If you’re planning to set up a business in the UK, one of the key issues you’re likely to be concerned about is taxation. After all, the main centre of your business will be in Poland, but some of your profits will be earned in the UK. In such a situation, how will income from UK activities be taxed?
When Does a Polish Entrepreneur Pay Taxes in Poland on Income Earned in the UK?
The issue of doing business in the UK and the associated taxes is detailed in the Double Taxation Avoidance Agreement.
Under its provisions, the profits of a Polish company are taxed in Poland unless the business is carried on in the UK through a 'permanent establishment’ located there. In this case, the profits of the business are taxed in the UK. This applies only to the income generated by the permanent establishment.
This means that if you run a business in Poland and earn income in the UK without having a permanent establishment there, you will only pay tax in your home country. However, if you do have a permanent establishment in the UK, part of the tax (on the profits made by the establishment) will be paid in the UK.
Permanent establishment in the United Kingdom and taxation of income from trade or business in the United Kingdom
As a Polish entrepreneur, you will often operate in the UK through a permanent establishment. As this involves an obligation to pay tax in the UK, it’s important to clarify what is meant by a 'permanent establishment’.
A 'permanent establishment’ is a fixed place of business such as Headquarters, branch, office, factory, workshop, mine, oil or gas well, quarry or other place where natural resources are extracted.
For construction sites, building works, or installations, a permanent establishment only exists if the work lasts longer than 12 months.
However, the following do not constitute a permanent establishment:
- Facilities used to store, display or deliver goods,
- Maintaining stocks of goods for processing by another business,
- Fixed places maintained solely for the purpose of purchasing goods or gathering information for the business,
- Maintaining a fixed place of business exclusively for preparatory or ancillary activities for the business.
When Might You Need to Register for Tax Purposes in the UK?
Despite the above rules, in some cases UK regulations require companies to register for tax purposes in the UK, even if the taxation of income earned in the UK is handled in Poland.
For example, in the construction sector, due to the Construction Industry Scheme (CIS) regulations, a Polish entrepreneur must apply for CIS status.
Registration for CIS is simpler for companies. However, sole traders operating in Poland must apply for a National Insurance Number (NIN) and register as self-employed (known as self-employed status).
In such cases, the contractor (client) deducts 30% tax from the Polish entrepreneur (if he does not have a National Insurance Number) or 20% (if he does have a NIN).
The Polish entrepreneur (in the case of a sole trader) must then file a UK Self Assessment Tax Return and claim a refund of the tax paid in the UK.
