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Preparatory activities may lead to the creation of a tax establishment


Foreign entities planning to use the potential and knowledge of Polish scientists and researchers have to take into account a risk that in some circumstances the commencement of co-operation with such persons may result in a tax establishment being created in Poland. They should examine whether work provided by the above persons is really of a preparatory and auxiliary character and does not fall within the core business of the entity, which was pointed by Director of the National Fiscal Information in the individual binding ruling issued on 7 February 2018 (ref. no. 0114-KDIP2-1.4010.344.2017.2.AJ). If the existence of a permanent establishment in Poland is confirmed, a portion of profits earned from the activities will have to be taxed in Poland.

The American company whose core business, as indicated in the background information, consists in services of intermediation and sales support as well research and development services connected with the energy and environmental protection sector. The main research and development activities of the company are carried on through a branch in Ireland. Nevertheless, the company is planning to start co-operation also with researchers in Poland – initially based on civil law contracts and in future also on employment contracts. Tasks and obligations of Polish researchers are to include research carried on while using some R&D assets and equipment owned by the company. No other Company resources, either core or auxiliary (e.g. accounting resources), will be allocated in Poland to support the work of researchers. They are to carry on their research in the premises leased by the company. The applicant also noted that researchers will not procure contracts, place on the market or publish the results of their research and work, or engage themselves in the activities of the Company in any other way going beyond the scope of their R&D tasks. It does not mean, however, that the results of their work will not be traded – managers in the USA will negotiate and execute an agreement for R&D services or for the sale of R&D results with an external entity. Moreover, Polish researchers will not have either any authorisation, including power of attorney, to represent the company towards third parties.

The issue which had to be determined was whether a fixed place of business which came into existence as a result of R&D work performed by Polish researchers on a permanent basis, in the leased premises, satisfies the requirements for treating it as a fixed place of business maintained for advertising purposes, for the provision of information, for scientific research or similar activities of a preparatory or auxiliary character, which are carried on for the enterprise. Pursuant to Article 6 paragraph 3 of the applicable Convention for the Avoidance of Double Taxation between the USA and Poland, such fixed place of business does not constitute a permanent establishment. According to the OECD Model Tax Convention on Income and on Capital, determination whether given activities are of a preparatory or auxiliary character should be based on finding whether the activities carried on by a fixed place of business constitute a material and significant part of the activities carried on by the enterprise as a whole. Preparatory activities precede the performance of a core activity, while auxiliary activities accompany or follow a core activity. In a situation where the objective of a fixed place of business is the same as the objective of the enterprise as a whole, one cannot say about performing activities of an auxiliary character. At the same time, as is indicated in the literature on the topic, if the activities of a fixed place of business cover preparation of reports, commentaries and analyses, it is not the procurement of information, either.

The tax authority reminded that in accordance with the Commentary to the OECD Model Convention a term “place of business” covers every and all premises, resources or equipment used for carrying on business of the enterprise. The fact of having a place of business at disposal should not be understood in a legal sense but in purely factual meaning. At the same time, in order for a place of business to create a permanent establishment, the enterprise must carry on business activities (which not necessarily have to be of manufacturing character – it may be e.g. trading business) wholly or partly through that place of business, using the personnel consisting of the employees and other subordinate persons (i.e. receiving instructions from the enterprise). In addition, a place of business must be “fixed” – i.e. a place of business must be linked to a specific geographic point.

So in the subject background situation it could be found that the American company has in Poland a fixed place of business through which business of the enterprise will be partly carried on, using the personnel and leased premises. Nevertheless, in the opinion of the authorities it cannot be found that such place of business will be maintained for the purpose of acquisition of information or for preparatory or auxiliary purposes, which would exclude the creation of a permanent establishment by virtue of special regulations. The activities of Polish researchers will be identical with one of the areas of the activities carried on by the company (R&D), and will constitute a material and significant part of the activities carried on by the enterprise as a whole.

The creation of a tax establishment in Poland results in a need to tax in Poland income generated by a permanent establishment located in the territory of Poland.

The individual binding ruling discussed here draws attention to a very important issue – performance of apparently similar activities may not create a permanent establishment in the case of one entities, while in the case of other entities a permanent establishment may be created. Each case requires individual assessment and broader perception of the activities carried on by the enterprise as a whole. Research work may in some situations constitute activities of a preparatory character, preceding e.g. manufacturing processes, thus not constituting a tax establishment (even if a fixed place of business has come to existence). If, however, the entity is in principle involved in R&D activities, selling their results to third parties (not using for its own needs), it may turn out that income tax will have to be paid in the country where a fixed place of business performing such activities is located.

Barbara Otrzonsek, Tax Consultant, ATA Tax Sp. z o.o.