Entrepreneurs doing business in another country should take into account the fact that a taxable permanent establishment may be set up on the territory of that State. This results in a requirement to pay tax in the country where the permanent establishment was created on income earned there.
1. Double taxation conventions and MLI Model Convention
Every double taxation convention contains a definition of a taxable permanent establishment. The provisions of such agreements largely repeat the regulation in the OECD Model Tax Convention on Income and on Capital, hereinafter referred to as the MLI Convention. The legal act in question defines a taxable permanent establishment as a permanent site through which the enterprise’s economic activities are wholly or partly conducted. An establishment may be, in particular:
a) a head office of the management board,
b) a branch,
c) an office,
d) a factory establishment,
e) a workshop,
f) a mine, an oil or gas source, a quarry or any other place of extraction of natural resources.
A taxable permanent establishment can also be a building site, a place where construction or installation works are carried out, provided that they last for more than twelve months. It should be noted here that the provisions of some double taxation conventions modify the duration of construction works on which the creation of a taxable permanent establishment depends, e.g. according to the double taxation convention concluded by Poland with Lithuania, this period is 9 months.
In accordance with the MLI Convention, a taxable permanent establishment isn’t created by:
a) the use of facilities serving solely for the storage, display or delivery of goods or merchandise belonging to the enterprise;
b) the maintenance of a stock of goods or merchandise belonging to an enterprise for the sole purpose of storage, display or delivery;
c) the maintenance of a stock of good or merchandise belonging to an enterprise solely for the purpose of processing by another enterprise;
d) the maintenance of a permanent site solely for the purpose of purchasing goods or merchandise either collecting information for the enterprise;
e) the maintenance of a permanent site solely for the purpose of carrying out any other activity of a preparatory or auxiliary nature for the enterprise;
f) the maintenance of a permanent site solely for the purpose of conducting any of the activities referred to above, provided – however – that the overall activity of this site, resulting from such a combination of activities, is of a preparatory or auxiliary nature.
A taxable permanent establishment may also arise through the action of a representative. Such a situation occurs if the representative acts on behalf of the enterprise, as well as holds and habitually exercises the power of attorney to conclude contracts in the Contracting State on behalf of the company. A taxable permanent establishment won’t also arise if the activities carried out by the representative are limited to these ones which, exercised through a permanent site, wouldn’t cause that this site to be considered a taxable permanent establishment. Moreover, the taxable permanent establishment won’t be created in the event that the enterprise operates through an independent representative, i.e. a person acting in his/her ordinary course of business.
The fact that the company with the head office in a Contracting State controls or is controlled by a company which has the head office in the other Contracting State or which conducts an activity in this other State doesn’t constitute a circumstance resulting in either of them being regarded as an establishment of the other company.
2. Polish tax legislation
The concept of a taxable permanent establishment is defined by Article 5a, point 22, of the Personal Income Tax Act of 26 July 1991 (i.e. Official Journal of 2024, item 226, as amended) and Article 4a, point 11, of the Corporate Income Tax Act of 15 February 1992 (i.e. OJ 2023, item 2805, as amended). Both the aforementioned legal acts define a taxable permanent establishment in the same way. They state that a foreign establishment means:
a) a permanent site through which an entity having its head office or management board in the territory of one State exercises entirely or partially an activity in another country, and in particular, a branch, representative office, factory, workshop or place of extraction of natural resources,
b) a construction site, construction, assembly or installation carried out in the territory of one State by an entity having its head office or management board in another country,
c) a person who, in the name and on behalf of an entity having its head office or management board in the territory of one State, acts in another country if this person has a power of attorney to conclude contracts in its name and actually exercises this power of attorney
– unless a double taxation convention to which the Republic of Poland is a party provides otherwise.
As can be seen, the definition of a taxable permanent office in Polish law is consistent with that one found in the MLI Convention and the double taxation conventions based on it.
3. Conditions giving rise to a taxable permanent establishment
In order to create a taxable permanent establishment, the following conditions must be fulfilled:
- existence of a facility – the existence of premises, machines, means and equipment necessary to conduct an activity is required;
- permanence of the facility – the facility should be permanent, not temporary;
- conducting all or part of the activity through a facility – the enterprise should use the facility to conduct its activity.
The above conditions must be fulfilled cumulatively.
4. Legal fiction
The taxable permanent establishment constitutes a legal fiction created by tax legislation. The statement that a taxable permanent establishment has arisen in a given country doesn’t mean that a legal existence separate from the enterprise has been created. Indeed, a taxable permanent establishment is part of the parent company. The Director of the National Tax Information explained it in the interpretation of 15 March 2019, 0114-KDIP2-1.4010.497.2018.2.JC. He pointed out that: “(…) The term “taxable permanent establishment constitutes an abstract concept that means a certain scope of tax obligation of a given entity by virtue of this entity’s activity in another country. However, the determination of the existence of an establishent of a foreign entrepreneur in the terittory of a given State doesn’t result in the creation of a new tax existence (within the meaning of income tax legislation) in this country. The permanent establishment isn’t a tax entity because such an entity remains the foreign entrepreneur who is nevertheless subject to tax in the country where he has a permanent establishment, albeit only on the income attribuable to him which he obtained thanks to that establishment. The abstract nature of an establishment in another State also manifests itself in the fact that an economic entity can’t have several establishments in the territory of one country, even if it has several branches there (several permanent sites). (…)”
5. Effects of the creation of a taxable permanent entity
If a taxable permanent establishment arises in a given country, the enterprise is obliged to pay income tax in that country on income earned there. This involves the need to register with the appropriate office, obtain a tax number, submit settlement documents and declarations, as well as fulfil other obligations imposed by law on taxpayers.
6. Legal notice
The study is a work within the meaning of the Act of 4 February 1994 on Copyright and Related Rights (OJ 2006, No. 90, item 631, consolidated text, as amended). Publishing or reproducing this study or its part, quoting opinions, as well as disseminating in any other way the information contained therein without the written consent of Crede sp. z o.o. is prohibited.
