How to execute contracts with your Polish subsidiary
When making the big plunge into the Polish market, many multinational businesses choose to incorporate, either directly or through a holding company, a subsidiary in Poland, very often in the form of a Polish limited liability company. In many instances, the multinational company (or the holding company) is the sole shareholder of the Polish subsidiary. The enactment of the Commercial Companies Code (the "Code") brought with it some new requirements that a parent company needs to comply with in entering into agreements with its wholly owned Polish limited liability company subsidiary or risk the invalidity of those agreements.
Special regulations (known as transfer pricing rules) on contracting between subsidiaries and parent companies have long existed in the area of tax law. Transfer pricing rules, in practice, require that related parties base their business relations on arm's length principles and restrict their freedom in contracting, particularly when it comes to prices and fees. Incidentally, as of Jan. 1, these tax regulations also were significantly expanded. While I will leave this issue for fuller discussion by our "Tax Watch" colleagues, I will just mention that transactions between related parties that exceed certain amounts must be specially documented. The new tax regulations specify the form and content of this documentation, the purpose of which, in principle, is to evidence that the underlying transaction was based on arm's length principles.
Prior to the Code's coming into effect, Polish commercial law, unlike tax law, did not contain special restrictions of any importance on parent-subsidiary transactions.
The present Code stipulates a number of mandatory formal requirements that apply to parent-subsidiary transactions. A failure to adhere to these requirements in contrast to a breach of the transfer pricing rules where the consequences are tax arrears in principle results in a contract (or at least part of it) becoming invalid. The purpose in introducing these requirements can be easily deduced. They are intended to limit the potential for malfeasance in a situation where one of the parties is only formally an independent legal entity. While it is not possible to review all of the new provisions on parent-subsidiary relationships, I will review the most significant and most risky (for the forgetful compliance officer) of these provisions, as they apply to limited liability companies.
Pursuant to the Code, if a parent company enters into an agreement with its subsidiary on the management of the subsidiary or the transfer of its profits, the parties are required to file an excerpt of certain provisions of this agreement with the Registry Court. These provisions include any clauses regulating the liability of the parent company for the improper performance of its obligations under the contract and the scope of the parent company's liability for the subsidiary's obligations toward its creditors. If the agreement does not regulate these issues or excludes such liability, the parties should also file this information. If the required filings are not made within three weeks after the signing of the agreement, the provisions limiting or excluding the parent company's liability become invalid.
As a side note to the rule mentioned above, the Code actually uses the terms "dominant" and "dependent" companies rather than "parent" and "subsidiary," and these terms mean more than just a majority shareholding stake. For example, a company can be "dominant" with respect to another company if it has the right to appoint or dismiss a majority of the management or supervisory board members.
More formal requirements apply if the parent company holds all of the shares of the subsidiary. If all of the shares of a limited liability company are held by one shareholder (or one shareholder and the company itself, which is permissible in some circumstances), any representations of the shareholder to the company must be in writing, with signatures authenticated by a notary. This broad term "any representations" is generally interpreted to include any contracts entered into between the shareholder and the company. However, the actual meaning of this provision is subject to controversy. In particular, it is uncertain as to whether it also includes all individual representations made by the shareholder. For example, some registry courts claim that potentially even shareholder resolutions are included. One of the consequences of having a representation in writing with notary-authenticated signatures is that the notary officially records the date of the representation (signing of the contract) and the authentication of the signatures, eliminating the possibility of backdating documents. A failure to make a representation in the proper form results in you guessed it the representation being invalid.
In the case of sole shareholders that are real, flesh-and-blood persons and who are concurrently members of the management board of the company, an even more restrictive provision may apply. If the sole shareholder is also the sole member of the management board of the company, any transaction between that shareholder and the company represented by him or her must be executed in the form of a notarial deed, a copy of which the notary will have to file with the Registry Court.
Incidentally, as of Jan. 1, 2001 new formal requirements also apply to the sale and pledging of shares in a limited liability company. Contracts evidencing these transactions also must be in writing, with signatures authenticated by a notary. Again, a failure to adhere to these formalities results in the sale or pledge being invalid.
The moral of this article is that there should be another item on the post-vacation "to-do" list of shareholders of wholly owned Polish companies: Get friendly with your local notary. You may become a frequent customer soon.
This article has been prepared by Lejb Fogelman, the managing partner of Hunton & Williams' Warsaw office, with the assistance of Aleksander Sobolewski, an associate attorney.
