Judgment of the Supreme Administrative Court - permanent establishment in Poland in connection with support services provided by a related company

Polski

The dispute concerned the question whether the activity conducted by the agent under the agency agreement constitutes permanent establishment in Poland within the meaning of the double taxation agreement concluded between Poland and Germany (“PL-DE DTT”).

The facts

The case concerned an individual tax ruling issued for a German company engaged in the production and sale of polymers as well as distribution activities for standard products (the “Company”).

Within the scope of distribution services (including the organization of product transport, order management, invoicing, customer relationship management or paying subcontractors), the Company is supported by local agents, in the case of Poland - I. sp. z o.o, ("Agent"). The Agent's services include primarily:

1) acting as a contact point for local customers,

2) performing marketing activities / providing information,

3) presenting products to clients,

4) providing clients with information on prices,

5) monitoring trends and market conditions,

6) forwarding inquiries and orders received from local customers,

7) maintaining an appropriate relationship with the client (collectively: "Services").

The agent is not authorized to negotiate terms or conclude any contracts on behalf of or for the benefit of the Company.

The Company took the position that the Agent's services do not lead to the Company's permanent establishment in Poland

The position of the Director of the National Tax Information

The Polish tax authority (“the PTA”) considered the Company's position to be incorrect. By referring to point 84 of the OECD Commentary (“the Commentary”) to Art. 5 sec. 5 in the latest version of OECD Model Tax Convention on Income and Capital (“the Convention”) ( version from 2017), PTA states that for sec. 5 to be applicable, all of the following conditions must be met:

• a  person acts in a Contracting State on behalf of the enterprise;
• in doing so, that person habitually concludes contracts, or habitually plays the principal role leading to the conclusion of contracts that are routinely concluded without material modification by the enterprise, and
• these contracts are either in the name of the enterprise or for the transfer of the ownership of, or for the granting of the right to use, property owned by that enterprise or that the enterprise has the right to use, or for the provision of services by that enterprise.

The position of the Provincial Administrative Court in Warsaw

The Company appealed against the interpretation to the Provincial Administrative Court in Warsaw (“PAC”), alleging, inter alia, that the Authority’s interpretation of Art. 5 sec. 5 of the PL-DE DTT was based on points 72, 84, 88, 89, of the Commentary to the  latest version of the OECD Model Tax Convention which should apply only to double tax treaties concluded or amended after 2017, and thus do not apply to the provision of the PL-DE DTT signed in 2003.

The Provincial Administrative Court in Warsaw, in its judgment of July 25, 2019 (sign. III SA/Wa 2687/19), disagreed with the Company's position and dismissed the complaint.

In the opinion of the Court, the Company's statements:

„cannot be reconciled with point 33 and 34 of the Introduction of the abovementioned OECD Commentary according to which the (bilateral) conventions should be interpreted, as far as possible, in the spirit of the revised Commentary”.

The Court pointed out that:

„both in the previous and in the current version of the Convention, there are provisions concerning the dependent and independent Agent. In such a situation, point 4 of the Commentary to Art. 5 contains restrictions on the application of this amended Commentary to sec. 4.1 of the Model Convention, which is justified by the fact that in treaties based on the oldest version of the Convention, this paragraph simply did not exist".

As a consequence,  the court concluded that:

„the activity of the Agent's employees constitutes a permanent establishment for  the Company in the territory of Poland [...] because it cannot be assumed, in the light of the facts described in the application, that the services provided by the Agent are of a preparatory or auxiliary nature”,

„the agent's marketing activities pursue the same goals as the core business of the German company and constitute an important part of the German company's business as a manufacturer and seller of specialized products and a distributor of standard products”.

The position of the Supreme Administrative Court

The Company filed a cassation complaint to the Supreme Administrative Court (“SAC”), which considered the allegations unfounded and consequently dismissed the cassation complaint.

In the oral justification, the SAC pointed out that both the justification and the arguments contained in the PAC judgment deserve to be taken into account, emphasizing that it cannot be assumed that the services provided by the Agent are of a preparatory or auxiliary nature, because the Agent's marketing activities are aimed at achieving identical goals with the core business of the Company.

PwC commentary

It should be noted that the PTA in individual rulings present an unfavorable position for taxpayers by refusing to recognize sales support activities as ancillary activities. In this regard, the PTA are increasingly willing to refer to the amended version of to the Commentary and the Convention, by applying the dynamic approach to the interpretation of tax treaties concluded before the introduction of the changes in the said Convention.

It should be noted that  in accordance with point 35 of the Introduction to the Commentary the dynamic interpretation of the provisions of treaties in the event of substantive changes made in the Convention followed by changes in the Commentary should not apply. Additionally, point 4 of the Commentary to Art. 5 of the OECD Model Convention, clearly states that the changes in Art. 5 sec. 5 and 6 (concerning the agent) are prospective only and should be interpreted only in relation to double tax treaties based on the revised OECD Convention of 2017.

As a consequence, the interpretation adopted in the analyzed case by the Director and the courts of both instances, in our opinion, has no legal grounds. In particular, it is inconsistent with the current wording of Art. 5 sec. 4 and 5 of the PL-DE DTT.

Moreover, Poland has not implemented changes under Art. 12 of the MLI Multilateral Convention to Art. 5 of the double tax treaties concluded by Poland, therefore the wording of the PL-DE DTT concluded in 2003 remains valid and unchanged.

In our opinion, the correct interpretation of Art. 5 sec. 5 of the PL-DE DTT was presented i.a. in the judgment of the Supreme Administrative Court, II FSK 1340/19 of February 15, 2022, indicating, among others, that a German company cannot be considered having a permanent establishment in Poland if the person in Poland who represents the German company acts as an independent agent and does not conclude contracts on behalf of German entity.

The above unfavorable verdict of the Provincial Administrative Court and the Supreme Administrative Court, as well as the analysis of tax rulings issued in recent years, indicate that the risk of a permanent establishment in Poland is growing in situations where Polish subsidiaries in provide various support services to foreign enterprises.