International settlements - how to safely develop your business abroad?
From this article you will learn, among other things:
- When do services become cross-border?
- What are intragroup settlements?
- What should you pay attention to when determining tax residence and foreign permanent establishment?
- What solutions facilitate cooperation with a branch abroad?
International settlements
When do services become cross-border?
Cross-border services are services provided to recipients in the EU or third countries. This may include, for example, traveling to a client's home to perform a service, advising on a foreign transaction, using a service abroad, or situations where the service itself "travels."
In the European Union, the premise of temporary nature is key, but in addition to the length of the period of service provision, its regularity, periodicity or continuity should also be taken into account.
In its judgment in Case C-215/01 Schnitzer, the CJEU indicated that the duration, frequency, and regularity of services should be examined to assess whether an obligation to register in another country arises. It ruled that a one-off contract for plastering services for a large construction project in another Member State, lasting several years, may also be subject to the freedom to provide services. You can read other similar CJEU rulings here.
International settlements
Settlements within the capital group and tax structuring
Settlements within a capital group (so-called intragroup transactions) are financial and operational processes taking place between related entities, i.e. companies belonging to the same ownership structure.
What are intra-group settlements?
These are all flows of value between a parent company and its subsidiaries, or between sister companies. The most common forms include:
- Sales of goods and services, e.g. one company produces components which it sells to another company in the group for final assembly;
- Support services (back-office), centralization of functions such as accounting, HR, IT and marketing in one entity (Shared Service Centre), which issues invoices to the others;
- Debt financing, intra-group loans, granting sureties or credit guarantees;
- Intangible assets, license fees for the use of a common trademark, patents or technology;
- Cash pooling, a liquidity management system in which the financial surpluses of one company cover the shortfalls of another.
Although from an economic perspective, a group may be viewed as a single entity, from a legal and tax perspective each company is a separate entity. This creates a number of specific challenges.
International tax structuring within capital groups allows for significantly better financial results than independent settlement of the involved entities. However, this requires expertise in, among other things, double taxation treaties. Implementing transfer pricing principles is crucial, as it prevents allegations of unfair practices and ensures balance in cash flows between related entities.
Main problems and risks
Correctly arranging these relationships is difficult due to the conflicting interests of the tax authorities and the internal business logic of the group.
- Transfer Pricing
- Double taxation
- Conflict of interest and minority shareholders
- Liquidity management and regulations
This is a key risk area. Tax authorities require that the terms of transactions between related entities be determined in accordance with the arm's length principle.
Challenges include establishing a "market price" for unique services (e.g., specific know-how). If the tax authority determines that the price was set at an inappropriate level, it may reassess the income and impose significant penalties.
In addition, entities in the group must prepare extensive documentation (Local File, Master File) that justifies the marketability of the prices applied.
Collecting huge amounts of comparative data (so-called benchmarking) and constantly monitoring changes in national and international regulations can also be a challenge.
It is possible that tax authorities in one country will question an expense incurred by a company, deeming it ineligible for tax purposes, even though authorities in another country have already taxed the same income for the recipient. Resolving such disputes can take years, so it is important to ensure accurate settlements on an ongoing basis to avoid potential disputes.
In companies that are not 100% owned by the group, the management must look after the interests of the specific entity, not just the group as a whole.
Risk. Acting to the benefit of the parent company at the expense of the subsidiary's financial results may lead to liability for damages to minority shareholders.
Transferring funds between companies can be interpreted as a hidden dividend or illegal financing if it is not supported by appropriate contracts and market interest rates.
Read also: Accounting obligations in Poland
International settlements
Tax residency - pitfalls and opportunities
Determining tax residence can be complicated, even for judges. According to the regulations, tax residence, also known as tax domicile, is a statutorily defined permanent place of performance of tax obligations. The key purpose of this institution is to identify a specific entity and establish the limits of its tax obligations within a given country.
To correctly determine (or change) residency, the place of residence is taken into account, and in case of doubt, also the so-called centre of vital interests, i.e., the place with which the person has the strongest personal ties. It should not be forgotten that tax residents in Poland settle all their income (domestic and foreign) here. An error in this respect can easily lead to a dispute with the tax authorities.
Read also: Tax residency – important explanations from the Ministry of Finance
International settlements
Transactions abroad – accounting and foreign establishment
If the foreign business is permanent (e.g., an office, branch, or construction site), the entrepreneur can establish a foreign permanent establishment. In this case, the permanent establishment's profits are settled in the country where it is located. A permanent establishment can also be established by individuals employed by the foreign entrepreneur in the country of operation or by individuals providing services to the entrepreneur, provided such individuals are authorized to conclude contracts on the entrepreneur's behalf.
See also: Tax representation and VAT settlement in Poland
How to settle transactions with foreign countries? Import and export of services
When exporting services to an EU contractor, the reverse charge mechanism applies - the invoice is issued without VAT, and the buyer settles the tax themselves. The entrepreneur is also responsible for reporting the transaction in the VAT-EU summary information and the JPK_V7 file. A valid invoice must include, among other things, the EU VAT numbers of both parties and a note about the reverse charge.
See also: New JPK structures and deadlines
International settlements
Risk management and transactions with a foreign branch
Accounting for transactions between headquarters and branches requires consideration of differences in local regulations. Currency exchange rate risk should be minimized through currency options or futures contracts to prevent fluctuations in the euro or zloty exchange rate from distorting financial results. The best foundation for this is International Accounting Standards (IFRS).
See also: Accounting for IT companies
Ensure the security of your international finances. Cross-border settlements do not have to be stressful when you have an experienced partner by your side. Contact us today to learn how we can optimize your international settlements and support your growth in international markets.
