Company tax residence – actual management abroad and country of taxation

Remote working and international management structures lead to situations where companies registered in Poland are actually managed from another country – e.g. by members of the management board residing in Germany, the Netherlands or Austria. This situation can have very serious tax consequences. In particular, it may lead to a change in the company’s tax residence, and thus determine in which country the company is subject to taxation on its total income.

What is a company’s tax residence and why is it so important?

Tax residence is a concept that determines in which country a company is subject to unlimited tax liability – i.e. where it must account for its entire income, regardless of where it is earned.

In Polish law, the basic principles are set out in Article 3 of the Corporate Income Tax Act (CIT): Taxpayers who have their registered office or management in the territory of the Republic of Poland are subject to tax on their total income, regardless of where it is earned.

This means that if a company has its registered office in Poland (e.g. entered in the National Court Register) or its management actually operates in Poland, it is considered a Polish tax resident and should pay CIT in Poland on its entire income, including foreign income.

However, if the actual management is located in another country, the situation becomes more complicated. In such cases, the final decision on where the company has its tax residence depends on the double taxation agreement concluded between Poland and that country (e.g. the Polish-German agreement of 2003).

What does it mean for a company to have its ‘actual management abroad’?

Polish regulations (Article 3(1a) of the CIT Act) indicate that a taxpayer has its management in Poland, inter alia, when the company’s current affairs are conducted in an organised and continuous manner in Poland.

In practice, therefore, it is not the registered address that counts, but where key strategic and operational decisions concerning the company’s activities are made.

What matters to the tax authorities is:

• who actually makes the decisions,
• where these decisions are made,
• whether the actual management of the company takes place in Poland, and not just the formal signing of documents.

Example:

A limited liability company is based in Poland, but all members of the management board reside in Germany. Meetings are held online, strategic decisions are made in Germany, and correspondence and financial supervision are also conducted there.

In such a situation, the tax office in Germany may consider that the place of actual management is located in Germany and that the company is a tax resident of Germany, even though it is registered in Poland.

Who decides where the actual management is located?

In practice, it is usually the tax administration of the country where the members of the management board reside that is the first to analyse where the company’s actual place of management is located.

If, based on an assessment made on the basis of national regulations and the provisions of the relevant double taxation agreement (in particular Article 4(3)), it appears that key decisions concerning the company’s activities are taken in the territory of that country, the authority concludes that the company has its place of effective management there and is therefore subject to unlimited tax liability in that country.

The foreign authority may then:

• challenge the company’s place of taxation,
• request an adjustment of tax returns,
• decide that the company should pay tax in Germany, for example, rather than in Poland.

In the event of a dispute over residence, international agreements provide for a mutual agreement procedure (MAP), under which both countries agree on a common position.

What are the consequences of changing a company’s tax residence?

From a tax perspective, changing the place of actual management means that:

1. The company loses its Polish tax resident status. It no longer settles its entire income in Poland – only that which results from activities conducted in Poland (e.g. through a permanent establishment).
2. In the country of actual management (e.g. Germany), the company is subject to unlimited tax liability – it must settle all its income there.
3. There is a risk of double taxation, especially if the Polish authorities do not recognise the loss of residence.
4. It may be necessary to correct previous tax returns if the company has been paying CIT in Poland for several years and a foreign audit finds that it should be paying it in another country.

Actual management abroad and business activity in Poland – potential permanent-establishment risk

Determining that a company has its actual management in another country does not end the analysis of its tax situation.

If the company conducted or conducts business in Poland in an organised and permanent manner (e.g. through an employee, office, infrastructure), this may mean the creation of a permanent establishment (PE) – in accordance with the relevant double taxation agreement.

In practice, a dual situation may arise:

• the company is considered a tax resident of Germany because its management is actually based there,
• but at the same time, a permanent establishment is created in Poland, which means that part of the income is still taxable in Poland.

Such cases are not uncommon. Although the Polish tax authorities do not question residency, they may require the income attributed to the permanent establishment in Poland to be reported and settled, especially if persons performing operational or management activities work in the country.

You can read more about tax establishments in the following article: Hiring remote employees from Poland by foreign companies – when does a permanent establishment arise?

How does this work in practice?

If the members of the management board of a company registered in Poland are tax residents of another country (e.g. Germany) and make decisions concerning that company while staying abroad – especially strategic decisions concerning the directions of development, investments or the type of activity – foreign tax authorities may consider that the actual management is located outside Poland (e.g. in Germany). This automatically shifts the company’s tax residence to the country where the management board actually operates.

In the course of such proceedings, foreign tax authorities will expect specific evidence of the actual place of management.

For example, simply stating in the resolutions approving the financial statements that they were adopted in Poland is not sufficient evidence if the members of the management board do not provide other materials – e.g. travel confirmations, meeting documentation, e-mail correspondence or invoices – confirming that they were actually in Poland and made decisions there regarding the company’s activities.

Importantly, such proceedings will not be conducted by the Polish tax office – which has no interest in transferring the company’s taxation abroad – but by the tax office of the country where the members of the management board reside.

As a result, a following situation may arise:

• the German authority will consider the company a German resident,
• while the Polish authority will still expect tax settlement on the part of income attributed to the establishment in Poland.

Changing the place of actual management does not automatically eliminate tax obligations in Poland. If the company conducts any business activity here or employs staff, it is worth analysing whether a tax establishment has been created and whether all CIT obligations in Poland have been properly fulfilled.

Summary and practical tips for entrepreneurs

Determining a company’s tax residence is not a matter of formalities in the National Court Register, but an analysis of the actual place where management decisions are made. In times of remote management and dispersed structures, it is easy to unknowingly move the decision-making centre outside Poland, which may result in a change of tax residence.

What to check:

• Do the members of the management board actually operate from Polish territory?
• Are strategic decisions (e.g. investment, financial) made in Poland?
• Are management board meetings documented and held in Poland?
• Is there evidence of travel to Poland and activity in the country?
• Are current activities carried out in Poland, or is it just a formal registration?

If your company has a management board operating from abroad or you are planning such a structure, it is worth assessing the tax implications in advance, including the risk of establishing a tax establishment, and avoiding disputes with the tax authorities.

getsix® supports entrepreneurs and investors in analysing the tax residence of companies, assessing the risk of double taxation and preparing documentation confirming the actual location of the management board. Contact our team of tax advisers if your company is managed from abroad or you are planning to relocate your management structures.

Legal basis:

• Agreement between the Republic of Poland and the Federal Republic of Germany for the avoidance of double taxation with respect to taxes on income and on capital, signed in Berlin on 14 May 2003.
• Act of 15 February 1992 on corporate income tax.

If you have any questions regarding this topic or if you are in need for any additional information – please do not hesitate to contact us:

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GETSIX TAX & LEGAL

Tomasz Nowak
Senior Tax Consultant
getsix Tax & Legal

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