Category: Poland

Significant changes have been made to Polish transfer pricing regulations in recent years. New legislation, adopted in 2017, introduced a three-tiered approach to transfer pricing documentation consisting of: (1) local file, (2) master file, and (3) country-by-country reporting. Poland was one of the first countries to introduce the changes recommended by the OECD in BEPS (Action 13).

Furthermore, beginning in 2018, a limitation on intra-group services (such as advisory, market research, marketing, management and supervision, data processing, insurance, guarantees, etc.) and licences between related parties that could be treated as tax-deductible was introduced in Poland. New regulations allow taxpayers to deduct up to 5% EBITDA above an annual threshold of PLN 3 million. However, the Polish Ministry of Finance plans to raise the limit up to 10% of EBITDA in 2019. More expenses on intra-group services might be recognized as tax-deductible costs only if confirmed by the Advance Pricing Agreement negotiated with the Polish authorities.

New Draft Rules on Transfer Pricing

In August 2018, and before taxpayers even had time to get used to the new regulations, the Polish Ministry of Finance published draft rules representing revolutionary changes in the area of transfer pricing. The main goal of the draft rules is to ease the compliance burden for taxpayers and ensure greater consistency of local transfer pricing documentation regulations with OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations. However, some of the proposed regulations, such as one allowing the tax authorities to re-characterize or not recognize transactions between related parties, may pose some risk for taxpayers. 

Moreover, the new bill does not change some elements which have been problematic for taxpayers. For example, benchmarking studies are still required to contain Polish comparables (however, this requirement is expected to be changed by decrees attached to the new bill). In addition, there are no plans to extend the seven-day deadline for taxpayers to submit tax documentation after receiving the tax authorities’ request. 

Tax Authorities’ Approach to Transfer Pricing

Tax authorities have, it seems, become particularly interested in transfer pricing in recent years during their discussions with taxpayers. At the same time, they have become more open to dialogue with taxpayers and to pursuing positive initiatives in respect of transfer pricing regulations. For instance, they have created the Transfer Pricing Forum – a discussion platform between the tax administration and business.

In terms of tax audits, Polish tax authorities have increased the effectiveness of their efforts by doing more preparatory analysis in advance, using statistical tools (like the Quick Analytics TP and Orbis databases, CIT-TP declaration, and SAF-T), and implementing data mining processes before initiating formal audits. These analyses may be triggered by, for instance, a decrease in profits or low profitability, deviations from the profitability level in the industry, or low income in relation to the capital employed.

According to statistics, in 2017 the Ministry of Finance initiated over 150 audits and proceedings in the field of transfer pricing and aggressive tax optimization, involving the understatement of tax liabilities amounting to PLN 635 million and a PLN 1.3 billion tax loss reduction. Transactions of special concern for the Polish tax authorities include: (i) intangible services and licences; (ii) loans and guarantees; (iii) business restructuring; and (iv) profit allocation to permanent establishment.

To sum up, transfer pricing is becoming an increasingly important area of tax law in Poland. This trend is clearly highlighted by the fact that despite a major amendment to the transfer pricing rules in 2017, the Ministry of Finance is already preparing more significant changes for 2019. 

By Andrzej Posniak, Partner, and Bartlomiej Wajda, Counsel, CMS

This Article was originally published in Issue 5.9 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

Andrew Kozlowski is Counsel (and former Managing Partner) at CMS in Warsaw, where he specializes in energy and project finance, corporate/M&A, privatizations, and international capital markets. He has been involved in numerous infrastructure projects in Poland and across CEE and various project finance transactions in the energy and transportation sectors, from motorways, railways, and waste, to energy utilities.

CEELM: Run us through your background, and how you ended up in your current role with CMS.

A.K.: I am a graduate of the University of San Diego Schools of Business and School of Law and a member of the California Bar. Prior to moving to Poland in March 1992 I practiced law in a San Diego-based law firm focusing on cross-border M&A and real estate transactions. In 1990 and 1991 I made numerous business trips to Poland advising clients on cross-border transactions between the US and Poland. During one of my stays in Poland I was asked by the Polish Minister of Finance to move to Poland and become one of his foreign legal advisers thru a program financed by the World Bank. In that capacity I advised Ministry officials on numerous international transactions.

