Katarzyna Judkowiak

Tax adviser (Poland)
Associate Partner
Phone: + 48 22 244 00 28

There are no grounds to deny a foreign company the right to deduct VAT on goods and services purchased in Poland in connection with the services performed for it by its Polish branch office. This is in accordance with the statement of the Supreme Administrative Court (SAC) in its judgement of 12 February 2014 (file no. I FSK 353/13).

The case in question involved a British company doing business in Poland via a branch office which performed services (chemical sample testing) for both the head office and end customers directly. To this end, it used to purchase some goods and services in Poland.

To confirm that it was indeed entitled to deduct the input tax on purchases of the goods and services for its branch office the company applied for an advance tax ruling.

The company argued that it had the right to deduct the expenses regardless of whether a service was sold through the branch office or by the head office, that is, no matter if the transaction and the tax were accounted for in Poland or not. At the end of the day, the Polish input tax will be connected with the taxable transactions (be it in Poland or abroad). The company claimed that it was entitled to do so under Article 86(8)(1) VAT Act, and a contrary approach would betray the fundamental principle of VAT neutrality. 

The above provision makes the VAT deductibility dependent on the following conditions:

  • a taxpayer supplies the goods or services outside Poland;
  • the amounts would be deductible if the supplies were made in Poland;
  • a taxpayer has documents which demonstrate the link between the deducted VAT and the supplies.

The Director of Tax Chamber in Katowice disagreed with the company and stated that the services performed by the branch office for the parent company were intragroup transactions and as such were non-taxable and, therefore, no right to deduct VAT existed. According to the tax authority, a taxpayer who makes in Poland only purchases and no taxable transactions (only non-taxable intragroup transactions) has no right to deduct VAT even if the purchases are connected with a taxable business activity (of the head office) carried on outside Poland.

The Provincial Administrative Court (PAC) in Gliwice did not uphold the company's appeal against the advance ruling (judgement of 25 September 2012, file no. III SA/Gl 986/12). 

The case went all the way up to the Supreme Administrative Court (SAC) which took a different stance and stated that a branch office was entitled to reduce the output tax by the amount of input tax. According to the court, the above-mentioned regulation should be interpreted in such a way that a taxpayer who has only a branch office in Poland does have the right to deduct the Polish VAT connected with the taxable business activity conducted abroad, provided that he has the supporting documents and at the same time the branch office carries out transactions taxable in Poland. Furthermore, the court stated that intra-group transactions do not rule out the application of Article 86(1)(8) VAT Act.

The judgement allows to conclude that the above-mentioned regulation gives the right to deduct VAT not only when a sales transaction must be disclosed in a Polish tax return, but also when the Polish input VAT shows (documented) connection with the business activity performed and accounted for abroad. It is worth mentioning at this point that the SAC issued a similar judgement already on 26 February 2013 (file no. I FSK 493/12). In that judgement the court confirmed that pivotal for the application of the above-mentioned regulation was to determine whether the company would be entitled to deduct the Polish input VAT if the transactions made by the parent company abroad were made in Poland. Similar conclusions can be drawn from, among others, the judgement of 14 November 2013 issued by the PAC in Cracow (file no. I SA/Kr 1483/13, non-final judgement).

The court rulings quoted above are of great importance for foreign enterprises doing business in Poland in the form of a branch office (or any other entity not registrable with the National Court Register), and suggest emergence of a consistent, pro-Community, taxpayer-favourable case law (see also the most recent judgement of 19 March 2014 of the PAC in Cracow, file no. I SA/Kr 2054/13). Pursuant to Directive 2006/112/EC, each Member State should treat any business entity, regardless of its place of registration, its VAT registration status and the place of business, as a taxpayer. The fundamental VAT neutrality principle says that input tax should not burden the taxpayers regardless of whether or not they make purchases in the same country where they do business

Importantly, the above court judgements may be applied to situations when an entity (e.g. a branch) makes transactions for both the parent company and customers, as well as to situations when the business of that entity merely supports the parent company's transactions taxable abroad. Nevertheless, in both situations a foreign enterprise which wants to deduct Polish VAT should have documents to confirm the connection between the deductible tax and the business activity carried on and taxed abroad.

Those rulings of the administrative courts give a chance for winning a dispute with the tax authorities which have so far consistently interpreted the regulations against the taxpayers (see e.g. advance tax ruling of the Director of Tax Chamber in Bydgoszcz of 7 November 2013, file no. ITPP3/443-382/13/AT, or the advance tax ruling of the Director of Tax Chamber in Katowice of 2 December 2013, file no. IBPP4/443-422/13/PK). One success story of a dispute won with the tax authorities involves the advance tax ruling of the Director of Tax Chamber in Katowice of 14 August 2013 (file no. IBPP4/443-289/13/PH) which he was forced to change in the aftermath of the above-mentioned SAC's judgement of 26 February 2013 (sygn. akt I FSK 493/12).

It is also worth scrutinising the rules of accounting for VAT on transactions performed by a branch office or other entities maintained in Poland by foreign enterprises. We encourage you to contact us – we would be glad to offer our tax advisory in Poland. Our tax advisers working in Rödl & Partner offices in GdanskGliwice, Cracow, PoznanWarsaw and Wroclaw will also answer other tax-related questions that you may have.