Poland's rapid development over the past decade has placed it in the top tier of European countries in terms of economic growth. Accordingly, it is becoming an increasingly desirable target location for foreign investment. Since the beginning of the economic transformation in early 90'ties, foreign direct investment in Poland exceeded USD 74 billion. By the 2004,nearly 1200 companies from 42 countries and representing virtually all sectors appeared on the PAIiIZ list of the Major Foreign Investors in Poland. The multitudes of "market niche" opportunities, combined with progress in privatization, have acted as a powerful incentive for investors, too. From May 2004 Poland has became a member of the EU

Since 1989 Poland has made the transition to a market economy with a rapidly expanding private sector and a well functioning legal and institutional infrastructure. Macroeconomic stability and broad consensus among politicians and decision-makers as to the goals of economic policy have resulted in high real GDP growth, averaging 5.4% in 1995-2000. Openness to foreign direct investments resulted in cumulated FDI inflow of USD 74 billion in the period 1990-2004. After a decade of development some sectors are still lagging behind in terms of adjustment to new market conditions. Overcoming the legacy of central planning has not been easy. One major economic challenge facing policy-makers is to continue the restructuring and privatization of large state enterprises, particularly in "problem" sectors such as mining, steel production and transport. Another is to maintain essential public spending without undermining budgetary discipline or fiscal stability. Problems in these areas together with the weak world economy have resulted in a significantly weaker Polish GDP growth of 1.0%, 1.4%, 3.7% and 6,1% in 2001, 2002, 2003, 2004. The major unfavorable characteristic of the Polish economy is the high unemployment rate which reached 19% in the year 2004. In the future the rate of unemployment will be decreasing slowly and salaries will be increasing slowly.

Further forecasts are also encouraging as GDP is expected to grow by 5,5% and 5,0% annually in 2005 and 2006 respectively. Inflation is 4.5%.

The legal concept of "doing business" is best defined under Polish law in the Law on Economic Activity (1999), which defines economic activity as ".production, construction, trade, service, the search for and extraction of natural resources, pursued for the purpose of obtaining profit and conducted in an organized and continuous manner". The Law also provides that undertaking and pursuing economic activity shall be free and allowed to every person on equal terms subject to any conditions specified in law.

This definition of "doing business" also applies to foreign investors undertaking economic activity in Poland. However, there are differences between investors from countries that apply the reciprocity rule to Polish enterprises, and those from other countries. Investors from countries applying the reciprocity rule may conduct economic activity on the same terms as Polish citizens.

Where the reciprocity rule does not apply, investors may conduct economic activity through:

- establishing limited partnerships, limited liability companies and joint-stock companies;

- purchasing and acquiring shares in such companies.

The following are the main legal forms available for doing business in Poland. All these forms are available to Polishinvestors and foreign investors based in countries applying the reciprocity rule for Polish enterprises:

- joint-stock company (spółka akcyjna - S.A.);

- limited liability company (spółka z ograniczoną odpowiedzialnością - sp. z o.o.);

- limited joint-stock partnership (spółka komandytowo-akcyjna - S.K.A.);

- registered partnership (spółka jawna - sp.j.);

- limited partnership (spółka komandytowa - sp.k.);

- professional partnership (spółka partnerska - sp.p.);

- sole proprietorship (indywidualna działalność gospodarcza);

- civil law partnership (spółka cywilna) - this partnership may not be registered as an individual entrepreneur conducting economic activity. Its participants may be registered as individuals pursuing economic activity jointly. Therefore, such a partnership is not a separate business entity. However, it may be used for joint investment projects or consortia.

Polish accounting is regulated by the Accounting Act of 29 September 1994 (with subsequent amendments). The Ministry of Finance has also issued several decrees covering specific accounting areas such as financial instruments, consolidation, accounting for banks, insurance companies and pension funds.

The Accounting Act was amended effective 2002 bringing Polish accounting practices further in line with International

Financial Reporting Standards. Minimal differences now remain as noted in section 4.5 below. The last amendments came into force on 1 January 2004.

Additional amendments are currently proposed to the Act to bring it in line with the reporting requirements of the Fourth and Seventh Directives on Accounting - particularly the publishing and translation requirements and exemptions. Additionally changes have been proposed to permit entities required to prepare financial statements in accordance with IFRS (in accordance with EU directives) to be exempt from preparing separate Polish financial statements. During 2003 the Polish Accounting Committee was established to prepare and issue standards to implement the Act. In areas unregulated by the Act, reference may be made to IFRS.

Financial statements must be prepared in Polish and expressed in the Polish currency. Financial statements consist of:

- a balance sheet;

- an income statement;

- notes to the financial statements (split into an introduction and supplemental notes);

- a statement of cash flows;

- a statement of changes in equity.

A cash flow statement and a statement of changes in equity are only required by entities whose financial statements are subject to an audit.