I joined the Warsaw office of CMS in January 1995 as its managing partner with the mission to quickly expand the office – which at that time consisted of one Polish lawyer. By the end of 1995 the office had ten Polish lawyers and a fee income of 2 million euros. In 1996 I convinced Stephen Shone and Pawel Debowski and their real estate team to join CMS. As a result, the office doubled to 20 lawyers. In 1998 I convinced Dariusz Mioduski, Andrzej Blach, and Tomasz Minkiewicz and their entire energy and infrastructure team to join us from White & Case. By the end of 1998 the Warsaw office had over 40 lawyers and was one of the largest law firms in Poland. Over the next 20 years we organically grew to over 140 lawyers in Warsaw and Poznan. In 2009 the firm asked me to become the practice group manager for the entire CEE region in addition to continuing to be the managing partner of the Polish practice. As a consequence, I virtually had no time to perform legal work, which was my true passion. In Spring 2016 I transferred all my management responsibilities to younger partners. This allowed me to focus full time on developing transactions for CMS clients resulting in new legal instructions for our partners.

CEELM: Was it always your goal to work abroad?

A.K.: It was never my goal to work and live abroad, although most of my work related to cross-border transactions. It was really my work at the Polish Ministry of Finance in 1992 which convinced me that CEE offered a tremendous opportunity to a then-young lawyer with international transactional expertise. My fluency in the Polish language was also a big factor.

CEELM: Tell us briefly about your practice, and how you built it up over the years.

A.K.: My practice currently concentrates on infrastructure finance, which is quickly spilling over to real estate development as the boundaries between the two are becoming less defined. In 2009, when I became the practice group manager for the CEE region I transferred most of my client responsibilities to younger partners, as I had to devote most of my time to managing the Warsaw office and the CEE region – which at that time totalled over 300 lawyers.

During the past two years, having relinquished all my management responsibilities, I have been concentrating on developing infrastructure and real estate development projects for CMS clients. My focus is to help clients structure transactions at a very early stage leading up to signing the term sheet. At that point my Polish colleagues take the lead in drafting documents. During the document negotiation phase I assist on a more high-level basis, concentrating on developing legal solutions to major deal-breakers. I feel that my present role is the high point of my career as I am confident that I am adding real value to clients in helping them develop new projects and overcome obstacles leading to their successful completion.

CEELM: How would clients describe your style?

A.K.: Deal maker vs. deal breaker. Our role as lawyers is to advise clients on the legal risks in a certain transaction and to minimize the chance of later disputes leading to litigation. Many lawyers have a tendency to provide clients with a litany of risks resulting in the transaction not completing. Since every business transaction is riddled with risks it is our job to provide our clients with a commercial perspective on their impact to the them so that they can take a view on whether or not to assume the risks.

CEELM: There are obviously many differences between the Polish and American judicial systems and legal markets. What idiosyncrasies or differences stand out the most?

A.K.: The main difference is in the litigation context. In the US once a dispute goes to trial there is a resolution within a matter of weeks. In Poland courts schedule one-day trials in three to six month intervals, resulting in court proceedings lasting up to seven years. This provides a lot of uncertainty to clients and is inefficient from the judges’ perspective, as they are required to read files multiple times. The overhaul of the entire court system which is currently being attempted by the current Polish Government is long overdue.

CEELM: How about the cultures? What differences strike you as most resonant and significant?

A.K.: I think the biggest difference is that in Poland families are much more close-knit. Parents tend to help their children even after they graduate from college. Children tend to take a more active role in tending to elder parents. Also, the role of the Church is much more prominent than in the US.

CEELM: What particular value do you think a senior expatriate lawyer in your role adds – both to a firm and to its clients?

A.K.: I think our experience in structuring transactions in different legal systems enables us to develop creative solutions to legal obstacles. Many times, my role is to be the strategic adviser to the client, which goes beyond pure legal advice. Furthermore, because of our network of contacts we are able to affect introductions to clients who can provide sources of financing or other types of expertise.

CEELM: Outside of Poland, which CEE country do you enjoy visiting the most, and why?

