1. What are the different categories of remote service providers operating in the country?
In principle, an individual who provides services to a principal from a foreign country can perform them in three different ways, constituting three different legal or tax categories:
a. On the basis of an employment contract which is governed by the Polish Labour Code.
b. On the basis of a service contract which is governed by the Polish Civil Code where the service provider is not a registered entrepreneur (freelancer)
c. On the basis of a service contract which is governed by the Polish Civil Code where the service provider is the registered entrepreneur (self-employment).
To a certain extent, the parties are free to choose the legal form most convenient for them. However, it should be noted that the Polish Labour Code has a legal definition of a labour contract, and if all the conditions are met, the service provider is considered to be an employee working under a labour contract. These conditions are: a) the obligation to perform certain work for the employer, b) under the employer’s supervision, c) at the place and time determined by the employer. Thus, whenever the contractual relations determine the instruments of supervision for the employer and the specific place and time of the work performed, there is a significant risk that the relationship will be considered a labour contract by its nature, regardless of the parties’ choice. Moreover, beginning from 2023, the Polish Labour Code also regulates remote work, specifying the parties’ duties and responsibilities. If the test for a labour contract fails, the contract will be qualified mostly as a service contract under the Polish Civil Code.
The parties will be relatively free to determine terms and conditions of their cooperation and the service provider will be considered a freelancer, unless he/she is an entrepreneur. There are many definitions of entrepreneurship in the Polish law for different purposes (income tax, VAT, social security levy, registration etc.). According to the Polish Income Tax Law, business activity – means activity aimed at profit making like (a) manufacturing, construction, trade, services, b) involving exploration, prospecting and extraction of minerals from deposits, c) involving the use of tangible and intangible assets – conducted on its own behalf regardless of its result, in an organized and continuous manner. The jurisprudence underlines “the organized and continuous manner” as being the most distinguishable factor.
2. Under what circumstances or situations does a remote service provider become a resident in the country?
According to the Income Tax Law in Poland, a natural person who: 1) has a centre of personal or economic interests (centre of vital interests) in the territory of the Republic of Poland, or 2) stays in the territory of the Republic of Poland for more than 183 days in a tax year is considered to be a tax resident. Although in the past, staying longer than 183 days constituted a significant risk of becoming a tax resident, after the Russian invasion in Ukraine and massive immigration of Ukrainians in Poland, tax authorities relaxed their stance. Even staying more than 183 days does not automatically lead to tax residency if the stay is due to circumstances beyond taxpayer’s control and the centre of vital interests remains abroad. It is also worth mentioning that Polish tax authorities are not especially harsh towards immigrants in auditing their legal basis for tax residency. In contrast, they instead base their decisions on taxpayers’ statements.
Particular bilateral treaties on double taxation avoidance may change the definition of tax residency, but most of them are likely constructed on the basis of those two tests: the centre of vital interest and the length of the actual stay.
3. How is income tax assessed on a remote service provider who holds residency status in the country?
In terms of the burden of taxes and other levies, the labour contract is the most burdened. The tax base is a net income. However, in the case of an employment income, the tax-deductible costs are fixed at PLN 250 per month. Income from an employment contract is taxed at a progressive rate of 12% up to PLN 120,000 (where the tax is reduced by PLN 3,600, which roughly corresponds to the PLN 30,000 tax exemption) and 32% above PLN 120,000. If the annual income exceeds PLN 1,000,000, the so-called solidarity tax of 4% is levied on the surplus. There is also an additional mandatory levy, which is a healthcare contribution of 9% of an income. Also, the social security contribution has to be mentioned, which is up to 35,85% of the income, but only up to the annual income below PLN 234 720 (2024). There is an unclear legal situation regarding the taxpayer. In principle, the employer is the payer of all the taxes. He/she is responsible for deducting and collecting the correct amount of taxes and paying them to the revenue office as well as sending the relevant forms informing both the revenue office and the employee about the income earned and the taxes deducted, collected and paid. However, the Polish tax authorities claim that if the employer has no branch or establishment in Poland, the duty to pay taxes (especially the monthly advanced payments according to PAYE ((pay-as-you-earn) principle) lies with the employee).
Service contract for freelancer is burdened similarly if no circumstances occur to make the income exempt from social security contributions. The main difference is in tax-deductible costs, which are fixed at 20% of income earned or even 50%, in case of income derived out of copyrights. According to tax authorities, as long as a principal does not carry out business activity in Poland, he/she is not obliged to deduct, collect and pay income tax to the Polish revenue office, and the duty lies with the service provider exclusively.
The system of taxing entrepreneurs in Poland strongly depends on their choices. In principle, there are three different models:
- Regular income tax and healthcare contribution according to the progressive tax rate, similar to that applicable in the case of employees and freelancers. In this model, an entrepreneur may benefit from lower threshold tax exemption (PLN 30.000 p.a.) and joint taxation with his/her spouse. The tax base is more flexible: It is income minus tax-deductible expenses, which are all costs related to the business.
- Flat tax rate of 19% (eventually increase of 4% solidarity tax in case of net income higher than PLN 1.000.000 p.a.). Healthcare contribution is reduced to 4,9% of net income. In this case, however, most of other incentives and befits are excluded.
- Revenue taxation. This model may be chosen if annual turnover does not exceed EUR 2 million. No tax-deductible expenses are allowed. Rates differ according to the nature of the business carried out and range from 8,5% to 17% in the case of services. Healthcare contribution is a lump sum depending on the revenue.