Joint-stock companies, limited companies, insurance companies, co-operatives and state-owned companies prepare,

outside the financial statements, a financial review by management - the management report.

The Personal Income Tax, Corporate Income Tax and Value Added Tax Laws were all introduced in the early 1990s. Investors should be aware that the Polish tax system is subject to continuous modification and amendments making it more compatible with EU directives and legislation. Foreign investors should note that Polish law, in particular tax law, is subject to frequent and fundamental changes. Moreover, such changes may occur through various mechanisms: changes in laws, varying court decisions, authorities' rulings and accepted practice.

A company is regarded as a Polish resident when it is either incorporated in Poland or managed in Poland. The concept of management for this purpose is broadly equivalent to the effective management test in many treaties and is typically exercised where the board of directors (or equivalent) meets and takes decisions. Resident companies are subject to corporate taxation on their worldwide income and capital gains. Non-resident companies are taxed only on income and capital gains earned in Poland. Estimates can be used to determine taxable income where this cannot be determined from the accounting records.

In practice taxable income is arrived at by adjusting accounting profits for tax purposes. Taxpayers are obliged to keep books of account in a manner that allows determination of the taxable base and the amount of tax due. Otherwise, income will be assessed by the tax authorities.

Generally, the taxable revenues of incorporated entities performing business activities are recognized on an accrual basis (as a rule, when the invoice is issued but not later than in the month in which the services/goods have been delivered). Chargeable capital gains are calculated by deducting the costs and expenses related to sale, from sales proceeds. They are aggregated with other sources of income and taxed at the standard tax rate. There is no indexation allowance. If the sales price differs substantially from market value, the tax office may require an independent expert valuation. Relief from Polish taxation may be available to a non-resident company if the respective country is covered by a double tax treaty.

Capital losses are deductible from normal business income.

A capital gain arising on a contribution in kind will carry the liability to recognize revenue at the nominal value of shares received, which in most cases should correspond to the fair market value of the assets contributed. Where a contribution involves an enterprise or an organized part of an enterprise, the taxable point is deferred till the disposal of shares acquired in exchange for the contribution.

Generally, costs incurred for the purpose of earning revenue are tax deductible at the time the revenue is earned provided that appropriate apportionment is possible; otherwise, costs are deductible in the tax year in which they were incurred. Most costs are tax deductible unless they are of a capital nature or benefit from special treatment in law.

Tax losses suffered by a company having legal personality may be carried forward and credited against income over the period of the following five tax years. Only half of the original loss may be deducted in any of the five years.

The standard corporate income tax rate is 19% in 2004. Where the taxpayer's tax year is different from the calendar year, the start of the year determines what the tax rate will be applicable during the whole tax year.

Individuals who are domiciled (i.e. staying with the intention to stay permanently) in Poland are subject to tax on their worldwide income.

Limited taxation (i.e. on Polish source income only) applies to those individuals who are not domiciled in Poland.

Income tax is payable on most sources of income including cash and in-kind benefits which are taxable as salary. One of the most important exceptions are relocation costs, which may be reimbursed at levels of up to twice the person's monthly salary in the month of relocation, which is tax free.

Interest income from personal, i.e. non-business, bank accounts and income from dividends, earned on the territory of

Polandare subject to a 19% withholding taxand are not subject to further taxation. The above flat rates are applied unless a

Income tax is payable at progressive rates: 19%, 30%, 40%.

Social security contributions are payable at rates of 18.71% by employees and (19.83% - 22.72%) by employers up to a cumulative earnings limit of PLN 68,700, and 2.45% by employees and (3.57 - 6.46)% by employers thereafter.

Contributions consist of four elements: pension (19.52%), disability (13%), sickness (2.45%) and industrial injury (0.97% -3.86%) insurance. The rate for the industrial injury insurance depends on the type of business activity conducted.

The first two are payable in equal parts by employees and employers up to the specified limit. Sickness insurance is only paid by employees and accident insurance only by employers. Both are uncapped. Employers must also pay contributions of 2.45% to the Labour Fund and 0.15% to guarantee the salaries of employees of bankrupt companies.

In general, for individuals subject to personal services contracts, contributions are computed in a similar way as for

employment income, i.e. are payable at the same rates, allocated between the service provider and the principal as

between employees and employers and subject to the same limits, or uncapped as appropriate. In certain cases, it may be possible to avoid payment of sickness and accident insurance. If the personal service contract is concluded with an employer, social security is payable as in the case of an employment contract.

Where an individual concluded a contract with a third party and already pays contributions in respect of e.g. an employment contract, payment of contributions for a personal service contract is voluntary unless the work is performed for the ultimate benefit of the original employer. However, the remuneration from the employment contract must be PLN 824 per month or higher.

