Appointment of a sales representative vs. risk of permanent establishment (Poland)
When a foreign entity plans to expand its operations to Poland, it is convenient for it to appoint a sales representative. This, however, brings about the tax risk of permanent establishment.
At the beginning, such an arrangement provides flexibility which is so valuable at the time of uncertainty of the business expansion's success.
To decide if the sales representative's activities in Poland give rise to a permanent establishment of a foreign enterprise, the activities must be thoroughly examined. If the examination shows that such a permanent establishment is about to exist, the foreign enterprise will be obliged to determine which part of its revenues is attributable to the sales representative's activities and to pay the income tax in Poland on that part.
The revenue taxed in Poland will not normally be taxed again in the country of the foreign enterprise because in most cases the double taxation avoidance agreements signed between Poland and other countries exempt the profit of a foreign permanent establishment in the country where the enterprise is based.
Sales network and collecting information
The fundamental task of a sales representative is to build the sales network. The sales representative distributes the goods by, among other things, attracting prospective customers or collecting information about their business standing and expectations. It is not uncommon for the sales representative to inform the foreign enterprise about the market situation and profitability of running or developing the business in Poland. An office is sometimes opened for the sales representative in Poland, but usually there are no official premises here.
It seems that the sales representative's activities show a low level of permanency and are weakly tied to the territory of Poland, especially when there are no official premises here. Still, the representative's activities may give rise to a foreign permanent establishment in Poland, and consequently to the obligation to pay income tax on the income attributable to the sales representative's activities in Poland. Whether a permanent establishment comes into existence in Poland depends on the scope of powers vested in and actually exercised by the sales representative.
Authority to conclude contracts
The sales representative's duties and powers which may bring a foreign permanent establishment into existence include, pursuant to Article 5(5) of the OECD Model Convention, having and exercising an authority to conclude contracts in the name of the foreign enterprise. This authority should be exercised by the sales representative habitually which is the case when the enterprise accepts the terms and conditions agreed upon by the representative and a new customer without modifying or questioning individual provisions.
Formal absence of the authority to conclude civil law contracts does not protect the foreign enterprise against the risk of sales representative's activities being regarded as a permanent establishment in Poland. The risk exists even if a contract is signed by the headquarters' representative but the negotiations in the name of the enterprise and the terms and conditions of the contract belong to the representative's duties and are done in such a way that the signature approving the terms is a mere formality. Negotiations may cover prices, discounts or payment facilities in dealings with new customers. Fixing those terms is a key point in collaboration with a customer. Consequently, by assigning this duty to a representative the enterprise transfers to him a significant part of its business.
A manufacturing enterprise X established in Germany has employed a sales representative in Poland. The representative's duties stipulated in the employment contract include attracting new customers in Poland, presenting the enterprise's portfolio and informing about the business terms. The enterprise reserved that the sales representative had no authority to sign framework agreements with customers. Besides those formal arrangements, the representative accepts orders from customers and, without consultation with the enterprise, grants discounts and offers deferred payment. The sales representative gave a Polish customer a 15% discount on the order value without consulting the employer, and X delivered the order.
In this case, the formal scope of duties set in the employment contract is very narrow, including mainly auxiliary tasks which do not bring a foreign permanent establishment into existence in Poland. Nevertheless, the actual authority of the representative is much broader and encompasses tasks which make up a significant part of the enterprise's business such as the pricing policy or payment terms. Importantly, the tasks are performed by the sales representative. Because what matters is the actual scope of activity pursued by the representative in Poland, in this example the foreign enterprise will be deemed to have a permanent establishment for tax purposes in Poland.
Therefore, to determine whether there is a permanent establishment it is necessary to look at the overall actual activity of the sales representative and its effects on the principal, and not the formal authority arising from the legal relationship of the parties. If in practice the representative decides himself about the terms and conditions of collaboration, he should be deemed to have and exercise the authority to conclude contracts in the name of the foreign enterprise in the meaning of Article 5(5) OECD Model Convention. Consequently, the risk of a foreign permanent establishment becomes a reality as a result of the representative's (agent's) activities in Poland.
Company Y from Belgium, which develops antivirus software, has employed a sales representative in Poland. His job is to present the software manufactured by Y and, among other things, conclude contracts for software purchase and maintenance. The sales representative has concluded no contract as the customers can make the contract directly through an on-line form on the Y's website.
In this example, the risk of permanent establishment stems from the representative's formal authority to conclude contracts. Nevertheless, that person actually performs only auxiliary tasks of software presentation. In this situation, despite the representative's readiness to conclude a contract with the company's customer, it can be presumed that no permanent establishment would exist.
Processing warranty claims
A permanent establishment may come into existence also as a result of the sales representative's authority to handle the customers' warranty and statutory warranty claims. In such a case, the tax authorities may claim that a part of the enterprise's operations has been transferred to Poland and, therefore, the percentage of profit attributable to that part should be taxed here.
If the sales representative's tasks include exclusively the auxiliary tasks in the meaning of Article 5(4) OECD Model Convention , there is no ground for existence of a permanent establishment. The auxiliary activities may include collecting information about the Polish market or prospective customers, presenting the enterprise's portfolio and business opportunities. Even if despite the formal authority to conclude contracts in the name of the foreign enterprise the sales representative actually carries out only the auxiliary activities, there will be no permanent establishment.
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