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47 (142) 2021
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Interviews

Has Poland become more – or less – foreign-investor-friendly as a result of Covid?

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Agnieszka Janicka, Warsaw office managing partner at Clifford Chance, and Krzysztof Hajdamowicz, counsel at Clifford Chance, talk to the BPCC’s Michael Dembinski about Poland’s perception as a place to do business, at a time when major foreign investment decisions are being made in the wake of global changes.

Foreign investors to Poland from the English-speaking world have tended to be larger corporates, rather than the SMEs that dominate the structure of continental European inward investment in Poland. It is said that this is because the common-law system differs significantly from the code-based legal systems that are the norm in continental Europe. Owner-managers of SMEs find the additional bureaucracy burdensome, a drain on their time. Do you agree with this view?

Operating in multiple countries at the same time always requires some extra effort from an organisation. It is definitely easier for large corporates that have their own extensive legal and compliance teams than for SMEs to accommodate such effort, especially if legal systems differ quite significantly.

It goes without saying that given the civil code system across continental Europe and harmonisation of various other laws driven by EU legislation, what investors from continental Europe can expect in Poland will be in many aspects similar to what they used to see in their home countries.

When it comes to investors from the English-speaking world (especially from the US) we note that certain Polish and EU regulations come as surprise to them. For example, labour laws in Poland, while still more employer-friendly than in some other continental Europe jurisdictions, offer employees a certain level of protection, which non-European investors sometimes find difficult to understand and accommodate. For such investors, investing anywhere else in continental Europe would be similarly burdensome as it would be in Poland.

Poland's reputation as a country in which foreign investors are treated on par with domestic capital has been somewhat undermined by press reports in the UK about political interference in the work of Polish courts, and a government keen on the notion of 'economic patriotism'. What would you say to put potential foreign investors' minds at ease?

While we see that the government is indeed more active in certain areas of economy than it used to be a few years ago, the overall level of foreign direct investment restrictions does not differ much from other EU countries and is not particularly burdensome for regular investments. Foreign investors need to pay more attention to the restrictions while planning their investments to assess whether it is likely that the government will interfere with their investment or exit plans.

Indeed, persisting discussions between the Polish government and the European Commission on the shape and direction of ongoing judicial reforms attracts the attention of investors. In cross-border transactions, arbitration based outside of Poland is now more common than it used to be a few years ago.

You say in your report* that "Poland, as a member state of the EU, applies the principle of free movement of capital and the principle of non-discrimination. Therefore, investors from EU or EEA or EFTA member states may invest according to the same principles as Polish citizens and are not treated as foreigners." What has changed in this regard to UK capital and UK citizens after Brexit?

From 1 January 2021 UK capital and UK citizens can no longer benefit from the EU principle of free movement of persons and will be treated differently than investors from the EU or EEA or EFTA member states. Certain new requirements and restrictions may now apply to UK capital and UK citizens in the same manner as they apply to other non-EU businesses and citizens. The UK-EU Free Trade Agreement provides for some special rules of cooperation between UK and the EU, which places UK business in a slightly better position in some aspects than other non-EU businesses.

However, as the UK remains part of the OECD, we do not think Brexit would have major practical impact on the ability of UK corporate and financial investors to invest in Polish companies.

Many EU Directives and their subsequent incorporation into Polish law end up being interpreted by Polish administrative bodies in different ways – varying from voivodship to voivodship. Foreign investors to Poland, when asked about what they'd like to see improved here, will say that the predictability and stability of the regulatory environment is a crucial element. How difficult is it to get nationally binding decisions on issues such as tax, labour law, environmental regulation etc?

Obviously, the fact that the day-to-day practice of various local authorities may still differ across different regions is unfortunate. We hope further digitalisation of public administration will improve the coordination of work and the approach between public authorities but this is a kind of problem that cannot be entirely eliminated.

Decisions on labour law are usually taken by local authorities, so it would be difficult to seek nationwide interpretations. When it comes to taxation, there are some possibilities to obtain limited protection by way of tax rulings.

Foreign investors setting up a legal entity in Poland often choose form of a limited-liability company (spółka z ograniczoną odpowiedzialnością). What are the pros and cons of this vehicle? In which circumstances does it makes sense - and in which does it not?

