The performance of a Polish permanent establishment of a foreign company may be relevant for the national minimum tax

A Polish branch of a foreign company that is a permanent establishment may be part of a group and benefit from a preferential tax rate on income from qualified intellectual property rights.

18 July 2022. The Director of the National Fiscal Information [KIS Director] issued an tax ruling[1] in which wase confirmed that a foreign permanent establishment, i.e. a branch of a foreign company located in the territory of the Republic of Poland, may be exempt from Polish minimum income tax.

Factual situation

A foreign company conducts business activity in Poland through a branch constituting a permanent establishment. The branch is engaged in the supply of goods to customers in Poland. The margins generated by the branch in Poland, as a rule, do not allow it to generate tax income at a level exceeding 1% of tax revenue[2]. This is due to the specifics of the market on which the entity operates. Accordingly, the branch in Poland is likely to be subject to minimum tax for each tax year. Due to the manner in which the minimum tax is calculated and the design of the tax base, in which the key element is an amount representing 4% of operating revenue[3] (excluding capital gains), it is highly likely that the minimum tax determined will exceed the profits generated by the branch in Poland. As a result, this could lead to a structural loss for the branch and make the business activities conducted by the entity in Poland unprofitable.

The only possibility to exclude the foreign establishment from taxation was to combine its results with other companies in Poland, which are dependent on the parent company of the branch.

In the facts of the case, the parent company is a Polish tax resident. The Polish parent company holds 100% of the shares in the foreign company and 100% of the shares in the Polish companies. The foreign company has a permanent establishment in Poland, which is covered by the individual interpretation.

The question therefore arises – can the result of the Polish permanent establishment of the foreign company be consolidated with the results of the other companies in the group for minimum tax purposes?

Opinion of the KIS Director

The Head of the KIS indicated that the very intention of the legislator was to subject foreign establishments located in Poland to the entirety of the provisions concerning the so-called minimum tax, including the tax exemptions provided for in the regulations.

However, the KIS Director points out that cases in which a foreign permanent establishment may be part of a group of entities covered by certain exemptions are rare and take place in specific circumstances. These conditions include the requirement that one company must hold directly 75% of the share capital, share capital or equity interest, respectively, of the other companies in the group for the entire tax year.

Thus, in order for a Polish permanent establishment of a foreign entity to benefit from the exemption, a condition relating to capital structure must be met: the parent company, which has its registered office or management in Poland and is subject to full taxation in the country, must also directly hold at least 75% of the shares in the capital of the foreign entity operating in Poland through the permanent establishment.

Thus, the result of the Polish parent company, the foreign company’s permanent establishment in Poland and the other Polish subsidiaries may be consolidated for the purposes of the Polish minimum tax exemption.

Summary

According to an letter of practice of the Director of the KIS dated 18 July 2022[4], a Polish permanent establishment of a foreign taxpayer may be covered by the exemption from the minimum income tax, provided that certain prerequisites are met. These prerequisites include the capital structure of the group, where the parent company must hold at least 75% of the shares in the share capital of the other companies in the group, and an appropriate level of the group’s income in its total revenue exceeding 2%. This means that even companies that incur losses may be exempt from the Polish minimum tax provided that the entire group meets the required criteria.

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[1] Ref. 0111-KDIB2-1.4010.14.2022.2.MK.

[2] Interpretation issued before the change in the regulations – currently it is 2%.

[3] Interpretation issued before the change in regulations – is now 1.5% or 3%.

[4] Ref. 0111-KDIB2-1.4010.14.2022.2.MK.