Fixed establishment in Poland and its influence on VAT settlements


The concept of a fixed establishment (Polish: stałe miejsce prowadzenia działalności) for value added tax (hereinafter: VAT) purposes is crucial to determine both the place of supply of services provided and the possibility of applying the reverse charge mechanism on local supply of goods. In practice, the identification of the entity as VAT payer when services are provided to a foreign company which does not have its place of establishment in Poland or when the goods are supplied by a foreign entity on the Polish market, depends on whether the entity has its fixed establishment in Poland or not.

As a rule, in the case of services provided by the taxpayer to an entity established in another country, the obligation to settle the VAT using the reverse charge mechanism is on the purchaser (e.g. a taxpayer from the UK). On the other hand, if the foreign entity established in another country (not registered for Polish VAT purposes) supplies the goods on the Polish territory to a Polish VAT taxpayer, it is the local entity which is liable for the VAT payment.

Nevertheless, the above rules of taxation are only applicable if the foreign entity does not have a fixed establishment in Poland in the meaning of VAT regulations. It should be stated, that in case the entity will recognize having a fixed establishment in Poland, consequently its Polish suppliers of services will not be entitled to apply the reverse charge mechanism. In such a case the obligation of using the local VAT rate will appear. Similarly, in the case of local supply of goods, the reverse charge mechanism will not be applied.

The Polish VAT Act does not include a definition of the fixed establishment. However, pursuant to EU law, a fixed establishment means any place other than the place of establishment of a business, characterized by a sufficient degree of permanence and a suitable structure in terms of human and technical resources to enable it:
1)    to receive and use the services provided for its own needs (from the point of view of the service recipient) or
2)    to provide the services which the fixed establishment supplies (from the perspective of the service provider).

However, having a VAT identification number (registration for VAT purposes in a country other than the place of establishment) is not in itself sufficient to state that the taxpayer has a fixed establishment on such a territory.

The case-law of the Court of Justice of the European Union (CJEU) has played an extremely important role in the understanding of the concept of the fixed establishment. Until recently, the above criteria were considered as fulfilled when the foreign companies had their own infrastructure in a foreign country, such as appropriate technical resources (e.g. machinery, production lines or warehouses) and employed directly their own staff. However, this approach has changed recently. In the judgment issued on October 16th 2014 in the case of Welmory (C - 605/12), the CJEU made a broader interpretation of the conditions determining the existence of a fixed establishment. The Court pointed out that to set up a fixed establishment, the taxpayer should have sufficient and constant technical and human resources that will allow it to receive and use the services for business purposes. In practice, it can be concluded that such a situation may also occur when technical and personnel resources do not belong to the taxpayer but to its contractor (subcontractor, manufacturer), even an unrelated company. Nevertheless, the taxpayer should keep the right to control both personnel and technical facilities.

Polish tax authorities use currently the argumentation from the Welmory case to consider almost automatically that a foreign entity has a fixed establishment in Poland when, even without having its own warehouse, production facility, real estate or human resources, it delegates production, assembling, warehousing services and processing of materials as part of an agreement on cooperation concluded with a Polish contractor.

According to a frequent approach presented by the tax authorities, the foreign entity might be recognised as operating in a fixed establishment if it uses the infrastructure and resources of a Polish subcontractor and it conducts its activity, falling within the scope of VAT, permanently and continuously. The acceptance of such a broad definition without taking into account other circumstances of the cooperation, such as the permanence of infrastructure, the scope of control over the contractor’s technical resources, the independence of the contractor and its employees, the ability to issue binding instructions etc. is incorrect in our view and may lead to the breach of fundamental rules of the VAT system (e.g. taxation of services in the country of the service provider).

Taking into account the above, both Polish companies and foreign suppliers should in any case analyse the structure the foreign entity holds in Poland as well as the adopted model of cooperation. Assuming a priori that a foreign entity does not have a fixed establishment in Poland, especially having in view the various options of cooperation and presence available in Poland, might trigger a risk during a tax audit.

Magdalena Jaworska, Licensed Tax Advisor, Manager,
Katarzyna Klimczyk, Licensed Tax Advisor, Consultant, Accreo

Author: Magdalena Jaworska, Licensed Tax Advisor, Manager, Katarzyna Klimczyk, Licensed Tax Advisor, Consultant, Accreo Price: free