How to avoid double taxation of a foreign warehouse?
Risk of double taxation on sales of goods through a foreign warehouse
Sales of goods through a foreign facility may be subject to income tax in the country where the facility is located.
Manufacturers or distributors of goods are subject to CIT in their countries of residence. If, though, the traded goods are kept in a warehouse located in another country, a portion of sales income may be subject to taxation in that country, both if sold to clients from the seller's country of residence and to foreign ones. For example, if a Polish furniture exporter sells its products through a distribution centre in Czech Republic, income from sales may be taxed both in Poland and in the Czech Republic.
In order to avoid double taxation of the same income, the interested states conclude double taxation avoidance agreements (DTAA) determining which income classes shall be taxed in the country of residence and which in the country of business operation. Most agreements concluded by Poland provide for profit generated by domestic businesses from operations carried out abroad through a permanent establishment (such as a leased warehouse) to be taxed in the country of operation. Specific agreements state either that the income in question shall be CIT-exempted in Poland or that the Polish taxpayer can deduct the foreign tax from its tax liabilities payable in Poland.
DTAA include exemptions from the principle that income is taxed in the same country where the permanent establishment operates. If a manufacturer uses such an establishment only to carry out auxiliary operations as opposite to the core business, no foreign tax obligation occurs.
Position of Polish tax authorities
Please note that many distributors residing in other countries supply goods to Polish clients through warehouses located in Poland. In such cases, foreign businesses do not have their own warehouses and do not have permanent employees in Poland. Often, such warehouses are run by third parties in the form of consignment warehouses and goods are transported to clients by third-party forwarding firms.
Pursuant to a unified ruling approach adopted by tax authorities, such a manner of operating in Poland does not result in tax obligation on the side of foreign distributors (see: tax ruling issued by Director of Tax Chamber in Warsaw on 2 June 2016 – file no. IPPB5/4510-397/16-2/RS; on 4 April 2016 - file no. IPPB5/4510-55/16-8/RS, and on 1 March 2016 - file no. IPPB5/4510-1184/15-5/RS).
OECD proposes an alternative approach.
Please note, though, that in a recent publication on counteracting BEPS (Base Erosion and Profit Shifting) OECD has changed its approach to the place of taxation regarding income from distribution activities. The proposed solutions provide that businesses using consignment warehouses in other countries should pay taxes in these countries.
Although the recommended BEPS version does not constitute a binding solution, it may contribute to changes in the recent favourable approach of tax authorities. Thus, businesses undertaking operations based on a consignment or foreign warehouse should consider the above risk.