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Provision of services may also lead to creating a taxable permanent establishment


Polish taxpayers who have business relations with entities from the Czech Republic should verify more thoroughly (than in the case of  business relations with other countries) whether they will be obliged to pay income tax in the country of their business partner’s registered office. This is because the Polish-Czech agreement on avoiding double taxation includes a non-typical (compared to the model agreement developed by OECD) catalogue of events which may result in creation of a taxable permanent establishment. Therefore, Czech entities undertaking operations in Poland should analyse whether a taxable permanent establishment will be created in Poland.

Pursuant to art. 5 sec. 1 of the Polish-Czech agreement (and also other agreements), the term ‘establishment’ means a permanent facility through which, or partly through which, the company’s business activity is conducted. The OECD model convention states that the term ‘permanent establishment’ includes in particular premises, and sometimes machines and equipment used by the company for business purposes. However, the condition for considering a given place to be a permanent establishment is that the taxpayer may freely dispose of it. A significant requirement for the establishment to exist is also its permanence.

Pursuant to the Polish-Czech agreement on avoiding double taxation, a taxable permanent establishment will be constituted in another country in particular in the event of having there a seat of the management, a subsidiary, an office, a plant, a workshop, a mine, a source of crude oil or gas, a quarry, or any other place where natural resources are extracted. Also, having a dependent representative will involve the necessity to pay tax. At the same time, the Polish-Czech agreement sets out a number of exclusions regarding situations when the establishment is not created. Thus, a negative catalogue includes using storage or warehousing facilities, purchasing goods, collecting information, conducting preparatory or auxiliary business activity, or maintaining stocks of goods or commodities.

An analysis of the definition of taxable permanent establishment included in other agreements on avoiding double taxation shows that in the aforesaid scope, the Polish-Czech agreement does not deviate from the accepted standards. However, curious is art. 5 sec. 3 of the agreement, which usually stipulates that in the event of a construction site, construction or assembly works, the establishment is created only if the duration of works exceeds 12 months. In the case of the Polish-Czech agreement, the aforesaid section not only refers to construction and assembly works, but also introduces the notion of so-called ‘service establishment’. Pursuant to art. 5 sec. 3 b) of the analysed agreement, the term ‘establishment’ also covers provision of services, including consultancy or management services by a company of the contracting country or by employees or other personnel hired by the company to this end, but only if such an activity lasts for the period or periods exceeding jointly six months in any 12-month period on the territory of the other contracting country.

The wording of the discussed provision agreed between Poland and the Czech Republic may give rise to certain interpretation issues. For example, it is not clear how the 6 months should be determined. It should be considered whether a criterion of physical presence, which is adopted for the purposes of applying the so-called ‘183 days rule’ known from art. 15 of agreements on avoiding double taxation will also be applied here, or the time verification is to be based e.g. on man-hours. There may also be doubts whether the 6 months should be interpreted as 183 days. It may also be disputable whether the six-month period – if an entity runs several projects at the same time – should be determined for each project separately, or jointly. Finally, attention should be drawn to the fact that the manner in which  art. 5 sec. 3 was introduced to the agreement; pursuant to art. 5 sec. 3 of the agreement, ‘the term ‘establishment’ also covers’ the said provision of services (therefore, also a construction site and construction works, to which pertains item  a) of the discussed regulation).

Taxpayers’ doubts in this respect are the subject of numerous interpretations of the Minister of Finance. Inquiries sent by taxpayers relate for example to whether art. 5 sec. 3 of the agreement with the Czech Republic is in its essence lex specialis in relation to art. 5 sec. 1. For instance, Head of the Tax Chamber in Katowice, in the interpretation of 22 April 2016 (file ref. IBPB-1-3/4510-209/16/MO) pointed that if a foreign entrepreneur’s establishment in Poland meets the definition of an establishment within the meaning of  art. 5 sec. 1 of the Polish-Czech agreement, it is insignificant whether it fulfils the premises for creating an establishment within the meaning of  art. 5 sec. 3. However, in the interpretation of 27 June 2014 (file ref. IPPB5/423-351/14-2/PS), Head of the Tax Chamber in Warsaw accepted the view of a taxpayer who claimed that the definition included in  art. 5 sec. 3 b) of the Polish-Czech agreement has a special nature in relation of the definition of a permanent establishment art. 5 sec. 1 of the agreement. In the opinion of the applicant, if a given type of activity forms part of the definition of a service establishment, but does not meet this definition in full (e.g. due to not exceeding the 6 months’ period), then a possible creation of a service establishment should not be verified in the context of other definitions – mainly the definition of a permanent establishment included in art. 5 sec. 1. The cited interpretations lead to different conclusions. According to the first one, a taxable permanent establishment - in the case of providing services - could be created even if the time of providing them does not exceed 6 months, if the premises of having a permanent establishment in the given country are met. According to the other one, however, the condition of having a permanent establishment would be insignificant.

Polish entities undertake cooperation with their southern neighbours very eagerly. According to the Czech statistical office, only in 2015 the trade turnovers amounted to over 16 billion EUR, therefore it may be expected that cross-border provision of services (including consultancy and management) will not be unusual in the both countries. The deviation from the definition of a taxable permanent establishment known from other agreements, included in the Polish-Czech agreement on avoiding double taxation, i.e. covering also provision of services gives rise, especially in the light of ambiguity of the regulation, to the risk of necessity to pay income tax in the country where the entities render services.