Under EU law on the freedom to provide services, Polish entrepreneurs take advantage of the possibility to transfer the seat of their company to another country as well as to internationalise. The German market is often the direction of choice. The specifics of doing business in Germany may give rise to doubts resulting from unfamiliarity with the legal and tax regulations to which companies operating across our western border are subject.
In our article, you will find out not only how Polish companies operate in Germany, but also when an entrepreneur becomes a German tax resident and what conditions he or she should fulfil to be able to pay social security contributions in Poland.
Polish company in Germany or another EU member state.
Let us start by giving an overview of the characteristics of freedom of establishment within the Union, it can take one of two forms, the important difference here being their organisation.
The first of these is:
- freedom of establishment, i.e. to operate independently, permanently and across borders in the EU Member State of one’s choice,
It allows an entrepreneur to set up a business outside his or her own country, under the conditions laid down by the legislation of another Member State for its citizens, and therefore gives freedom to choose a location throughout the European Union, thus gaining new prospects for operation and growth.
While the second is:
- freedom to provide services, which is the temporary provision of services to entities in another EU Member State.
It gives an entrepreneur the possibility to temporarily provide services to an entity from another Member State, in a situation of permanent establishment in his/her own country.
If a service activity in one Member State is temporary, it will be protected under the free movement of services. If, on the other hand, it is permanent and organised, it will be protected under the freedom of establishment.
When does an entrepreneur cease to be a Polish tax resident?
An entrepreneur who operates in Germany will not in every case be obliged to pay taxes in this country. This obligation will arise for those who are permanently resident* in Germany or have resided in Germany for more than 6 months continuously (*permanent residence means in practice the so-called centre of life interests, i.e. the flat or house where the taxpayer’s life centre is located, e.g. family life, main gainful activity, etc.).
Also people who do not meet the above conditions can apply for residency.
To do so, they must submit an application to the authorities. The question of the amount of foreign earnings is also relevant here. Earnings abroad (i.e. outside Germany) must not exceed a certain equivalent, which is updated annually, or the German income will account for 90 per cent of the taxpayer’s total income.
If an entrepreneur fulfils one of these conditions, he becomes a German tax resident and should pay tax in Germany. Here, it is also worth remembering that tax residency does not depend on the taxpayer’s declaration – it is determined on the basis of the factual circumstances of the business.
An entrepreneur has the possibility to remain a Polish resident, e.g. due to unfamiliarity with German regulations or a language barrier. In order for this to happen, he should not only ensure that he does not meet any of the above conditions, but also properly document his activities in case of a German tax inspection.
Company activity in Poland and Germany in light of double taxation treaties.
Double taxation treaties that Poland has concluded with all countries of the European Union and the European Economic Area (with the exception of Liechtenstein) oblige the Polish entrepreneur to fulfil tax obligations in only one country: either Poland or Germany.
When a company maintains a permanent establishment (e.g. in the form of a branch, office or workshop) in a country other than the country of tax residence, then the situation becomes more complicated. This is because the profits of the permanent establishment must be taxed in the country of its location. The concept of a ‘permanent establishment’ is understood quite broadly – it also includes a building site or construction or installation work if it lasts long enough (usually 12 months).
Social insurance of a company operating in Germany.
When it comes to the payment of social security dues, we have a similar situation as in the case of taxation – a Polish company in Germany should only pay social security dues in one Member State. An
entrepreneur can pay social security contributions in Poland if he has been operating his business for at least 2 months and intends to transfer it to Germany for no more than 24 months.
To this end, the entrepreneur should:
- collect documents confirming the operation in Poland for at least 2 months before transferring it to Germany, e.g. contracts or invoices;
- maintain an infrastructure in Poland that will enable the commencement of operations upon return;
- make the foreign activity similar to the one conducted in Poland.
The cumulative fulfilment of the above conditions entitles the entrepreneur to apply to the Social Insurance Institution for a special A1 certificate – this confirms that the entrepreneur is subject to Polish insurance legislation.
Company in Poland or in Germany – where is it more advantageous to do business?
In conclusion, in order to obtain an answer to the question of whether the transfer of business activity to Germany is advantageous for the Polish entrepreneur, it is not possible to give an unequivocal , universal answer. Each taxpayer’s situation is different, and it also depends largely on the type of business and the expectations of the entrepreneur.
Certainly, the tax burden in Germany will generally be higher than in Poland. However, due to the expansion of the German tax scale and numerous allowances, it is not excluded that German tax solutions will be more favourable for a given entity than those applied in Poland. As regards social security, the situation is similar – for some Polish companies in Germany it will be profitable to be subject to German legislation, for others to settle according to Polish regulations.
Tax settlement issues or the amount of social security contributions are not the only aspects to look at when considering the decision to relocate.
Other equally important elements include:
- the degree of familiarity with the foreign legislator,
- the favourability of the tax authorities or the specifics of the industry,
- and, above all, the attractiveness of the German market for Polish companies.