Entrepreneurs in Poland do not pay their mandatory social security contribution according to their revenue, but it is a lump sum that amounts to PLN 1485,31 in 2024.
4. How is income tax assessed on a remote service provider who holds non-residency status in the country?
In the case a taxpayer does not pass the test for tax residency, he/she may be subject to limited tax liability and still be obliged to tax his/her income in Poland according to the source of income principle. Under the Article 3 Section 2a and 2b “Natural persons, if they do not have their place of residence in the territory of the Republic of Poland, are subject to tax liability only on income (revenue) earned in the territory of the Republic of Poland (limited tax liability). Income (revenue) earned on the territory of the Republic of Poland by the taxpayers (…) shall be regarded in particular as income (revenue) from:
- work exercised in the territory of the Republic of Poland on the basis of an employment relationship, regardless of the place of remuneration payment;
- activity/services performed personally in the territory of the Republic of Poland, regardless of the place of remuneration payment;
- business activity carried out in the territory of the Republic of Poland, including through a permanent establishment located in the territory of the Republic of Poland.”
In the case of work and personal services, the crucial distinction lies in the place of exercise/performance. In practice, it is easier to determine the place of performance under the labour contract, since it is one of the essential elements of the contract, which should be stipulated expressly therein, or the employee should be informed respectively. However, in the contemporary business environment, it often happens that the place of work determined in the contract does not correspond to the place where the work is actually exercised. Since the tax law is autonomous, the tax authorities may investigate all the circumstances to establish the actual place of work independently. In practice, in the European Union, those are not tax authorities who investigate where the work is exercised but Social Security Agencies, who are mainly interested in correct social security contribution payments. It is due to the fact that the system of determining which country is entitled to receive the social security contribution burdening the employee’s salary is quite complex in the EU, has many exceptions, and is often abused by employers.
The provisions of the Polish Income Tax Act overlap with the provisions of tax treaties, which usually regulate income from employment in Article 15. The guiding principle is exactly the same as in the Polish law, but there is also an exception which refers to the employee’s delegation abroad. As long as the employee’s presence in the country of delegation does not exceed (usually) 183 days in a 12-month period and the remuneration is paid by an employer who does not have a permanent establishment or residence in Poland, the income derived from work performed in Poland may be taxed in the employer’s country of residence.
Under the Polish Income Tax law, the principles of taxation for freelancers are similar to those for employees. Whenever the services are performed in the territory of Poland, the income derived from them should be taxed in Poland regardless of the residence of the principal and the place of remuneration payment.
The independent services are usually governed by the Article 14 of the tax treaty. Although it has been deleted from the OECD Model Convention, it still remains in most tax treaties. There are two important differences from the labour contract: Firstly, the independent personal services are usually defined specifically in this provision and include scientific, literary, artistic, educational or teaching activities as well as independent activities of physicians, lawyers, engineers, architects, dentists and accountants. Secondly, the income is taxed according to the residency of the services provider, unless he/she has a fixed base regularly available to her/him in the other country for the purpose of performing her/his activities. The term “fixed base” intentionally corresponds to the term “fixed place of business” used in Article 5 of the Model Convention, and there should be no significant difference in interpretation. In the Polish version of the treaty, this is further emphasized by the use of the same term in both articles.
5. In what scenarios can a remote service provider inadvertently establish a permanent establishment for a foreign company in the country?
In the case of a foreign entrepreneur carrying out business in Poland who is not a tax resident of Poland, the business income should be taxed according to her/his tax residency, unless there is a permanent establishment in Poland. The definition of permanent establishment can be found both in Polish Income Tax law and in tax treaties. For purposes of remote work, two important aspects of the definition should be considered: a fixed place of business and the concept of a dependent agent.
Fixed Place of business: In order to fulfil the definition, the company must have material means and, if necessary, personnel that are appropriate to carry out its activity in the other state of installation. The place of business must be permanent in time. There is no specific time limit, but often the time limit provided for in Article 5.3 of the OCDE Model Convention, which is 6 months, is taken as a reference. The place of business must be geographically fixed and established in a particular location. The company must have control over the place of business. In principle, and without prejudice to specific cases, the home office can be considered as an establishment where there is an office and material means suitable for the employee to provide her/his services.
However, as mentioned above, since the Russian invasion in Ukraine, the interpretation of the fixed place of business has become more relaxed. For example, in one of its decisions, the Administrative Court stated that a hotel room or a temporarily rented apartment cannot be considered a fixed place of business, especially if the entrepreneur’s stay in Poland is temporary, forced by circumstances beyond the entrepreneur’s control, and he/she intends to return to the original country of residence.
A dependent agent exists when there is a contractual relationship between the agent and the corporation so that the agent has the authority to contract on behalf of the corporation and regularly exercises that authority. The agent is legally bound to follow the instructions of the company. The agent acts for a single company or a small number of companies.
The existence of a permanent establishment can have two different consequences: Either an independent entrepreneur providing B2B services remotely will be considered to have his own permanent establishment in the country where the services are provided, or a remote service provider will constitute the permanent establishment of the company to which the services are provided. In the former case, the entrepreneur’s income is taxed in the country where the service is provided. In the latter case, the situation is more complicated, as the company receiving the services must allocate part of its income to the place of establishment and tax it in the country where the services are provided.
For further information, contact:
Marcin Gorazda, Managing Partner
Gorazda, Świstuń, Wątroba i Partnerzy adwokaci i radcowie prawni, Kraków
e:lp.moc.wsg@adzarog.nicram
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