A.K.: The Czech Republic, because of its capital Prague, which I think is the most beautiful city in Europe, full of history and beautiful architecture.

CEELM: What’s your favorite place to take visitors in Warsaw?

A.K.: Lazienki Palace and Park, the former palace of Polish kings. The park is in the middle of Warsaw and is breathtaking for its size and natural beauty. 

This Article was originally published in Issue 5.9 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

The commercial real estate market in Poland continues to be on a growth path. In 2017, the market recorded high demand in all major asset classes, breaking records in the hotel and warehouse sectors. The total value of transactions is growing consistently, and in 2017 it reached EUR 5.1 billion – the highest level in the history of the Polish market.

This figure can be attributed to several factors. The relatively high absorption of this market and the relatively high rates of return on investments in commercial real estate in Poland seem to be the most important. Analysis shows that in most cases there is an increase in demand calculated on a year-on-year basis. This provides a significant incentive for developer activity. Indeed, the rate of return yielded from investments in commercial real estate in Poland is higher than in Western Europe, making it especially attractive to international investors.

In addition, investments in real estate are still an attractive way of investing capital in macroeconomic terms, in light of the stable and relatively high growth rate of the Polish economy. Poland seems to be perceived as a recognized real estate market, gradually reaching the status of a mature market, due to the increasing liquidity and diversity of investment products and the growing number of investors.

In terms of sectors, the greatest activity is happening in the office and warehouse markets. Currently, there are over 1.8 million square meters of modern office space under construction in Poland. Most projects are being implemented in Warsaw, and among regional cities, the construction boom is most visible in Krakow and Wroclaw. At the end of December last year, over 1.3 million square meters of warehouse space were under construction in Poland, providing a record supply of 2.3 million square meters of modern warehouse space. In both the office and warehouse markets, 2017 was also record-breaking in terms of space leased. As a result, the vacancy rate fell to an almost unnoticeable level. This trend is also visible in the hotel market.

Developers are not slowing down, which leads to record-breaking demand for land in Warsaw and regional cities. Some developers have secured land banks that allow them to take advantage of the market boom, but others are facing a significant increase in land prices, especially in relation to land intended for housing development. Available land which is well-prepared in technical and legal terms and is in a good location is rare. In the office market, the alternative is to look for land in places typical of B class office buildings, as well as investments in dynamically growing regional markets, even in such promising new locations as Lodz and Szczecin.

The role of the BPO/SSC external services market should be noted as an important factor stimulating office investments, and the BPO/SSC sector will continue to be one of the key sectors affecting the situation in the office real estate market in Poland. Attention should also be drawn to the growing importance of the co-working services sector. It seems that the market is confident that such offers are an attractive and developing product for entities from other sectors of the economy. As such, the providers of co-working services fill the gap between the expectations of the traditional commercial real estate market and the pressure on flexibility on other lines of business. 

Significantly, among the factors stimulating growth on the commercial real estate market, the legal environment is not mentioned. On the contrary, the instability of the law on business practices and the increase of new regulations operate as a brake on the development of this market, as business expects durable solutions in the field of spatial planning and the construction process. As persistent ills, there are also ownership issues resulting from the lack of uniform rules for the re-privatization of land. Thus, there are many challenges for the legislator and for legal practitioners seeking to contribute to the development of the commercial real estate sector in Poland.

By Mateusz Grabiec, Partner, Baker McKenzie

This Article was originally published in Issue 5.9 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

I love my profession. It has given me the privilege of being a witness to and an active participant in the significant changes which have unfolded in Poland over the last 30 years. I graduated in 1985 when the Polish economy was socialist. Nothing at that time could lead one to realistically expect that the socialist regime would fall in a few years, with Poland becoming a free country. When I went to study in Oxford in 1988, I left a socialist Poland, only to return to a Poland already on its path to a free market economy.

Socialist Poland had no corporations, only state-owned enterprises; it had no concept of shares or shareholders. My Oxford studies on company law and employee share ownership proved helpful when I became an expert for the Ownership Transformation Board advising the Prime Minister.

