Remote working is a topical issue in Poland also due to changes to the Labour Code introduced in April 2023, where for the first time the remote work performed by employment contract holders has been precisely regulated.

Post-pandemic approach to home office: PE or not? 

It is important to note, that there are no specific regulations or binding guidelines of the Polish Ministry of Finance regarding the impact of remote work on PE issues in the post-pandemic environment.

In accordance with the standard wording of Double Taxation Treaties, profits of a company of a contracting state are taxable only in that state if the company continues with business in the other contracting state through a PE situated therein. If the company conducts business in this way, the profits of the company may be taxed in the other state to the extent that they are attributable to a PE.

One of the ways in which the PE can be created is by the existence of a so-called ‘fixed place of business’. In this case, a PE arises if the following conditions are cumulatively met:

1) there is a place used to conduct business, and
2) the place is fixed and
3) the place is used to conduct business activity that is not of a preparatory or auxiliary character.

Private rulings 

There are several private rulings, which present the following interpretation of PE conditions in connection with remote working:

• Regarding condition (1), the prevailing view in current tax office rulings and decisions of Administrative Courts in Poland is that any place where remote work / home office work is performed can be considered a ‘place of business’. In this respect, it is sufficient for work to be carried out by an employee using equipment provided (or which is remunerated/compensated) by the employer.

• Regarding condition (2), for the recognition that a ‘place of business’ is fixed, the intention of use is decisive (whether the employer envisages or agrees that the ‘place of business’ is to be used on a permanent basis). In practice, it is also taken into account whether the form of employment (legal form, duration of contract) indicates the permanent nature of the work performed.

• Regarding condition (3), it is verified whether the work performed in Poland is part of the company’s core business or if it coincides with the objective of the company as a whole.

In practice, every case must be analysed individually to assess the possible tax consequences of having employees in a home office in Poland.

Consequences of creation of a PE in Poland

If a PE in Poland arises, it particularly involves the following consequences:

• the requirement to allocate income (revenues and expenses) to the activity of the PE,
• registration for tax purposes in Poland,
• obligation to file CIT returns, calculate and pay CIT advances and/or annual tax in Poland,
• verification of Transfer Pricing obligations,
• PIT and social security consequences regarding employees residing in Poland,
• other potential legal obligations.

The existence of a PE is important as its creation may have legal and tax consequences from the first day of activity in Poland. Thus, the optimal approach is to assess the tax aspects of hiring employees in their home offices before they commence employment.

If you would like to know more about creation of permanent establishment, other tax issues related to remote working in Poland, or need any tax advice regarding the country please visit the homepage of WTS&SAJA Sp. z o.o., the exclusive representative of WTS Global for Poland and contact their experts.

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General tax registration rules

According to the Russian tax legislation a foreign legal entity that conducts business activities in Russia through a separate division (representative office, branch, construction sites and other places of business) for a period exceeding 30 days in a calendar year is required to register with the Russian Tax Authorities. If a foreign legal entity operates in more than one location, it should register separately in each of the locations that it is present in (real estate or construction site must also be registered separately).

We notice that there is also an exception from general rules. Starting from 1 January 2019 а foreign legal entity that provides services in electronic form specified in paragraph 1 of Article 174.2 of the Russian Tax Code, is subject to registration in the Russian Tax Authorities (so called “VAT registration”), if the place of sale is Russia. According to the paragraph 14 of the article 306 of the Russian Tax Code, such activity does not lead to a permanent establishment status, thus, it does not create a foreign company’s PE in Russia.

In general, foreign legal entities may be liable for taxation in the Russian Tax Authorities in the following cases:

• If they are recognized as Russian tax residents based on certain criteria;
• If their business activities create a foreign company’s PE in Russia;
• If they receive income from a source in Russia (not connected with the activities of a foreign company’s PE in Russia) that is subject to withholding tax.

