Home office either a foreign establishment for CIT purposes
On January 31, 2022 the Voivodeship Administrative Court in Gliwice (hereinafter: “WSA”) issued a ruling under docket no. I SA/Gl 1340/21, concerning the occurrence or otherwise of an establishment within the meaning of the CIT Act in connection with the employment of remote staff in the territory of Poland.
The case involved a company with its registered office and management in Denmark, providing insurance services in Denmark and through its subsidiary in the Swedish market. The company did not have its own branch in Poland, but was planning to engage employees who, under employment contracts, would support the company's operations with respect to basic administrative tasks and data analysis. Notably, the company did not envisage providing its employees with office space in Poland and the work would be performed in the home office system. Furthermore, the employees would not have any capacity to act and conclude contracts on behalf of the company.
In connection with the above facts, the Company applied for a private tax ruling to the Head of the National Revenue Information Service (hereinafter: the KIS Head) with a question whether a foreign establishment will be created in the territory of Poland within the meaning of the CIT Act and the Polish-Danish convention on the avoidance of double taxation if employees are engaged in the territory of Poland who will perform work for the company on the terms described above.
The company concluded that in the above state of affairs, no permanent establishment will be established in Poland, as all of the prerequisites for an activity to be recognised as conducted in the form of a permanent establishment will not be fulfilled jointly, viz.:
- existence of an establishment;
- permanent nature of the establishment;
- the performance through the establishment of activities which are not merely preparatory or auxiliary in nature.
The KIS Head, however, did not support the above standpoint, stating that the activity conducted by the company fulfils the condition of existence of a permanent establishment, and that the activities performed by the employees in Poland coincide with the objects of the Danish company rather than being merely preparatory or auxiliary. The authority justified its decision by the fact that the Danish company conducts insurance activities, in particular related to travel insurance, while the tasks of the employees in Poland, which primarily include handling claims related to travel insurance, administrative support for the accounting department and analysis of insurance prices, are significantly similar to the objects of the Danish company's business.
As a result of an appeal lodged by the company, the case was referred to the WSA in Gliwice, which agreed with the opinion of the KIS Head in respect of the first two conditions for the existence of an establishment.
The WSA held that although no office space was provided by the company to the employees in Poland, the performance of their tasks under a home-office regime would result in the creation of a separate establishment of the company. In the Court’s opinion, such an establishment would be an employee's residential unit in which the employee performs the work using equipment provided by the company.
Furthermore, the WSA also found the second criterion to be met, i.e. the criterion of permanent character of the establishment. The WSA justified its standpoint by the fact that the company hires employees in Poland under employment contracts for an indefinite period of time, which proves its intention to conduct business in the long term.
However, the WSA took a different approach to the third criterion, i.e. performance of activities which are not merely preparatory or auxiliary. Unlike the KIS Head, the court found that the scope of activities performed by the employees in Poland is not identical to the objects of the Danish company's business, nor does it represent its material or significant part. In the light of the above, the WSA decided that the Company does not satisfy jointly all the conditions for its activities in Poland to be recognised as a foreign establishment and hence overturned the private ruling.
Although the judgment was favourable for the taxpayer, the ruling does give rise to some controversy, as it is difficult to agree with the position of the authorities that each time an employee is employed in the home-office regime a permanent establishment will be created, in particular where the employee does not have the authority to act and conclude contracts on behalf of the company and the company does not have the right to manage freely the employee's residential space.
Natalia Szymocha, Tax Consultant, ATA Tax Sp. z o.o.
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