I believe that a lawyer needs to develop a thorough understanding of lawyering by taking up various roles and learning the ins and outs of the profession. After graduating, I completed formal judge training, although I never became a judge. I was admitted to practice as a legal counsel. The fifteen years I spent as a faculty member in the Department of Civil and Commercial Law at the Poznan University, including my time working on my PhD dissertation, let me build a toolbox for in-depth legal analysis that is now so important in providing advice. Since the early 1990s, I have advised various corporations or served on their supervisory boards and, in this way, I have developed a good understanding of business and corporate realities. My involvement in numerous governmental projects and work for parliamentary committees has given me insight into the law-making process, which is also of great value. 

In addition, I appreciate the several years I worked in a law office affiliated with one of the Big Four firms, which was when the word “partner” first appeared on my business card. This deepened my realization that lawyering is a service, and that it is the quality of your business advice that matters, and not how many footnotes or Latin maxims your legal advice contains. Crucially, I recognized that to provide top-quality legal services the lawyer is required to understand the client’s business. That was also when the idea struck me to create a team of energy lawyers, which is the sort of advisory work I have been doing for over 20 years now, and successfully so, if you go by Chambers and Legal500 rankings. More often than not, a good understanding of my clients’ business and the applicable regulatory environments has given me a competitive advantage. For example, it allows me to bring them various opportunities –  and, if I am convincing enough, the client usually retains us for implementation. In contrast, increasingly, when a client on its own identifies a need for legal assistance, it can be expected to launch a beauty contest and request proposals from several firms.

The last 30 years did not just involve a quantum leap from socialism to capitalism, but also the milestone of Poland’s 2004 accession to the European Union, resulting in wide-ranging changes in all areas of law.

Recent times have seen a fundamental change in the relationship between law firms and in-house counsel. In the 1990s and early 2000s, an academic background, a good command of English, and knowledge of EU legislation usually gave law firm partners an edge over in-house lawyers. This is rare now. Corporate legal directors of today typically have an excellent education, speak foreign languages, know EU law, and, importantly, have significant business experience.

As a result, General Counsel are increasingly-demanding business partners, especially after the last global financial crisis. Unlike before, they now expect law firms to accept fee budgets or caps and to take risks they previously did not incur. The challenge for law firms is to rise to such increased expectations. As the Managing Partner of a leading Polish law firm, I think the key job for me and my partners is to create opportunities for the best young lawyers who want to work for us and join us in facing the new challenges.

My generation knew we had to work very hard to close the gap between the old and the new system as quickly as possible. Today’s legal graduates are millennials with a different view of the work-life balance than we once had. Reason and good will are usually enough to work out any differences.

The environment and technological setting for legal services are changing. But, more importantly, the job continues to offer plenty of joy and satisfaction.

By Jerzy Baehr, Managing Partner, Wiercinski, Kwiecinski, Baehr

This Article was originally published in Issue 5.9 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

Against the backdrop of the many significant and at times highly controversial changes being made to Polish law at the moment, the country is close to enacting its first ever serious whistleblower protection laws. What will this protection look like, and what does its passage mean for Poland?

The European Background

The European Commission defines whistle-blowers as “persons who report (within the organization concerned or to an outside authority) or disclose (to the public) information on a wrongdoing obtained in a work-related context, help prevent damage and detect threat or harm to the public interest that may otherwise remain hidden.” According to the Commission, because “they are often discouraged from reporting their concerns for fear of retaliation … the importance of providing effective whistle-blower protection for safeguarding the public interest is increasingly acknowledged both at the European and international level.”

The fear of negative repercussions is not simply theoretical. According to the 2017 Special Eurobarometer 470 Report on Corruption that was requested by the European Commission, Directorate-General for Migration and Home Affairs and coordinated by the Directorate-General for Communication, 81% of European respondents indicated they would not report corruption they experienced or witnessed due to the potential risk of reprisal.

Accordingly, and following the recent and highly-publicized Dieselgate, Luxleaks, Panama Papers, and Cambridge Analytica scandals, on April 23, 2018, the European Commission issued a proposal for a new Directive on the Protection of Persons Reporting on Breaches of Union Law, which would establish a comprehensive legal framework for whistle-blower protection. 