The registration obligation of foreign legal entities does not depend whether the activity of the foreign legal entity is taxable or not in Russia. Thus, you need to keep in mind that if a foreign legal entity conducts business activities in Russia through a „separate division”, for a period exceeding 30 days in a calendar year, is required to register in the Russian Tax Authorities. Each case whether the activity of a foreign legal entity leads to a permanent establishment status or not should be analysed separately.

New requirements for a foreign company’s PE in Russia

According to the latest amendments to the article 23 of the Russian Tax Code (Federal Law of 20.04.2021 N 100-FZ), starting from May 2021, all foreign companies, registered in Russia (except those foreign legal entities that are registered in Russia due to rendering electronic services) are obliged to report to the Russian Tax Authorities information about the participants of this foreign company (information about its founders, beneficiaries and managers).

It is necessary to disclose information about the indirect participation (if any) of an individual or a public company if the share of their direct or indirect participation exceeds 5%. The deadline for submitting information is 28 March of each financial year. Therefore, the transitional period stipulates that for the first time, foreign companies should submit information about their participants (founders, beneficiaries and managers) not later than 28 March 2022 (as of 31 December 2021).

We also notice that before entry into force of the new reduction of the art. 23 of the Russian Tax Code, only foreign legal entities owning the real estate objects, were required to report to the Russian Tax Authorities at the location of the real estate object information about their participants founders beneficiaries and managers).

The Russian Tax Code provides for the penalty in the amount of RUB 50,000  (roughly EUR 580) in case a foreign legal entity fails to report the information about its beneficiaries, founders and managers to the Russian Tax Authorities (p. 2.1 of the art. 129.1 of the Russian Tax Code). Thus, in order to be in line with the new Russian Tax Code’s requirements we recommend to take into account these new rules and report all the information to the Russian Tax Authorities according to the deadline.

If you would like to know more about the new requirements for a foreign company’s PE in Russia or receive further information about carrying out business activities in Russia, please contact the experts of ALTHAUS Group, the exclusive representative of WTS Global in Russia.

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Tax and social security implications of permanent remote work in Austria

In the first scenario Mr A and the company agree that, from now on, Mr A can work 100% remotely from his home office in Austria, independently of the COVID-19 pandemic.

The Austrian tax administration takes a “facts and circumstances-approach” to assess whether remote work in Austria creates a permanent establishment (PE) for the foreign employer. The main criteria are the extent of home office work, the nature of work carried out in the home office and whether it was initiated by the employer or by the employee. In the case in question, it is very likely that the tax administration assumes that a PE is created. In addition, home office work would trigger municipality tax (3% from employee’s gross wage).

Mr A is subject to Austrian income taxation. The foreign employer will not have to deduct and pay monthly Austrian wage tax, but will have to file a so-called wage-statement by March of the following year. The employee will have to file an income tax declaration by June of the following year.

As Mr A spends 100% of his working time in Austria, he is also subject to Austrian social security regulations. The foreign company will have to register with the competent Austrian social security authorities and deduct and pay monthly Austrian social security contributions (employee and employer part). If the company is located in another EU country, Mr A and his employer could agree that these compliance duties are fulfilled by Mr A. However, in practice, this is rarely carried out, as all non-compliance risks would remain with the foreign employer. In addition, the foreign employer will have to pay a contribution to the Austrian family support fund (3.9%).

Tax and social security implications of remote work in Austria only during the COVID-19 pandemic

In the second scenario Mr A and the company agree that, only during the COVID-19 pandemic, Mr A can work 100% remotely from his home office in Austria. The Austrian tax administration takes the position that, if home office work is performed only temporarily during the COVID-19 pandemic, the home office will not create a PE for the foreign employer.

As regards Austrian income taxation, there is no difference to the first scenario. Only in case the company is a German resident company, Austrian income tax could be avoided.

This is due to the fact that, according to a mutual agreement on the tax-implications of COVID-19 concluded between the German and Austrian tax administration, the employee could opt (no obligation) to remain subject to German income taxation.