A limited liability company is pretty straightforward and fairly easy to operate, which makes it a suitable vehicle for most of investments irrespective of size of operations, as they offer the benefit of the corporate veil, and there are not so many governance formalities compared with other types of vehicles that are available.

Following recent tax changes to the taxation of limited partnerships (which as of 1 May 2021 will, in principle, cease to be tax transparent, which could imply double-taxation, especially for limited partners) we expect limited liability companies to become even more popular.

Limited liability companies are particularly useful as subsidiaries of foreign corporates or 50-50 joint-venture companies in which both shareholders retain equal rights. However, for companies with multiple shareholders, especially if more sophisticated ‘waterfall’ arrangements were envisaged, other types of investment vehicles may need to be considered.

In March 2021 a simplified joint-stock-company (prosta spółka akcyjna) will become available and we expect it to compete in popularity with the limited liability company.

How easy is it do business remotely with Poland? Electronic establishment and e-signatures are becoming easier to deal with -- for EU nationals and business entities. Has Brexit made this impossible for British firms/UK citizens? Is it possible to get around the need for 'wet-ink signatures' for paperwork?

As elsewhere in the world, the Covid-19 pandemic has forced many business organisations into remote working mode.

Before the pandemic many businesses in Poland used to operate in a traditional manner, requiring their employees to show up in the office every day and producing tons of wet-ink documents even in circumstances where digital signatures would be sufficient and legally permitted. This has changed to a large extent, as digital signatures are now more common. During the course of 2020 many laws were amended to permit remote meetings of corporate bodies of companies and more remote communication with public authorities.

Polish public administration is widely accessible remotely and many day-to-day formalities may be handled by web portals. Some proceedings still need to be handled in a traditional manner though.

Certain transactions still require wet-ink signatures or documents executed during to person meetings of the parties with a notary.

We see a visible breakthrough in the ways some public authorities operate. Many of their employees do work remotely and we have seen examples where even where wet-ink hard copies were required by law, the authorities were willing to proceed on the basis of electronic copies with originals required only at the final stage. This is a significant change in approach. On the other hand, some other public authorities especially those relating to less-essential public services have been pretty locked-down and have not been able to transition to the digital reality yet.

After all, once the Covid-19 contingency subsides, we expect both remote work and communication between business organisations and public authorities to be more friendly than it used to be.

Some potential practical barriers for foreign investors may still remain in place. In principle, the Polish public administration operates and communicates in Polish language only.

Moreover, to validate signatures on communication one needs to either have an account in a special Polish public administration portal or use qualified digital signature that meets the requirements under the EU’s eIDAS regulation. Other types of digital signatures that are commonly used by business organisations but do not meet eIDAS requirements may be useful for day-to-day communication or to execute some commercial contracts, but will not be sufficient to communicate the with public administration

Poland's labour law is seen as archaic in light of today's technology, remote working and activity-based workspaces – and Covid-19 has exacerbated the feeling that the Labour Code is no longer relevant for resolving employer/employee disputes. What advice would you give to a potential foreign investor looking to set up operations in Poland – say, in the BPO/SSC sector, or in manufacturing or logistics?

We expect that the Covid-19 pandemic will imply some long-term changes to labour law as remote work becomes more flexible. Some changes have already been introduced and we expect more to follow. The present labour code reflects the principles of EU labour law.

While numerous regulations are far away from being ideal from an employer perspective as they are aimed at providing protection to employees, in the short term we would not expect a revolution. Furthermore, we do not find existing Polish regulations particularly onerous compared with many other continental Europe jurisdictions.

Like most other sovereign nations, Poland is trying to collect as much corporate income tax as possible on revenues earned in-country; what steps is the Ministry of Finance taking to limit the untaxed transfer of profits to other jurisdictions?

In line with tendencies that are commonly visible in most of the OECD countries the Polish government is trying to ensure that various reliefs and exemptions under double taxation treaties or local regulations are available only to foreign entities of real substance in the relevant foreign jurisdiction that are the beneficial owners of the relevant payments. In connection with those tendencies, the withholding tax Pay & Refund mechanism is to be introduced in to the Polish tax system, but the Ministry of Finance has once again postponed (presently until 1 July 2021) its coming into force.

 

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