In addition to the above healthcare contribution is payable. The contribution in question amounts to 8.25% (in 2004) of the employment income decreased by the employee social security contribution assessed. The healthcare contribution may be deducted from tax on employment income up to 7.75% of its calculation basis. Consequently, the remaining part of the healthcare contribution (0.50% of the assessment basis) is left as an additional non-deductible cost (decreasing the after-tax income).

Foreign employees employed by a foreign entity, i.e. not under an employment contract regulated by the Polish Labor Code, are not subject to social security/healthcare contributions. If employees also have a local contract under which they receive remuneration, contributions are only payable on the local element. As of 1 May 2004, after Poland accession to the EU, the European social security regulations start to apply. The general rule involves contributing to the social security system of the country where the work is actually performed.

On 1 May 2004 Poland becomes a member of the European Union (EU) and a part of the Common Market. Generally

speaking, the Polish VAT Act has changed in line with the regulations of VI Directive and other EU Directives related with VAT. However, based on the Treaty of the Accession, there are some derogations as far as the harmonization is concerned.

Under the draft Polish VAT regulations, VAT applies to the following transactions:

- supply of goods and services made in Poland for consideration. The supply of goods includes handing over by a taxpayer of business - related goods for not business - related purposes, e. g. donations. However, the supply of samples and small gifts in the course of the business is excluded from the VATable events;

-exportation of goods outside the EU;

- importation of goods from outside the EU;

- intra - Community acquisition of goods effected for consideration in Poland, inclusive of the movement of goods between different Member States within the same business;

-intra - Community supply of goods inclusive of the movement of goods between different Member States within the same business.

Activities which are outside the scope of VAT include selling up the company or a branch that prepares its balance sheet independently.

The taxpayers are legal entities, organizational units without the status of legal persons and individuals that independently carry on any economic activity, disregarding its goal or results. A VAT payer is also an entity which is the recipient of the services rendered or goods delivered by taxpayers having their registered seat, fixed place of business or place of residence abroad.

The use of word 'independently' means that employees under contracts of employment are excluded from tax. Moreover, other persons rendering services under 'ad-hoc' agreements are also outside the scope of VAT provided. They are bound to the employer by a contract of employment or by any other legal ties creating an employee-employer relationship with regard to the working conditions, remuneration and employer's liability.

The place of supply with respect to goods is considered the following:

- the place where the goods are at the time of dispatch or transport to the purchaser;

- the place of installation or assembly;

- the place where the goods are at the time of delivery (in case they are not dispatched or transported);

- as regards the delivery of goods on ship, plain or train boards - the place where the passenger transport starts;

- the country of importation.

The place of intra - Community acquisition is in principle the place where the transport or dispatch ends.

The place of supply of services, in principle, is the place where the supplier has his registered seat or fixed place of business or the place of residence. However, there are special rules determining the place of supply of, among others:

- services connected with immovable property - the place of supply is where the property is situated;

- transportation services - the place of supply is the place where the transport takes place, having regard to distances covered;

- intangible services, e. g. consultancy, advertising, electronic etc. - the place of supply is assigned to the place of establishment of the customer provided that the customer is a taxpayer established in the EU or any entity established in the third country.

In Poland, three rates of VAT apply - the standard rate of 22%, the reduced rates of 7% and of 0% (exemption with credit according to the European VAT nomenclature). The standard rate of VAT applies to all supplies of goods or services, unless a specific provision allows a reduced rate or exemption.

As an example, the 7% VAT rate is applicable to health care related goods and hotel services. 0% supplies include exports of goods outside the European Union and intra - Community supplies of goods. Exempt are, e. g., supplies of financial or health care services. In addition, on the basis of the EU Accession Treaty, exclusively within the transitional period, i. e. till 30 April 2008, the super - reduced VAT rate of 3% may be applied to foodstuffs.

The taxable base for VAT purposes is net turnover, including received subsidy, subvention and any other extra of similar nature related to supply of goods or services, decreased by the amounts of rebates and discounts.

As regards import of goods, the taxable base is the customs value increased by all customs and excise duties, including provision, packaging transportation and insurance costs incurred up to the first place of destination in Poland.

The taxable base for intra - Community acquisition of goods is the amount of payment due from the purchaser, inclusive of taxes and duties paid in connection with the goods acquisition as well as costs of provision, packaging, transportation and insurance collected by the seller.

In principle, under the Polish VAT regulations the tax point arises when the goods have been released or the services have been completed. Where a transaction should be documented with a VAT invoice, the tax point is the time when such a document is issued, but no later than on the 7th day from the day the goods were released or the services completed.

However, for selected supplies (e.g. electricity, telecommunications, transport, leasing) the tax point is deemed to arise at a different point (e.g. payment deadline or payment receipt).

A taxpayer may recover input tax, which is VAT charged on goods and services supplied to it for taxable business purposes.

Input tax is generally recovered by being deducted from output tax, which is the VAT charged on the supplies made.