Offset explained
"The monetary value of the offset agreement must be at least equal to the value of the military sales agreement entered into with a foreign supplier."
Art. 1(6) The Act on Offsets
For every zloty the Polish government pays to a foreign supplier of military and defense-related equipment, the foreign supplier is generally required to reinvest the amount received back into the Polish economy, thereby creating an 'offset' to the Polish treasury. This requirement does not apply to Polish suppliers. And presumably, now that Poland has joined the EU, the Law on Offsets will no longer apply to EU-based suppliers.
An offset is defined as either a 'direct' or 'indirect' purchase of shares from the State Treasury; purchase or contribution-in-kind in a limited liability or joint stock company; or the execution of a sales agreement by which licenses, know-how, the transfer of rights, or the provision of services are concluded between a foreign supplier and a Polish entity. A direct offset pertains to the delivery of armaments and military-related equipment. An indirect offset refers to all other contracts not directly related to military defense. Direct offsets must total at least half of the total value of the offset agreement. And finally, an offset is only required if the aggregate value of the military supplies provided by a particular foreign supplier totals at least €5 million (zł.22.2 million) in a given three-year period.
But wait a minute, how can a foreign supplier earn a profit if it is required to reinvest the total value of its contract back into the Polish economy? The answer can be summed up in one word - 'multipliers.' In order to explain how multipliers work, let's look at a hypothetical example.
Let's say a Canadian tank manufacturer has a contract to supply the Polish army with 25 tanks, having a total value of €100 million (zł.444 million). As part of the sales agreement, the Canadian company must also enter into an offset agreement totaling €100 million. Does this mean that the Canadian company must actually invest €100 million in Poland? The answer is no. Depending on the type of offset investment, the Polish government may increase the 'value' of the investment by a multiplier of up to five times the actual investment. For instance, an offset investment in a sector deemed to be of special importance to national safety or defense may be given an offset credit of up to five times the actual investment total. However, an offset investment in a sector of the economy with less strategic importance, i.e. an indirect offset, may not receive any extra offset credit. So, for example, an offset investment of €20 million (zł.88.8 million) in a jet engine factory in Poland may very well satisfy the Canadian company's obligation to provide €100 million in offsets, but only if the Polish government agrees to apply a multiplier of five to determine the value of the Canadian company's investment.
Additionally, our Canadian tank manufacturer may also receive offset credits for facilitating the opening of new export markets for Polish manufactures or providing assistance to scientific research in Polish universities. In this case, offset credits may be earned by a foreign military supplier by locating foreign buyers for Polish goods, or in the case of Polish universities, by securing foreign funds and/or expertise for scientific R&D. As such, our Canadian manufacturer could receive an additional offset credit of €10 million (zł.44.4 million) for arranging a scientific exchange program between Canadian and Polish universities, even if the funding for the exchange program were to come from a third party.
Offset obligations may also be satisfied by purchasing goods manufactured in Poland, as opposed to actually investing in a Polish manufacturer. For instance, instead of investing €20 million in a jet engine factory in Poland, our Canadian investor may instead satisfy its offset obligations by agreeing to purchase €20 million in jet engines over a ten year period, as opposed to actually investing in the plant. Moreover, our Canadian tank supplier may satisfy its offset obligations by finding a third-party buyer for the jet engines.
The end result is the same. Offsets, in the form of foreign investment, will flow into Poland as a result of the Law on Offsets. However, the actual amount of investment will not necessarily match the reported value of the offset agreement, as the credit value assigned to each offset will vary depending on the multiplier chosen by the Polish government. And, as our example shows, the foreign investor may be able to satisfy its offset obligations by securing the financial commitment of third-party foreign investors.
Paul Fogo is a senior attorney with Miller Canfield W. Babicki & Partners.
Art. 1(6) The Act on Offsets
For every zloty the Polish government pays to a foreign supplier of military and defense-related equipment, the foreign supplier is generally required to reinvest the amount received back into the Polish economy, thereby creating an 'offset' to the Polish treasury. This requirement does not apply to Polish suppliers. And presumably, now that Poland has joined the EU, the Law on Offsets will no longer apply to EU-based suppliers.
An offset is defined as either a 'direct' or 'indirect' purchase of shares from the State Treasury; purchase or contribution-in-kind in a limited liability or joint stock company; or the execution of a sales agreement by which licenses, know-how, the transfer of rights, or the provision of services are concluded between a foreign supplier and a Polish entity. A direct offset pertains to the delivery of armaments and military-related equipment. An indirect offset refers to all other contracts not directly related to military defense. Direct offsets must total at least half of the total value of the offset agreement. And finally, an offset is only required if the aggregate value of the military supplies provided by a particular foreign supplier totals at least €5 million (zł.22.2 million) in a given three-year period.
But wait a minute, how can a foreign supplier earn a profit if it is required to reinvest the total value of its contract back into the Polish economy? The answer can be summed up in one word - 'multipliers.' In order to explain how multipliers work, let's look at a hypothetical example.
Let's say a Canadian tank manufacturer has a contract to supply the Polish army with 25 tanks, having a total value of €100 million (zł.444 million). As part of the sales agreement, the Canadian company must also enter into an offset agreement totaling €100 million. Does this mean that the Canadian company must actually invest €100 million in Poland? The answer is no. Depending on the type of offset investment, the Polish government may increase the 'value' of the investment by a multiplier of up to five times the actual investment. For instance, an offset investment in a sector deemed to be of special importance to national safety or defense may be given an offset credit of up to five times the actual investment total. However, an offset investment in a sector of the economy with less strategic importance, i.e. an indirect offset, may not receive any extra offset credit. So, for example, an offset investment of €20 million (zł.88.8 million) in a jet engine factory in Poland may very well satisfy the Canadian company's obligation to provide €100 million in offsets, but only if the Polish government agrees to apply a multiplier of five to determine the value of the Canadian company's investment.
Additionally, our Canadian tank manufacturer may also receive offset credits for facilitating the opening of new export markets for Polish manufactures or providing assistance to scientific research in Polish universities. In this case, offset credits may be earned by a foreign military supplier by locating foreign buyers for Polish goods, or in the case of Polish universities, by securing foreign funds and/or expertise for scientific R&D. As such, our Canadian manufacturer could receive an additional offset credit of €10 million (zł.44.4 million) for arranging a scientific exchange program between Canadian and Polish universities, even if the funding for the exchange program were to come from a third party.
Offset obligations may also be satisfied by purchasing goods manufactured in Poland, as opposed to actually investing in a Polish manufacturer. For instance, instead of investing €20 million in a jet engine factory in Poland, our Canadian investor may instead satisfy its offset obligations by agreeing to purchase €20 million in jet engines over a ten year period, as opposed to actually investing in the plant. Moreover, our Canadian tank supplier may satisfy its offset obligations by finding a third-party buyer for the jet engines.
The end result is the same. Offsets, in the form of foreign investment, will flow into Poland as a result of the Law on Offsets. However, the actual amount of investment will not necessarily match the reported value of the offset agreement, as the credit value assigned to each offset will vary depending on the multiplier chosen by the Polish government. And, as our example shows, the foreign investor may be able to satisfy its offset obligations by securing the financial commitment of third-party foreign investors.
Paul Fogo is a senior attorney with Miller Canfield W. Babicki & Partners.
