Limited liability company or branch – how to choose the form of activity for a foreign entrepreneur in Poland?

Branch vs. Limited Liability Company – Legal Form and Liability

A foreign entrepreneur’s branch and a limited liability company represent two entirely different legal forms of conducting business in Poland. In the case of a branch, it’s even difficult to speak strictly about a legal form, as it constitutes a separate and organizationally autonomous part of the business conducted by a foreign entrepreneur outside his statutory seat. A branch is characterized solely by its organizational separation and does not possess its own legal personality, and consequently, the capacity to perform legal acts, acting only within the legal framework set for the parent enterprise. When incurring liabilities within the branch’s operation, the obligated entity becomes the foreign entrepreneur himself, similarly, receivables arising in connection with the operation of the branch belong exclusively to the foreign entrepreneur. Although one can find claims on the internet that the consequence of the branch’s lack of legal personality is the absence of liability for its activities, this is not true. The foreign entrepreneur is liable for the debts of the branch, and members of the board or another managing body of the company can be held accountable for tax settlements.

In the verdict of case I FSK 1665/15, the Supreme Administrative Court ruled that Polish tax authorities are entitled to decree on the tax liability of the directors of a foreign company for tax arrears in Poland based on the provision of Article 116a in conjunction with Article 116 of the Tax Ordinance.

Undoubtedly, however, the issue of liability seems to be somewhat blurred in the case of a branch.

A limited liability company is a separate legal entity, which has its own legal personality and the capacity to perform legal acts. The shareholders of such a company are not liable for its obligations as a rule, and the company itself is responsible for all debts with all its assets, and additionally, if the execution from the company’s assets is ineffective, the responsibility with all their assets burdens the members of the company’s board.

Scope of Operation of a Branch and a Limited Liability Company

A foreign entrepreneur can conduct business in Poland only within the scope of activities specified by laws and statutory documents applicable to the foreign entrepreneur. He cannot undertake activities beyond the contractual scope of the enterprise’s activities from abroad. A limited liability company also has its scope of activities specified in the company agreement, however, deviating from this scope of activities in the current legal state is merely a formal breach for which the board may be held responsible. This does not invalidate the legal acts of the company.

Representation

A limited liability company is represented by its board, whereas a branch of a foreign entrepreneur does not have its own representation, but the entrepreneur himself is represented, in the case of, for example, a foreign company – also by its organs. The regulations require the appointment of a proxy in Poland, who is supposed to perform managerial functions by definition.

Finance and Taxes

From a tax perspective, a branch of a foreign entrepreneur fundamentally does not differ from a limited liability company.

Both entities are obliged to pay income tax on incomes earned on the territory of Poland. Depending on the type of entity, this may be PIT (in the case of individuals or foreign companies characterized by tax transparency) or CIT. Both the company and the branch are VAT taxpayers. For a branch of a foreign entrepreneur, separate accounting is maintained, but since the branch does not possess its own capital, its finances are recorded in the annual financial report of the foreign entrepreneur.

A foreign entrepreneur has full freedom to decide on the financial condition of the branch and the regulations protecting the safety of economic trade do not apply to the branch, such as the obligation to announce the bankruptcy of a limited liability company or the obligation to make a decision about its further activity in case of incurring significant losses. Therefore, the branch can incur losses, and the foreign company is not obliged to cover them in any formalized manner or aim for the branch’s bankruptcy. However, it should be mentioned that these losses may affect the financial condition and obligations in the home country of the foreign entrepreneur.

Practical Difficulties

In practice, conducting business through branches of foreign enterprises is under-regulated. This leads to various legal controversies, for example, regarding the use by the Polish branch of the NIP (tax identification number) assigned to the foreign entrepreneur. Courts and tax authorities still dispute how this should look and whether obtaining a NIP number for such a branch is necessary at all. Deciding on a branch should also take into account that entrepreneurs operating in Poland may have much greater trust in a Polish law limited liability company than in a branch, for example, of a foreign company, especially when it comes to countries known for a high level of anonymity and protection of shareholders and management from third-party claims. Running a branch also requires appropriate accounting organization in the foreign company.

How to choose the right form of business activity?

Limited liability company or branch? There is no straightforward answer to such a question because everything depends on the individual situation, business goals, and the way of operation of the foreign entrepreneur. When making the choice, whether to establish a branch of a Polish enterprise or a new subsidiary company, one should analyze the advantages and disadvantages of the company and the branch.