As regards social security, the competent Austrian ministry takes the view that temporary restrictions on cross-border employment imposed by COVID-19 do not constitute relevant changes as regards the applicable social security legislation. This means that, in the case of COVID-19 related temporary remote work in Austria, the employee will remain within the applicable foreign social security legislation of its country.

If you would like to know more about the tax and social security consequences of remote work in Austria, please visit the homepage of ICON Wirtschaftstreuhand GmbH, partner firm of WTS Global in Austria!

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Transfer pricing rules before 2018

Transfer pricing (TP) rules were implemented into Ukrainian tax law from 2013. However, before 2018, permanent establishments (PEs) were a blind spot for TP control.

According to the Tax Code of Ukraine, non-residents that conduct business activity in Ukraine via a PE pay corporate profit tax. However, TP rules that were in force before 2018 did not provide any special rules for PEs. It was unclear whether PEs in Ukraine are subject to TP reporting requirements alongside regular corporate profit tax reporting, and what transactions of PEs in Ukraine may be recognised as being subject to TP control.

It was clear, however, that the Ukrainian TP rules lacked any legal basis to control dealings between PEs and non-residents establishing such PEs. This was due to the definition of controlled transactions for TP purposes, which did not provide grounds to extend the control to dealings between parts of the same legal entity.

This ambiguity meant that PEs of non-residents mostly ignored TP control in Ukraine, even though, under the rules existing before 2018, some PE transactions might have been recognised as being subject to TP control: for instance, if a PE had dealings with a foreign related party of the non-resident that established the PE.

Introduction of TP reporting for PEs in Ukraine

Starting from 2018, Ukrainian TP rules were supplemented with the new type of controlled transactions, namely, transactions between a non-resident and its PE in Ukraine. The Ukrainian Tax Code prescribes a special value threshold for recognising such transactions as controlled, namely UAH 10 million (roughly EUR 305,000), without applying the turnover-based threshold which is provided for enterprises.

Thus, 2018 became the first TP reporting period for PEs in Ukraine.

However, there was still some ambiguity due to the lack of proper guidance from the Ukrainian authorities on how PEs in Ukraine should conduct the analysis in practice and comply with the reporting requirements. Moreover, it was unclear how the results of such TP analysis may be applied to the corporate profit tax base calculation.

The Tax Code of Ukraine (sub-para.141.4.7) provided for the following options to calculate profits that non-residents derive through their Ukrainian PEs:

• The profit is calculated according to the general rules of the Tax Code, assuming that the PE is deemed a taxpayer separate from the non-resident and operates independently.
• If a non-resident operates both in and outside of Ukraine and does not determine profit derived from Ukraine, a separate balance sheet for its Ukraine-related activity should be prepared. This balance sheet should be approved by the tax authority at the location of the PE.
• If it is impossible to reliably calculate the profit sourced in Ukraine, then the profit is calculated as Ukraine-sourced income of the PE less costs, calculated by applying a 0.7 coefficient to such income. In other words, the profit is effectively calculated as 30% of the income received by the PE without needing to allocate and prove costs related to the PE activity.

PEs filed special reports to declare their profit tax liabilities using one of the mentioned methods. Many PEs opted for the approach calculating profit as 30% of income due to its simplicity.

After extending TP control to dealings between non-residents and their PEs in Ukraine, the above rules were supplemented with the reference that the profit under all such methods should be calculated with due regard to Ukrainian TP rules. It was not clear though how such rules should have been applied for the cases when the profit is calculated as 30% of income.

Recent changes to calculation of profit

The rules of profit calculation by PEs in Ukraine were changed once again by Law #466-IX, which came into force in May 2020. From this date onwards, the special rules of profit calculation by PEs, including the calculation method applying the 0.7 coefficient, were deleted from the Tax Code.

Instead, the new rules stipulate that the profit should be calculated following the arm’s length principle. Such profit should be in line with the profits of independent entities carrying out the same or similar activity as if such PE operated separately from the non-resident. The amount of any profit should be calculated according to Article 39 of the Tax Code setting forth Ukrainian TP rules.

