1. Initial Share Capital

In Poland, the minimum required share capital for a limited liability company (spółka z o.o.) is PLN 5,000. However, establishing your subsidiary with only the minimum capital is generally not advisable. Such a small amount can adversely affect your company’s credibility and limit its operational capabilities. Conversely, excessively high share capital can create future complications, particularly when returning this capital to the parent company, as it involves complex and formal procedures to decrease the share capital later.

A balanced approach is optimal: set the share capital at a reasonably high level, reflecting realistic initial operating needs, without unnecessarily inflating it.

2. Loan Agreements from Parent Company

A highly recommended method of financing your Polish subsidiary is through a loan provided by the parent company. This is one of the most popular strategies due to several advantages:

• Flexibility: When the subsidiary no longer needs the funds, the capital can be easily returned to the parent company along with interest payments.
• Income Generation: The parent company earns interest from the loan, thus benefiting from its financial support.
• Tax Optimization: Under specific conditions related to the duration of ownership and percentage of capital held, interest payments from the subsidiary to the parent company may be exempt from withholding tax in Poland.

It’s crucial to ensure the loan agreement clearly defines the loan duration, method of calculating interest, and interest rates. Proper structuring is essential to fully benefit from tax exemptions and compliance with Polish regulations.

3. Additional Payments to Share Capital

Another common and practical method is making additional payments to the subsidiary’s share capital (dopłaty). However, this method requires specific provisions within the company’s Articles of Association. Without these explicit provisions, additional payments are not permissible.

This approach has both advantages and drawbacks:

• Advantages:
  • Offers financial support without incurring debt.
• Disadvantages:
  • The return of these additional payments to the parent company is strictly regulated and dependent on the subsidiary’s financial condition.
  • The parent company does not receive interest payments, meaning no direct financial return from the funds provided.
  • In case of bankruptcy, repayment of additional payments has lower priority compared to loan repayments.

Practices to Avoid: Fictitious Service Invoicing

Occasionally, entrepreneurs attempt to finance their subsidiaries by issuing invoices for fictitious services, typically advisory services, to their parent companies. This approach is strongly discouraged. Such actions constitute tax fraud under Polish law, can lead to severe penalties, and severely damage the credibility and legal standing of your business.

Conclusion and Recommendations

When operating a subsidiary in Poland, selecting the right financing strategy is crucial. Striking a balance between adequate initial share capital and flexible financing methods such as parent company loans or additional capital contributions is key to successful, compliant, and tax-efficient business operations.

If you need assistance in structuring financing for your subsidiary, drafting appropriate loan agreements, or understanding the tax implications, our experts at Sarego Finance are here to help.

Contact us for personalized support tailored to your business needs.

Jerzy Gaweł
Partner – Tax Advisor