Tax Supervisor at RSM Poland
As promised earlier, I will try to present some practical solutions prepared by the German Desk Team of RSM Poland which make it easier for foreign investors, in particular entities from German-speaking countries, to start or expand their business in Poland in the context of complex and often changing legal and tax regulations.
The choice of legal form is key
When a foreign investor decides to start a business in Poland, the first thing they have to face is the choice of the legal status for this business. The choice is by no means trivial, as this decision is going to affect a number of important aspects related to the operation of the entity, liability for its obligations, as well as the scope of this liability, economic risk or reporting obligations. The choice of the legal status determines the legal and fiscal situation, both of the entity being established and of the investor. Hence, the choice of the legal status must be preceded by an in-depth analysis of the investor’s assumptions and goals he wishes to achieve in his business run on the territory of Poland.
The types of business activity in Poland that are the most popular among foreign investors include: a limited liability company and a branch of a foreign company seated on the territory of the Republic of Poland.
Limited liability company
The incorporation, organisation and operation of a limited liability company are regulated by the Act of 15 September 2000: Code of Commercial Companies. Unless specific regulations provide otherwise, a limited liability company may be incorporated by one or more persons for any purpose allowed by the law. A limited liability company may not be formed solely by another single-shareholder limited liability company. It should be pointed out that a daughter company incorporated in Poland is a business entity separate from the parent company, and as such is subject to Polish legal regulations, with the objects of the company’s business activity not being determined by the scope of the foreign entity’s business.
The governing bodies of a limited liability company include the general meeting and the management board that manages the company’s affairs and represents the company outside.
What is characteristic for this legal status is the principle that shareholders shall not be liable for the obligations of the company. Thus, a limited liability company is quite a safe solution for the investor. The legal and fiscal implications of incorporating a limited liability company in Poland may also play a role for the foreign entity here. Firstly, in certain circumstances, the parent company and the daughter company may split the costs borne by one of them on joint projects. This also pertains to tax deductible expenses.
Furthermore, under the provisions of the Corporate Income Tax Act, revenues from profit sharing of legal persons (hence e.g. revenues of the parent company earned from the dividend paid out by the daughter company) are exempt from income tax in certain situations. One of the prerequisites of the aforementioned exemption is that a given entity must hold directly no less than 10% of the shares in the share capital of the subsidiary. It must be noted, however, that the aforementioned exemption shall not be applied in the case in which the application of this tax exemption is the main purpose of companies, or the functioning of companies in such a relation and the payment of funds is not economically justified.
What must be emphasised as well is the fact that if there is any trade or economic cooperation between related entities, the application arm’s length prices for goods or services in question is mandatory.
As an alternative to incorporating a limited liability company, the entity may purchase shares in the share capital of a limited liability company that already exists. Responding to the needs of foreign investors who would like to start their business in Poland right away, RSM Poland has prepared an offer of the sale of shares in already registered limited liability companies, i.e. shelf companies.
Branch of a foreign entrepreneur
In order to run business on the territory of Poland, foreign entrepreneurs from the European Union Member States may establish their branches on the territory of the Republic of Poland. This matter used to be regulated by the Act of 2 July 2004 on Freedom of Economic Activity, and now it is the Act of 6 March 2018 on the Rules of Participation of Foreign Entrepreneurs and Other Foreigners in Trade on the Territory of the Republic of Poland.
In accordance with the legal definition provided in this Act, a branch is a separate and organisationally independent part of business activity conducted by the entrepreneur outside of his seat or main place of business.
From the point of view of the operation of the branch, it is important for the foreign entrepreneur to conduct the same business as abroad. In other words, the business of the branch may not go beyond the scope of the business of the parent organisation. Both the case law and the doctrine emphasise that a branch does not have a separate legal standing, but is merely a set of assets separated functionally and spatially. As a rule of thumb, the liability for branch operations extends to the parent organisation. What should be noted, however, is that even though a branch of a foreign entrepreneur does not have the legal capacity, it may have certain organisational competences along with rights under the labour law. It is assumed that a branch of a foreign entrepreneur may become an employer within the meaning of the Polish labour law regulations provided that it has a sufficiently separate property and organisation, and is authorised to establish and terminate employment relationships with employees.
For a potential foreign investor it may also be decisive that a foreign entrepreneur who has established a branch, is obliged to maintain separate accounts for the branch in Polish in accordance with the accounting regulations.
In this context, let me remind you that RSM Poland offers a comprehensive service of registering your branch in Poland and offers other services necessary to ensure that a branch of a foreign entrepreneur operates properly and in accordance with the regulations in place, including: accounting, tax and legal services. There is also an option of a location service, owing to which the address of our office becomes the mailing address of the branch.
Decision can be tough
The aspects I have presented above are just some of the things that must be considered when choosing the legal status for a business to be run by a foreign entity on the territory of Poland. As I have already mentioned, this decision should be preceded by a thorough analysis of the environment and the industry in which the investor operates; it should also involve defining and specifying the goals of your planned business in Poland. Therefore, it is often necessary to consult professionals, who will evaluate the situation of the foreign entrepreneur in the light of the local legal and tax conditions. The choice of the best legal status in a given case should ensure that the foreign entity has legal and tax safety, the costs are minimised, and all kinds of risks connected with running a business in Poland on a daily basis are reduced. RSM Poland experts offer their support here, reducing the investor’s involvement in the procedures of incorporating a company or establishing a branch in Poland as much as possible.