Legal Brief #2: 10 Fundamentals Of Tax And Law For Entrepreneurs

10 Fundamentals Of Law And Tax For Entrepreneurs

Written by Jan Marczynski and JWMS Law Firm team

When you decide to start your business, you must balance the effort put into formalities and the core of your business. Obviously focusing on drafting documents when you still have not verified whether there any potential clients may be wasting your effort.

At the same time, the law may have serious implications on your business idea, sometimes requiring you to adjust to it. Especially in Poland, where both local and EU regulation and, what is more, practices of the authorities, have a big influence on entrepreneurs.

#OMGKRK asked us to put together a list of 10 issues that somebody willing to start a business in Poland should remember about, from a legal point of view.

1. It’s Poland – Polish law applies

That may be a truism for anyone who has even basic understanding of how law work internationally, however all too often we’re asked by clients to try to apply regulations from e.g. US law.

There are obviously situations when it is possible to agree that a particular agreement will be subject to foreign law. International contracts usually have such clauses and any B2B contract may be subject to the regulation of foreign law.

Still, more often than not this is not a case and “law of the land (here – Poland)” applies. It applies with most administrative regulations – like digital services regulations, personal data protection (GDPR), most of the time with tax law but also in case of contracts. Polish law cannot be effectively excluded in particular when one of the parties is protected by law – especially with employment contracts and when dealing with consumers.

For entrepreneurs from EU it should not be that difficult as more and more of regulations of member-states are harmonized (so they are similar) or even directly set on EU level. From those from other countries, some things may not be that natural – in particular, many limitations to freedom of contract made to protect those who are considered as “weaker” parties (consumers, employees, artists etc.).

Tax law applies according to double tax treaties in case of income taxes, according to EU rules in case of VAT, but there are some other taxes that you may be obligated to pay.

Polish Investment & Trade Agency has a website with a more detailed summary of Polish law: https://www.paih.gov.pl/polish_law

Polish copyright law is published here (although it may be not updated version): http://www.copyright.gov.pl/media/download_gallery/Act%20on%20Copyright%20and%20Related%20Rights.pdf

2. Check the taxes – you may have to prove that you are not a fraud

Tax law is considered as one of the most common hindrances being a pain in the back of Polish entrepreneurs. While the rates are not that bad, the law may not always be logical. So, pretty much the first thing to do when you set up your business is to find a good accountant who will act as the first contact for tax authorities.

You must remember that having a business address is crucial for the tax authorities. Despite the fact that many current businesses have limited need for a physical address, tax authorities seem to think that without it no business can operate – for them “benchmark business” is a steel mill or a grocery store. Their care is somewhat understood as setting up of fake companies for purposes of tax frauds has been a huge problem in Poland for many years.

As a result, if you register your business in a virtual office and try to register for VAT, you will get a letter from tax authorities asking why are you registered in such a place, what is the scope of your business etc. etc. What is crucial is to get this letter and answer it quickly – there is nothing more proving that your business is fake for the tax authorities than not being able to get traditional mail at your registered address. A simple explanation of the nature of your business should be enough to convince them that you are not a fraud, however, it may depend on the person who handles your case.

Some more information about Polish taxes may be found here: https://www.paih.gov.pl/polish_law/tax_law.

3. There are different legal forms available, so choose wisely (and most probably – you’ll choose spółka z o.o.)

If you have any experience with legal systems based on German law then you will not have a problem with understanding the various types of legal forms for businesses that we have in Poland. Polish company law was obviously inspired by German law and the types of companies and partnerships are similar.

There’s not a point of delving into specifics of all the eight “standard” types of legal forms and several more obscure.

What you should note is that “individual business” or “sole proprietorship”, sometimes called “B2B” or “self-employment” is very popular, even for bigger businesses. This type of business is basically a natural person that registers themselves as a businessperson and simply does their work in that way. It gives no protection against liability, but on the other hand is simple to register, allows for cheaper bookkeeping and less formalities.

Foreigners setting up companies here mostly choose “spółka z ograniczoną odpoiedzialnością” which is equivalent to Limited liability company, or to be more specific German GmbH, Italian S.r.l., French SARL and so on (comparison to LLC may be misleading as there are various types of LLCs around the world). It may be registered even by people from outside of EU, gives some protection against liability and is still pretty flexible and rather easy to set up.

