on the territory of one state, acts within the territory of another state, provided that this person has a power of attorney to conclude contracts on its behalf and actually exercises this power of attorney (dependent agent).

The above regulation shall be applied taking the relevant double taxation treaty to which Poland is a party into account.

What should be emphasised is that, in accordance with the regulations, if a person employed by a foreign entity in Poland performs only preparatory or auxiliary activities with respect to the principal business of this foreign entity, this will not be tantamount to the creation of a permanent establishment that gives rise to tax liability, neither in the form of a fixed establishment not as a dependent agent.

Does working from home give rise to a taxable permanent establishment?

What is the situation of an employee of a foreign company who performs their duties remotely (which is known in Poland as “Home Office”) on the territory of Poland? More and more often, tax authorities take the position that this may give rise to a taxable permanent establishment of this enterprise in Poland. What is being considered here is both a personal establishment (dependent agent) and a fixed establishment within the meaning of the CIT Act.

When it comes to the latter, i.e. a fixed establishment, the following conditions must be met jointly:

• there is an establishment, i.e. a place where a given activity is actually performed,
• this establishment is permanent in nature,
• the business is carried on in whole or in part by that establishment and it is not merely ancillary or preparatory in nature.

Taking the above premises into account, the Provincial Administrative Court in Gliwice ruled quite recently that working from home may give rise to a taxable permanent establishment in the form of a fixed establishment (cf. ruling of 31 January 2022, ref. I SA/Gl 1340/21).

What is more, a permanent establishment may also arise from conducting a business through a foreign website, if this website is used to conduct s service or retail business and it is stored on a foreign server, and the entrepreneur operates this server and the premises where this server is located.

However, a mere website without a server being at the enterprise’s disposal shall not give rise to a permanent establishment: this refers to a situation where an entrepreneur, for example, uses another person’s server without having either the server itself of the premises where the server is located at their disposal (cf. Commentary to OECD Model Convention; R. Pioterczak Permanent establishment, branch and representative office: taxation of foreign entrepreneur’s income. Definition of a permanent establishment; published by ABC, LEX).

Working from home during a pandemic

In the wake of the pandemic, the OECD Secretariat issued a document (Analysis of Tax Treaties and the Impact of the Covid-19 Crisis) that states that currently working from home is often due to country-specific pandemic restrictions or it is dictated by concerns for staff safety.

Analysis of Tax Treaties and the Impact of the Covid-19 Crisis points out that if working from home in a given enterprise is temporary, and the employer in their home country continues to have an office to which the staff will return once the pandemic is over, the risk of creating a permanent establishment is lower.

The intention behind this document is clearly to mitigate the risks involved in doing business during a pandemic. However, the creation of a permanent establishment still is and will be incredibly topical and important, because in many cases remote work is here to stay. There is no doubt that, even once the pandemic is over, working from home is going to remain a popular form of work organisation, also in international organisations.

Given the great complexity of this problem, we recommend a verification of the risk of creating a permanent establishment in each and every case. If you would like to receive some individual advice in this regard, please feel free to contact us.