U.S. Troop Buildup Calls Polish SOFA to Tax Practitioners’ Attention

The U.S.-Poland Defense Cooperation Agreement of 2020, governing the status of U.S. military forces in Poland (sometimes called the Polish Status of Forces Agreement, or Polish SOFA), was followed by an increase in the number of U.S. soldiers stationed in Poland. In 2022, thousands of additional U.S. troops were sent to Poland in response to the Russian invasion of Ukraine.

A greater U.S. military presence in Poland could increase activity in Poland by subsidiaries of U.S.-based multinational defense contractors, U.S. citizens, and U.S. resident employees of those subsidiaries, as well as U.S. citizens and U.S. residents who directly act as individual independent contractors to the U.S. military in Poland. This will likely trigger more interest among such U.S. defense contractors and their employees in the Polish corporate and individual income tax concessions in the Polish SOFA.

Polish SOFA Income Tax Concessions

Article 34(2) of the Polish SOFA favorably states that U.S. contractors are exempt from Polish income tax on their income derived from a contract or subcontract with U.S. forces. Article 2(f) of the Polish SOFA defines a U.S. contractor as “a natural person who is not a citizen of nor ordinarily resident in the territory of the Republic of Poland or a legal person who is not registered in the territory of the Republic of Poland, and is present in the territory of the Republic of Poland to provide goods and services to U.S. forces under contracts with or for U.S. forces.”

Article 20(5)(a) of the Polish SOFA likewise favorably provides that compensation received by U.S. contractor employees solely under an employment contract with a U.S. contractor are exempt from Polish personal income taxation. Article 2(g) of the Polish SOFA defines a U.S. contractor employee as a natural person who is not a citizen of nor ordinarily resident in Poland, and who is in an employment relationship with a U.S. contractor and working in Poland in connection with a contract or subcontract to provide goods or services to U.S. forces.

Article 20(6) of the Polish SOFA likewise favorably provides that periods during which a direct U.S. contractor who is a natural person, or is a U.S. contractor employee, is present in Poland solely under a contract with or for U.S. forces, will not be considered as periods of presence within Poland for purposes of creating Polish tax residency.

A Polish tax exemption will typically be beneficial in the frequent situations where it is projected that some or all of the hypothetically applicable Polish taxes would not be fully creditable against U.S. pre-credit tax liabilities.

Comparison With Polish Income Tax Treaty

These broad Polish corporate and individual income tax exemption provisions potentially available to U.S. military contractors and their employees in the Polish SOFA are generally more expansive than in the current U.S.-Poland income tax treaty. This is also the case for the new version of that income tax treaty that, since 2013, has been pending ratification in the U.S. Senate.

For example, Article 8 of the current U.S.-Poland income tax treaty and Article 7 of the pending version would permit Poland to tax the business profits of a Polish permanent establishment of a U.S. corporation, such as a Polish branch of a U.S. corporation defense contractor. Article 15 of the current treaty and Article 7 of the pending version permit Poland to tax a U.S. tax resident individual who provides independent professional services in Poland—though it only applies under the existing treaty only if that independent contractor is within Poland for 183 days or more during the year.

Article 16 of the current treaty and Article 15 of the pending treaty generally permit Poland to tax a U.S. individual employed by a Polish permanent establishment of a foreign corporation, or employed by a Polish corporation, if the person’s compensation is borne by the payor or if the person is within Poland more than 183 days during the year. Thus, the current and pending U.S.-Poland income tax treaty would typically allow Polish corporate taxation and Polish individual taxation of U.S. military contractors and their employees.

But Article 5(2)(b) of the current U.S.-Poland income tax treaty and Article 1(2)(b) of the pending treaty favorably provide that the tax treaty is not to operate to deny any benefit conceded by Poland to a U.S. corporation—or to a U.S. tax resident independent contractor or employee—in another agreement with the U.S. The Treasury Technical Explanation of Article 1(2)(b) of the pending treaty explicitly states that such other available benefits include the benefits provided to military contractors by the Polish SOFA.

SOFA Dispute Resolution

In evaluating the implications of the Polish SOFA, it’s important to consider the Polish government interpretations, which may not coincide with the U.S. government interpretations. Article 36(3) of the Polish SOFA provides that interpretive disputes are to be resolved through U.S. and Polish government consultation and are not to be referred to any national or international court or any third party for settlement. Therefore, when considering the scope of the Polish income tax concessions in the Polish SOFA, Polish and U.S. advisers may well need to be consulted.

The dramatic potential effects of SOFA host country interpretations of the scope of its income tax concessions in the SOFA agreements being narrower than the U.S. interpretation can be appreciated in connection with the long-running controversy concerning different SOFA agreements—such as the U.S.-Germany SOFA agreements. Some German tax offices have taken the position—contrary to the U.S. Defense Department position—that an individual independent contractor, acting as a technical expert for the U.S. military, but living in Germany for an extended period of time or living in Germany with a German spouse and children, can be deemed ineligible for the exemption from German personal income tax described in the German SOFAs.

Despite the efforts of the U.S. State Department, U.S. Defense Department, German Foreign Ministry, German Defense Department, and other organizations, this income tax issue reportedly remains unresolved. Another example of a long-running dispute involving the scope of host country income tax concessions for U.S. military contractors and their employees occurred in connection with a former NATO–Afghanistan SOFA. That dispute reportedly was eventually resolved in 2021 favorably toward the military contractors and their employees.

Conclusion

When dealing with worldwide income tax planning for U.S. military contractors and their employees, reviewing SOFAs with the countries where the activities will occur is often a good starting point.

This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Alan S. Lederman is a shareholder at Gunster, Yoakley & Stewart, P.A. in Fort Lauderdale, Fla.