In the meantime, however, and until that framework is officially enacted, the protection of whistle-blowers on a national level in Europe is uneven. Indeed, only ten EU countries – France, Hungary, Ireland, Italy, Lithuania, Malta, Netherlands, Slovakia, Sweden, and the United Kingdom – ensure the full protection of whistle-blowers, with the rest granting only partial protection, usually only in particular sectors such as financial services, transport safety, and environmental protection.

Poland is one of these countries.

The Unsatisfactory Current Situation

Currently, provisions in Poland’s Labor Code, Criminal Code, and Code of Criminal Procedure loosely protect the right of whistle-blowers. Under the Polish Labor Code employees are protected from unfair dismissals, and the Code of Criminal Procedure requires witnesses to a crime to notify law enforcement authorities. Nevertheless, although complaints can be filed to the country’s Labor Inspectorate or Human Rights Ombudsman, ultimately Polish law provides little protection for the identity of whistle-blower, and – in the context of unfair dismissals – puts the burden of proof on them to prove that their dismissal was tied to their reporting. 

In addition, the relevant provisions in the Labor Code and the Code of Criminal Procedure are subject to judicial interpretation, allowing each judge to interpret the rules differently. According to Transparency International’s 2013 Whistleblowing in Europe report, “since the [Polish] provisions are subject to judicial interpretation, it is difficult to predict how a particular judge will apply these general rules to a particular whistle-blower case. This adds yet more subjectivity into an already incomplete whistle-blower framework. Further, judges’ hands are tied by Supreme Court rulings that often do not allow the underlying reasons for an employee’s dismissal to be examined. This means that judges may not consider a whistle-blower’s public interest disclosure.”

And part of the problem may be an overall lack of governmental enthusiasm for pursuing corporate crime in the first place. According to Grzegorz Makowski, a Transparency International Partner in Poland and expert at the pro bono IdeaForum think tank of the George Soros-founded Stefan Batory Foundation, statistics on corporate liability law indicate that from 2006 to 2016 there were around 200 cases related to corruption, with only 60 convictions, leading generally to what Makowski calls “ridiculous” fines. 

Ultimately, the current whistle-blower protection provisions in Poland are widely criticized as being ineffective and badly designed to tackle the real issues whistle-blowers face, even though Poland ratified the United Nations Convention against Corruption in September 15, 2006 and in November 22, 1996 ratified the Convention on the Organization for Economic Co-operation and Development. Whistle-blower rights are also potentially protected under Article 11 of the Charter of Fundamental Rights of the European Union and Article 10 of the European Convention on Human Rights. “The problem is real, because we are not complying with international standards,” Makowski says.

Thus, although according to Blueprint for Speech (an NGO that provides research and analysis in support of freedom of expression), public support for whistle-blowers is high, the level of protection they are afforded in Poland, currently, is not. 

This may soon change. 

Either/Or: Two Draft Laws Circulate in Parliament

In recent years, Poland has made several attempts to introduce provisions into legislation addressing whistle-blower protection. Two draft laws currently under consideration by the Polish Parliament reflect different strategies to do so. 

The first of these, the Transparency in Public Life law, was drafted by the Polish intelligence agencies as a combination of four pieces of legislation (involving lobbying, access to public information, declaration of assets, and whistleblower protection), and includes a provision that guarantees protection against retaliatory actions, such as terminating employment contracts. Although it was initially expected to be enacted in February of this year, push-back has put it on hold for the moment. 

The second draft law providing whistle-blower protection that is under consideration is the new draft Corporate Liability bill put forward by Poland’s Ministry of Justice in May of this year (with an updated version released in August). 

Although both the draft Transparency in Public Life law and draft Corporate Liability law address the protection of whistle-blowers, they do so in different ways. The Transparency in Public Life law only applies to crimes involving bribery and/or tax evasion, and ensures protection only for those whistle-blowers whose status is officially acknowledged by a prosecutor. By contrast, the Corporate Liability law would protect whistle-blowers irrespective of public prosecutor involvement, and is not limited to specific offenses. Unlike the Transparency in Public Life law, it also requires that companies address any issues revealed by a whistleblower, with sanctions levied on those that fail to do so. 

As both draft bills are still in process, it is not clear which law (if either) will be enacted first. “I can sense an internal competition between these two public officials,” CMS Partner Arkadiusz Korzeniewski says, referring to the sponsors – the Polish Intelligence Agencies and the Ministry of Justice – of both bills. “We will see who is going to win the struggle.” 

