A taxpayer is considered to be a Polish tax resident because he has a management board in Poland, also when his current affairs are conducted here in an organized and continuous manner, despite having a registered office in another.
Determining tax residence should not be problematic by definition. If an economic entity is registered in Poland and conducts its economic activity here, then – in accordance with the general rule – it is subject to taxation on all its income in Poland. But is it only then? Not necessarily.
For years, legislators around the world have been waging an unequal race with the economic reality, trying to adjust the regulations (including tax regulations) to its level of complexity and the pace of changes. The digital revolution and the fact that an increasing part of services can be delivered remotely and the fact that physical presence is no longer crucial for effective business management and decision-making makes it not so obvious to determine the tax residence of a given entity.
The concept of tax liability is inextricably linked with tax residence. Currently, this issue is governed by two provisions – Art. 3 sec. 1 of the CIT Act, specifying the so-called unlimited tax liability, and art. 3 sec. 2 of the CIT Act, which constitutes a limited obligation.
Pursuant to the first of the above-mentioned provisions, tax residents are entities that have their registered office or management board in Poland and, as a result, are obliged to pay corporate income tax in Poland on all their income, regardless of where it is earned (i.e. also on income earned abroad). Accordingly, tax non-residents are taxed in Poland only on the income they receive in the territory of the country.
Bilateral agreements are helpful
Insightful readers will immediately realize that a given taxpayer may have an unlimited tax liability in Poland and a limited tax liability abroad (e.g. in the Czech Republic). It may then come to a situation where the right to tax Czech income will be claimed by both the country in which this income is earned (in our example – the Czech Republic) and Poland, due to the unlimited nature of the tax obligation. To avoid such situations, bilateral international agreements on the avoidance of double taxation are signed.
This example shows how important it is to determine whether a given entity has limited or unlimited tax liability in Poland. In practice, this may turn out to be troublesome, because the construction of the definition of a tax obligation indicates that entities not having their registered office in Poland, but having a place of management here, can still be considered Polish tax residents. While determining the place of the seat is objective and usually does not cause problems, determining the place of management is much more subjective and often requires the use of the so-called professional judgment.
This is due to the fact that, unlike the place of seat, it is difficult to clearly determine the place of management on the basis of the formal status of the entity, i.e. information resulting from founding acts or official registers, such as, for example, the National Court Register.
The answer to these difficulties is to be a provision clarifying the definition of the Polish place of management.
Changes from January 1
A lot of talk about establishing a tax residence began with the appearance of the first projects of the Polish Deal. The proposed changes turned out to be unfavorable for many Polish entrepreneurs and for the self-employed, who began to threaten with business emigration to, for example, the Czech Republic or Slovakia. It seems that these voices were also listened to by the legislator who, as part of the amendments to the amendment, decided to clarify the definition of the place of management in Poland and to take into account this type of practice.
Pursuant to the provisions of the provision (Article 3 (1a) of the CIT Act), which entered into force on January 1, 2022, the taxpayer will be considered a Polish tax resident due to having a management board in the territory of Poland, also in a situation where his current affairs are conducted in an organized and continuous manner on the territory of Poland, despite being based in another country. At the same time, the basis for running the company’s affairs can be basically everything (the provision uses an open catalog), i.e. provisions of the articles of association, court decisions, powers of attorney granted or the existence of connections within the meaning of the provisions on transfer pricing. The main purpose of these changes, according to the justification to this provision, is to prevent Polish residents from establishing companies abroad that are effectively managed from Poland.
Effects also on holding companies
It is worth noting that the commented change may also affect businesses that have been operating abroad for years, but have Polish tax residents as board members. Many international enterprises (including Polish companies that expanded their activities abroad) decided to establish foreign holding companies, e.g. in order to organize the capital structure or to ensure access to foreign investors and financing.
Due to their experience and position in the organization, foreign holding companies are often managed by Poles. In the event that these persons (on their own or acting with other Polish directors) can make decisions that are binding on a foreign company (i.e. they represent it), the amendment may result in an unintentional change of the tax residence of such a company to a Polish one, which in turn may result in – at least temporarily – double taxation of its income.
To sum up, the commented change should encourage capital groups with an international reach to verify the current holding structure and the adopted corporate governance. And those who intend to flee with business abroad should prepare for this emigration a little better than just by registering a business in another country.