The bad side is that it costs some money to set up, requires “full bookkeeping” and registration in of the company National Court Register may take some time.

4. Registering company remotely takes time and money (so maybe it’s better to plan a trip)

While you can register Polish spółka z ograniczoną odpowiedzialnością using the Internet, it requires first getting Polish social security number (PESEL) and then either Polish “trusted signature” – ePuap or “certified electronic signature” provided by one of the authorized firms. It is not a problem if you already live in Poland and e.g. worked for somebody. It may be more problematic if you’re not in Poland and decide to set your business here, but not necessarily move to Poland.

It may be done remotely, however, it requires at least passport (or even more documents) notarized, apostilled (which in many countries can be done only in the capital city), delivered in hard copies to Poland and sworn translated and so on and so on.

Somebody may start the company in a “traditional” form for you as an attorney, signing articles of association as a notarial deed, but it requires notarial power of attorney delivered to Poland.

It can also be done in other ways – long story short, it is completely possible to have a company in Poland without coming here, but plan ahead as there is quite a lot of paperwork related, at least if you do it for the first time.

If you want to give the Internet registration a try the link is here: https://ekrs.ms.gov.pl/

To get ePuap signature you must register here: https://epuap.gov.pl/

Unfortunately, both of those portals are only in Polish.

5. Consumer protection law

A consumer is a natural person that enters into an agreement with no relation to their business or professional activity. As in other EU countries, in Poland consumers are protected by law.

When you deal with consumers:

– you cannot use abusive clauses in any contract if the template of the contract (which includes terms and condition in e-commerce) was presented by you,

– you must provide them with specific information required by law, which is more extensive if the agreement is concluded remotely (e.g. accepting terms and conditions of SaaS platform) or even simply outside of the premises of your business.

Abusive clause is generally defined as “clause which has not been negotiated individually with consumer and it shapes their rights and obligations in a way that is contrary to good customs and grossly violates consumer’s interests”.

There is a lists of clauses that are considered as abusive – one of them in the Civil code, and another held by Polish Competition and Consumer Protection Authority.

While it is not a simple matter, it is important to know that any clause including waiver of any rights that the consumer has according to the law will be most probably abusive. So with terms and conditions addressed to consumers the good rule is “less is more”. All those “waivers of any rights”, “acceptance of all risks” and “acknowledgments of no liabilities” you know from non-EU terms? Those can actually do more harm than good.

The abusive clause is not only null and void, but using it is punishable by an administrative penalty up to 10% of the company’s revenue (in some cases – up to EUR 10,000.00).

Polish Consumer Protection Authority publishes a list of the clauses that have been considered as “abusive” – https://www.uokik.gov.pl/rejestr_klauzul_niedozwolonych2.php (again, this site is only in Polish).

6. GDPR

While a lot has been said and written about GDPR, the main thing is that personal data protection is important in the EU. You must check whether your business model includes processing of personal data, and if you think that it does not – check again.

Obviously, it is crucial for businesses that transfer personal data between different entities (e.g. HR companies, insurance agencies, event organizers) or process sensitive data (like medical institutions), however just storing names of users is a type of processing of data, so GDPR applies to most of the e-commerce platforms.

Being compliant with GDPR regulations maybe not the easiest (and even cheapest) thing to do, however, the penalties are high, so it’s better to deal with it from the beginning that to suffer consequences later.

And, what is worth noting, “dealing with it” does not mean just having procedure made on the other side of the world hidden somewhere on a server or using some ready-made documents. It means actual implementation of proper procedures.

The decision of the President of Personal data Protection Office are published on the Office’s website: https://uodo.gov.pl/pl/129.

7. You pay the tax even if the clients does not pay

The general rule about VAT and income tax is that you have to pay the tax when you issue the invoice. And the law states that you issue the invoice not when you get the payment, but when you perform the service or when you deliver the goods.

There are some exceptions, however, this applies to most of the cases. As a result, you may have to pay both income tax and VAT, even though you were not paid yourself. There are ways to get the paid taxes back, however it is not always that easy. As a result, there is a risk that you will not only waste your time and resources when dealing with a dishonest client but also will have to pay to the government the tax from revenue that you actually never made.

The basic way to deal with it is getting at least partial advance payment. You should be careful with any “magic legal tricks” that would help you with this, like setting the moment when the service is declared as “performed” – most of the term have been tried and have been proven not to really work.