Weighing the Pros and Cons 

Many in the Polish legal community are concerned about the provision in the Transparency in Public Life law providing prosecutors with exclusive responsibility for determining who qualifies as a whistle-blower and who does not for purposes of obtaining the law’s protection. “The Transparency rules are very strange, to put it mildly,” Wolf Theiss Partner Jacek Michalski says. “It does not make any sense to define a whistle-blower only when a prosecutor accepts his or her arguments and information.” 

In addition, the provisions in the Transparency in Public Life liaw limiting its applicability to specific criminal acts has also drawn some criticism. “The purpose of the whistle-blower provision is to provide tools to protect against offenses or wrongdoings within organizations,” Michalski says, “and these are not always necessarily connected to tax evasion or bribes. There might be other issues that a whistle-blower could report in a given form and format.”

But the Corporate Liability law, which grants power to the courts instead of the prosecutor to determine who is and who is not entitled to whistleblower protection, does not escape criticism either. The downside of the draft Corporate Liability law, Grzegorz Makowski claims, is the absence of any protection for whistleblowers who are still employed and seeking ways to use internal mechanisms to report irregularities without getting fired. Makowski says, “It seems they [the lawmakers] would like to create incentives for employees to report on their employers without offering them any protection.” 

Baker McKenzie Partner Radoslaw Nozykowski is more optimistic. Speaking about both bills, he notes, “to a certain extent, it is a step in a good direction, because the previous law was not very effective, and certain changes were needed.” And he describes the draft Corporate Liability law in particular as “kind of an umbrella legislation, because it covers reporting on any kind of crime.” Still, Nozykowski says, “I do believe that this draft needs serious work. It is a good start, but it definitely needs to be drafted much more carefully.” 

Ultimately, many believe that both of the attempts to address the issue are insufficient, and that a full and separate act is needed, providing real protection to whistle-blowers in all appropriate situations. To this end, Makowski reports, two years ago the Polish Ministry of Justice initiated consultation on the possibility of combining all whistle-blower protections into one act. The proposal received a positive response at the time, he says, but the idea was dropped at a later stage for undefined reasons. Subsequently, his organization – the Batory Foundation – working alongside Poland’s Labor Union and Trade Union, drafted a new law on whistle-blower protection at the end of 2017.  

Although Makowski reports that the Batory Foundation’s umbrella proposal was supported by Poland’s Central Anticorruption Bureau, at the moment it appears the draft bill on Transparency in Public Life is receiving more support in the government. Makowski insists that he and his colleagues are not discouraged. “We think this is a window of opportunity. It will be difficult to ignore our proposed law totally,” he says, “and we will advocate for this bill until next year’s parliamentary election.” 

CMS’s Arkadiusz Korzeniewski agrees that umbrella protection is needed, and that merely protecting whistle-blowers from having their employment terminated is not enough, as whistle-blowers to significant violations are rarely interested in continuing their employment with notorious employers anyway. “The current EU system leaves a lot of space for domestic legislation, and thus, when it comes to general principals, both [of Poland’s draft] laws are definitely steps in the right direction. But the mere fact that this person blew the whistle means his or her professional career is over, because this person will not be able to get any job in her or his profession, because no one wants to have a person like this. So no matter what is written in legislation prohibiting discrimination and retaliation, this will not be enough.” 

Korzeniewski concedes that he is unimpressed with the current proposals circulating in the Polish parliament. “I doubt this very rudimentary measure of protection would be sufficient for making whistle-blowing a more effective measure of combating corruption fraud or other law violations done in companies.” Ultimately, he says with a sigh, some aspects of the problem may be beyond the reach of legislation anyway, making a full protection of whistle-blowers impossible. 

Conclusion

Few would challenge the notion that protecting those who report on crime and ethical violations in the work-place deserve from retribution will encourage them to step forward, providing valuable assistance to authorities in their ongoing attempts to identify and prosecute bad actors. The best way to do so, however, remains a subject of great debate. Poland is attempting to solve this riddle.

This Article was originally published in Issue 5.9 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.