The business case for investing in Poland may be known, but the legal reasons for locating and investing there are just as compelling, say Pirouzan Parvine and Karina Furga-Dąbrowska of Salans
The outlines of Poland’s business law will be familiar to Indian investors, especially those with prior exposure to the legal system of another country in the European Union (EU). Poland was part of a programme for the convergence and integration of Polish and EU legal norms before it joined the EU in 2004. As a result, Poland reformed its legal system to the extent needed to ensure that the gap in the legal environment between the two was as small as possible.
Convergence with a local flavour
It is, however, important to keep in mind Poland’s history, as it influences certain matters. These include the country’s real estate environment where in addition to standard freehold and leasehold ownership, title to land may be by way of a right of perpetual usufruct, which is typically a 99-year ground lease. The title to the land, especially in the cities, may also be exposed to restitution claims from former owners who gave it up during the years of communism.
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As it stands, several Asian companies, including some from India, have chosen to invest in Poland over other EU countries. Poland has remained resilient in the face of economic turmoil in Europe and investors are attracted by the size of its internal market, its relative success in its fight against corruption, and its ideal position as a gateway to the mature and still strong EU economies on account of its long border with Germany.
A flexible corporate framework
Poland has a civil law system. Its Civil Code and the Commercial Companies Code apply to a wide range of matters.
Many investors choose to initiate activities by setting up a limited liability company (LLC). It requires a small amount of share capital – around €1,500 (US$1,900) – and is quite easy to operate, especially with a single shareholder. It is also possible to buy a shelf company in Poland.
Other forms of companies are available and are sometimes required by law. For instance, a joint-stock company is the mandatory form for banking activities or for companies listed on the Warsaw stock exchange.
As regards governance, an LLC generally has only a management board, but it can choose to also have a supervisory board, which is mandatory in certain cases.
An Indian citizen wishing to serve on the management board of a Polish company should be aware of the rules of liability, which are fairly strict. Depending on the business activity to be carried on, foreign investors sometimes opt to outsource their management board posts to service providers.
Corporate income tax in Poland is at a flat rate of 19%. Tax optimization is possible and a company may seek and obtain a tax ruling from the tax authorities.
Employer-friendly – by Western standards
Employers in Poland can cooperate with third persons. While a classic employment contract may be for a fixed or indefinite period of time, employers can opt for a “service agreement” or for a “mandate agreement”.
This is most often done when the service may be provided with a certain degree of autonomy and the service provider bears some of the risk. The employer need not withhold tax when a service agreement is entered into.
One of the advantages for a self-employed service provider is the 19% flat-rate income tax that may be claimed. Employees pay income tax at rates that go up from 19% to 32%.
Attractions of special economic zones
Poland currently offers investors, including those from India, 14 special economic zones (SEZ). Investors who obtain a permit to operate in a SEZ are exempt from corporate income tax.
Exemptions differ among SEZs. For large investors they can be up to 30%, 40% or 50% of the eligible investment expenditure. This includes either capital expenditure incurred to develop the investment, which may only include entirely new assets in case of large investors, or employment costs for two years.
If the investment is in a SEZ, the application procedure for a SEZ permit is straightforward and can be completed within a few months.
SEZ investors may also benefit from exemptions from local real estate taxes provided by some local municipalities. This requires a prior notification. The SEZ regime is currently designed to continue until 2020, but efforts are on to extend it to at least 2026.
State aid
Apart from the SEZ exemptions, which are extremely popular with foreign investors, Poland offers other forms of state aid: long-term subsidies, support from EU funds, employment aid, restructuring aid for acquisition of existing enterprises, or various local schemes of public support.
Investors seeking state aid should keep in mind the following: the application for investment incentives should be filed before the investment is launched; compliance with EU state aid laws should be verified in advance; and investment commitments should be considered with diligence.
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Pirouzan Parvine is a partner in the corporate/M&A practice of Salans in Warsaw, where Karina Furga-Dąbrowska, is a partner and head of tax. They can be contacted at PParvine@salans.com (T: +48 22 242 57 43) and KFurga-dabrowska@salans.com (T: +48 22 242 57 63).
Salans has prepared a more detailed guide for Indian investors and will be making it available shortly to Indian companies and law firms it collaborates with.
