In an era of growing remote work popularity, more and more people are embarking on so-called workations, performing their duties from abroad, combining work with leisure and sightseeing. Providing work in such a format requires caution, as it may potentially result in tax/registration obligations in a foreign country for both the employee and the employer.
Similarly, caution is required when an entrepreneur, providing services under a B2B formula, goes on a workation. The advancing digitization and the nature of the services provided (e.g., specialized consulting) mean that individuals registered in the CEIDG do not need to stay in the country to provide services to a Polish contractor.
Traveling abroad seems like an attractive option - however, it is essential to remember that such a decision may carry specific tax consequences.
Remote work abroad and tax residency
Individuals who decide to conduct their sole proprietorship remotely from the territory of another country must consider issues related to tax residency.
In the case of staying abroad, under the local regulations of another country, one can be recognized as a tax resident of that country. However, this situation does not exclude the possibility that the conditions for being recognized as a resident in Poland will still be met - staying in the territory of Poland for more than 183 days in a year or having a center of vital interests in Poland. In such a case, proper determination of residency will require an analysis of the relevant double taxation avoidance agreement.
A Polish tax resident, in principle, taxes all their income in Poland, including income from business activities. Similarly, a Polish non-resident taxpayer is taxed in Poland only on income sources located in Poland. Therefore, as long as the status of a Polish resident is not lost, income from business activities should be taxed in Poland.
However, it is important to remember that double taxation avoidance agreements contain provisions regarding the creation of a so-called "foreign permanent establishment." The profits of enterprises, which can be classified as achieved by a foreign permanent establishment, are subject to taxation in the country where the establishment is located.
Remote work abroad and the risk of creating a foreign permanent establishment
Remote work abroad carries the risk of creating a so-called "foreign permanent establishment," which may lead to the necessity of accounting for business income outside Poland. The tax authorities of a given country may interpret the remote provision of services using a laptop at the place of temporary stay as grounds for recognizing that an establishment has been created.
According to the OECD Model Convention, for an establishment to be created in the territory of another country, the following are necessary:
- The existence of a place of business (i.e., a place where business activities are conducted);
- A permanent character of the place (it must be established at a specific location with a certain degree of permanence, i.e., it is not of a purely temporary nature);
- Conducting the business activities of the enterprise through this permanent place (unless the activity carried out in the facility is limited to preparatory or auxiliary activities).
Activities of an auxiliary or preparatory nature are activities that do not have a direct impact on the profit achieved by the enterprise and do not justify attributing it to the entrepreneur's permanent place of business in the country where they are performed.
In the case of a sole proprietorship, it may be considered that an establishment (and thus a permanent establishment) exists in every place where the entrepreneur currently resides.
The approach of Polish tax authorities indicates that an establishment in the territory of Poland does not arise if the activity was conducted in Poland through a place for less than six months. However, this practice may differ in other countries.
PwC Commentary
A short-term workation, during which the entrepreneur provides services remotely, should not result in the creation of an establishment abroad. The situation becomes more complicated in the case of longer stays, e.g., over 183 days. In practice, with long-term stays and work, even from a private apartment, a foreign establishment may be created, which will result in additional tax burdens abroad. Therefore, entrepreneurs planning a trip should analyze each case in detail, considering not only the provisions of double taxation avoidance agreements but also the practice of foreign tax authorities.
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