8. Keep your registration data updated and if you leave – remember to check if you actually left

If you set up a company or partnership you register it in National Court Register (Krajowy Rejestr Sądowy – KRS). Data there includes the address of the company which is considered as a valid correspondence address (any mail delivered there, at least by the authorities, may be considered as validly delivered even if you do not actually receive it).

Many entrepreneurs got into serious problem after failing to update the address of their businesses. Sometimes they forget, sometimes they want to avoid paying the court fee, which is currently PLN 350 for updating the data in the KRS. It is a great way to save PLN 350 and then be obligated to pay PLN 18,000 (actual case we got – fine for failure to file financial statements), PLN 30,000 (actual case we got – claims made by previous partner delivered to the registered address), PLN 80,000 (actual case we got – late social security payments, that were not even supposed by the particular partnership) or PLN 650,000 (actual case we got – VAT that the management was later obligated to pay personally as the company was insolvent).

And if you decide to severe your ties with the company, remember to check whether it has been done properly (resignation from the management board of a company may be more complicated than you think) and if registry court dealing with KRS registration has accepted it.

Link for free of charge official database of Polish National Court Register, where you can find data of all companies registered in Poland: https://ekrs.ms.gov.pl/web/wyszukiwarka-krs/strona-glowna/index.html

9. Transfer of copyrights

Polish law has special requirements regarding the transfer of copyright. First of all, as other European countries, we have:

• “economic copyrights” (or “monetary copyrights”) – that are fully transferable,
• “moral copyrights” – that cannot be transferred,
• some other related rights that the author has.

We do not have a popular “work for hire” clause that would make the ordering party safe from any claims by the author. If work protected by copyrights is created by an employee (working based on employment contract) as part of employment, in general, the copyrights are either transferred or belong to the employer. However, this does not apply to people working based on B2B contracts or other non-employment contract (freelance). What is more, even in the case of employment, there are controversies regarding moral copyrights and derivative copyrights (right to modify the copyrighted work).

Transfer of copyrights requires written form – and written means either signed by hand or with a certified electronic signature. No other signing software, or e-mail, or anything else will work. The agreement has not only be signed, but also must include specific provisions to safeguard to person that acquires the copyrights.

Issue of moral copyrights may also be stipulated in an agreement – still in must be explicitly described in it if you want to be protected against author’s claims.

Again, making any shortcuts about this issue makes you vulnerable, as author’s rights are strongly protected by Polish law.

10. Employment

There are three main types of contracts used to hire people in Poland:

– umowa o pracę – employment contract,

– umowa o świadczenie usług (often called umowa zlecenie) – services contract,

– umowa o dzieło – specific work contract (this translation is one of many others – we’ll use it as it present the essence of this contract quite well.

An employment contract is regulated by labor law, so employee has many guarantees and is protected by law. There are rules about the termination of the contracts, limitations of liability, rules about working hours, obligatory health examinations and so on. At the same time, this contract obligates the employee to loyalty towards the employer. It must be used if work is done under direct supervision, in a way dictated by the employer, in particular in specific time and place (although this is not necessary for contract to be considered employment). It is subject to minimum wage regulations and salary is subject to social insurance payments.

Services contract may be used when the cooperation is continuous, but the service provider has much more freedom, in particular in relation to when and where the services would be provided and how they would be provided. It is subject to minimum hourly wage rules and salary is subject to social security, however with some exclusions, e.g. for students. Other issues can be stipulated much more freely (in particular – termination of the agreement).

A specific work contract may be used when you hire somebody to make a specific task that has some material result and the cooperation is not based on the fact that this person is available most of the time and provides some continuous service. Remuneration for umowa o dzieło is not subject o minimum wage regulations and no social security contributions have to paid – just income tax.

Crucial thing is – choice of the type of contract is not simply done by naming it somehow or even drafting it so on paper it seems to be e.g. umowa o dzieło. Again, no “magic legal tricks” are good. If you hire office manager and call agreement with him or her “umowa o dzieło” because once a day they have to create a material report summarising their day it will not survive any audit or court case.

And again, labour law cannot be simply bypassed by applying foreign regulations – Polish law will still apply and Polish court will accept case filed by employee, no matter what you put in the agreement.