Subsidiary or branch?
A comparison of the two main forms in which foreign businesses operate in Poland
Foreign businesses may establish a branch or representative office in Poland. Under the principle of freedom of establishment, business entities from other EU member states may take up and conduct business in Poland under the same rules as Polish citizens, including operation of a branch. Business entities from outside the EU may establish a branch in Poland under the rule of reciprocity, unless otherwise provided by treaty.
Foreign entities that decide to begin doing business in Poland most often choose to operate here in the form of a Polish subsidiary—typically a limited-liability company (sp. z o.o.)—or in the form of a branch. Thus it would be useful to compare these two legal institutions.
The main distinction between a limited-liability company and a branch of a foreign business entity is the legal form. A branch does not have legal personality, nor may it be regarded as an organisational unit without legal personality, which the law vests with legal capacity, because no law in Poland provides such legal capacity to a branch. A branch is rather a distinct, standalone organisational part of the foreign business entity, operated at a different location. Thus the branch as such does not have legal capacity or the capacity to enter into transactions, but acts only as part of the foreign business entity. All rights and obligations connected with the operations of the branch are essentially the rights and obligations of the foreign business entity. A consequence of the lack of legal personality on the part of the branch is that the branch as such is not liable for its own operations. Instead, the foreign business entity is fully liable for the branch’s operations.
In a limited-liability company, by contrast, the full liability is borne by the Polish company. The shareholders are not liable for the company’s obligations. Therefore, in practice, if the foreign business entity intends to limit the liability for its Polish operations to its assets in Poland, it will decide to establish a subsidiary in Poland (typically a limited-liability company). In that case, the foreign business entity will need to invest in the share capital (the statutory minimum is PLN 5,000). In the course of its operations, the company is subject to legal regulations designed to monitor the company’s financial condition and afford safety in commercial dealings. The main regulations in this respect include the Commercial Companies Code and the Bankruptcy and Rehabilitation Law, which provide for
- an obligation to file a petition to commence bankruptcy or arrangement proceedings if the company’s obligations exceed the value of its assets
- an obligation to convene a shareholders’ meeting to adopt a resolution on the continued existence of the company if the company’s losses exceed the sum of the reserve capital, the supplementary capital and half of the share capital
- a prohibition on returning shareholders’ contributions
- a prohibition on paying out to the shareholders any assets of the company needed to fully cover the share capital
- certain statutory limitations on payment of advances to the shareholders against anticipated dividends
and many other duties, prohibitions and restrictions.
Separate accounting books are maintained for the branch of a foreign business entity, but the branch does not have its own capital, and its finances are reflected in the financial reports of the foreign business entity. The foreign entity has full discretion with respect to the financial condition of the branch, and may for example decide to continue operating the branch even if it makes losses year after year. In such case, the legal protections for creditors will be determined by the applicable laws governing the foreign entity.
A business entity deciding to conduct operations in the form of a branch should bear in mind that the operations of the branch must fall within the business purposes of the foreign entity (either the same type of business, or operations within a narrower range).
In the case of a limited-liability company, the company’s business purposes may be freely chosen and need not coincide in any way with the business of the foreign shareholder—subject only to restrictions under which certain operations must be conducted in a different legal form, or where operations are prohibited by law or it is a regulated industry.
The name of a limited-liability company may generally be freely chosen, but the name of a branch must be identical to that of the foreign entity operating the branch. In the case of a branch, the reason that the name must be the same is that the branch is only a part of the foreign entity, even though, organisationally, it functions on a standalone basis. Any change in the name of the foreign entity automatically results in a change in the name of the branch, which means that the name of the branch as entered in the National Court Register is only declarative, and if the name of the foreign entity changes the branch must begin using the new name immediately, even before the new name is entered in the commercial register in Poland. By contrast, a change in the name of a limited-liability company is legally effective only upon entry of the new name in the commercial register.
There are certain mandatory elements that must be included in the name of a limited-liability company or the name of a branch of a foreign business entity. The name of a limited-liability company must include the ending “spółka z ograniczoną odpowiedzialnością,” which may be abbreviated in practice to “spółka z o.o.” or “sp. z o.o.” In the case of the Polish branch of a foreign business entity, the name must include the company name of the foreign entity plus a Polish translation of its corporate form and the words “oddział w Polsce” (i.e. “Polish Branch”). The law does not recognise the use of any abbreviations for the name of a branch.
Another important difference involves the timing of commencement of operations. A limited-liability company may begin doing business as soon as the articles of association are concluded, prior to the company’s registration in the National Court Register, as a company “in organisation” (although the rules for operating “in organisation” differ somewhat from the rules applicable to a registered company—the liability rules, for example, are different). A foreign entity may not begin doing business in Poland in the form of a branch until the branch has been entered in the commercial register.
A foreign business entity establishing a branch in Poland is required to appoint a person at the branch who is authorised to represent the foreign entity. The representative may conduct only the activities he or she has been authorised to perform, and thus the authority of the representative is much narrower than that of the management board of a limited-liability company. For example, a commercial proxy for the branch must be appointed by the foreign entity rather than by the branch representative.
Magdalena Moczulska and Agata Kalemba, Corporate Law, Restructuring, and Business-to-Business Contracts practices, Wardyński & Partners