Two-step analysis recommended

Yet this change has not made the situation clearer. Ukrainian TP rules are primarily designed for application by enterprises and do not contain any special rules which may be followed by PEs to determine their profits. Also, there is no official clarification from the authorities so far.

We understand that the only reliable way would be to follow the OECD-authorised approach to allocate profits to PEs. It implies that the two-step analysis should be carried out:

• firstly, hypothetical dealings between the non-resident and its PE should be identified, and
• secondly, such dealings should be priced by applying TP methodology.

Ukrainian taxpayers are required to file corporate profit tax returns quarterly (with some special exceptions). Therefore, it is likely that the forward-looking TP analysis should be implemented, otherwise, in many cases PEs in Ukraine would lack the information necessary to draft the return.

Yet these are just preliminary thoughts on the matter. Hopefully, taxpayers will receive proper clarification from the authorities very soon.

Clarification still required

Such clarification is desperately required due to the lack of appropriate transition rules in Law #466-IX. This change occurred in the middle of the year and a lot of PEs have already reported their profits for the first quarter applying the previous mechanisms. So, the question arises of how to file the reports after the changes. Thus far, the tax authorities have just recommended filing the ordinary profit tax return instead of the report on profit of the PE. However, the tax authorities have not shared their vision on how the data from previously filed reports should be transferred to such regular profit tax returns. This is especially important in the cases when the profit was calculated as 30% of income.

Hopefully, the authorities will very soon produce clear guidance that can be followed. Otherwise, the only option for PEs in Ukraine would be to use the results of the TP analysis for previous years and adapt these for the current profit tax reporting. If a PE has not conducted any such analysis, it is highly recommended to do so urgently.

If you would like to know more about the latest TP-rules for PEs in Ukraine, please visit the homepage of WTS Tax Legal Consulting, LLC, the exclusive representative of WTS Global in Ukraine.

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The 2018 spring issue of WTS CEE Tax Bridge has been published. It summarizes the latest developments in permanent establishments in 10 countries of the Central and Eastern Europe Region.

We are happy to introduce our first Tax Bridge this year. In order to place stronger emphasis on regional tax problems in Central and Eastern Europe and to rise to the challenges of our era, we have renewed and refreshed not only the content but also the format of our publication.

From 2018 our Tax Bridge doubles up as our Central and Eastern European Newsletter. We still address a specific issue every quarter, just like before, but now the selected issue will also be examined from the viewpoint of different countries in the CEE region. We are proud to say that we were able to collect expertise from 10 different countries for our first regional Tax Bridge, focusing on the latest developments in permanent establishments in our region. This means you can read about the regulations in Austria, Belarus, the Czech Republic, Hungary, Poland, Russia, Serbia, Slovakia, Slovenia and in Ukraine. 

Permanent establishments will become a very hot topic

BEPS Action 7 (Preventing the Artificial Avoidance of Establishment Status) on permanent establishments (PE) and the profit attributable to permanent establishments will sooner or later become a very hot topic in all CEE countries too, as it is now in Poland for example (where not only the corporate income tax but also the VAT aspects can be challenging). Keeping the tax base in the countries where the actual work or service is performed will be more and more important. At this stage we see that CEE tax authorities do not follow a uniform approach with respect to permanent establishments. Some countries apply only the minimum standards in the Multilateral Instrument (MLI), while others focus more closely on the topic and have strict rules to conclude that permanent establishments actually exist, and thus to tax the profit created in the given country.

If you are contemplating cross-border activities, it is good to know at least the basic tax rules in the country where the service or work will be performed. Nevertheless, we recommend contacting our colleagues directly before starting activities in these countries to avoid tax exposure and excess tax administration related to retrospective tax compliance for permanent establishments.

You can download WTS CEE Tax Bridge #1/2018 in PDF format here:

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WTS CEE Tax Bridge #1/2018 (PDF)

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