Establishment of software development center in Poland | Guide to IT outsourcing

Updated: 20.06.2024

Why Invest in Poland?

Since the collapse of the communist regime in Central Eastern Europe, Poland has emerged as a leader in the region. Over the past three decades, Poland’s gross domestic product (GDP) has increased more than tenfold, growing from $65 billion in 1990 to $690 billion in 2023.

In comparison, Hungary and Czechia’s economies grew by five and seven times, respectively. Key reasons why foreign investments so frequently hit Poland are:

→ Strategic Central Location

Poland’s central position in the Central and Eastern Europe (CEE) region, bordering Germany, Czechia, Slovakia, Ukraine, Belarus, Lithuania, and Russia, makes it a prime location for investment and business operations.

→ Access to the Baltic Sea

Direct access to the Baltic Sea is facilitated through major seaports in Gdańsk, Gdynia, Szczecin, and Świnoujście, enhancing trade and transportation opportunities.

→ Advanced Infrastructure

Poland boasts a developed network of highways spanning 5,000 km and an extensive railway system covering 20,000 km, providing efficient transportation and logistics solutions.

→ Legal and Political Stability

As a member of the European Union (EU) and NATO, Poland offers a stable legal and political environment, ensuring security and predictability for investors.

→ Abundant Talent Pool

With 17.3 million active employees, Poland has a large and skilled workforce comparing to other eastern european countries, making it an attractive destination for businesses seeking human resources.

→ Large Consumer Market

Poland has a substantial consumer market with over 38 million residents and a steady influx of expatriates from Eastern European countries, offering significant business and growth opportunities.

Why outsourcing of software development to Poland is so popular?

Hiring software developers in Poland by international corporation has become increasingly popular for several reasons:

1. High-Quality Education System. Over 300 Polish tech universities produce many highly skilled graduates in computer science and related fields, forming a robust IT talent pool of Polish software developers and software engineers.
2. Massive IT Expats Hub. Poland became one of key destinations for relocations of talented developers from Ukraine, Belarus, and Russia. It is one of the most popular destinations for outsourcing services due to its large talent pool with good technical skills and technical education.
3. Skilled Workforce. Polish developers are known for their technical proficiency and problem-solving abilities.Companies at international market appreciate local developers especially because Polish developers work with popular programming languages and high-tech skills that fulfill all project requirements in the IT market.
4. Cost-Effectiveness. Compared to Western Europe and the United States, the cost of hiring developers in Poland is lower.
5. Cultural Compatibility. Poland’s cultural and business practices are similar to those in Western Europe and North America.
6. Time Zone Advantage. Poland’s time zone (Central European Time) is convenient for coordinating with both European and North American offices. This overlap in working hours makes real-time collaboration more feasible.
7. Strong English Proficiency. Many Polish software developers have a good command of the English language, which is crucial for international projects and communication.
8. Growing IT Ecosystem. Poland has a rapidly growing tech industry with a robust ecosystem of IT companies, startups, software companies and tech hubs.
9. Tax Incentive for Tech Companies. Polish government attracts IT investors with tax incentives such as IP Box, R&D Relief, Special Economic Zones

These factors combined make Poland an attractive destination for companies looking to hire skilled software developers. In consequence of above listed factors major IT firms have invested in Poland including:

• Google (Warsaw, Kraków),
• Microsoft (Warsaw, Wrocław),
• IBM (Warsaw, Kraków),
• Intel (Gdańsk),
• Cisco (Kraków),
• Amazon (Warsaw),
• HP Inc. and HPE (multiple cities),
• Capgemini (Kraków, Wrocław, Poznań),
• SAP (Warsaw, Gliwice),
• Accenture (Warsaw, Kraków).

These companies have established offices and development centers, contributing significantly to Poland’s local IT industry growth.

IT Hubs in Poland – which cities attract the highest number of IT investors?

The Polish IT sector employs approximately 600,000 people, with major hubs in Warsaw (110,000 IT employees), Kraków (55,000 IT employees), and Wrocław (40,000 IT employees).

Key sectors include fintech, software development, gaming, and e-commerce gaming. Other notable hubs include Poznań, Gdańsk, and Łódź, contributing to Poland’s boosting IT industry.

Employment forms for Polish software developers

The legal environment for the employment of software developers in Poland is somewhat distinct compared to other countries. According to the latest statistics:

• Approximately 65% of software developers in Poland work under B2B (Business-to-Business) contracts.
• Only about 35% are employed through traditional employment contracts.

The preference for B2B contracts among software developers can be attributed to the significantly lower taxation and social security contribution costs associated with this form of engagement. As a result, a larger portion of the budget is retained by the software developer (contractor). For figures simulation, please see below.

It is legal to hire software developers based on B2B contracts?

Engaging software developers through B2B agreements is a common practice in Poland, widely accepted by public authorities. Despite multiple attempts by the Polish government to limit B2B contracts to prevent the circumvention of employment laws, these efforts have been unsuccessful due to political and social resistance.

According to legal experts, the engagement of software developers via B2B contracts is considered lawful under the following conditions:

• Independence and Autonomy – Contractors must retain significant independence and autonomy in their work and task performance.
• Lack of Subordination – Contractors should not work under conditions of subordination typical of an employment relationship. They must have control over how and when they perform their tasks.
• Distinctive Contractual Terms -The contract terms should reflect a B2B relationship, distinctly different from those in employment contracts, encompassing differences in benefits, rights, and obligations.

What is the difference in cost of software developer engaged based in B2B contract and employment contract?

As you may see in below table – in case of monthly total budget of 15.000 PLN for one software developer:

• Employee receives in his pocket approx. 9.000 PLN, remaining amounts are taxes and contributions;
• B2B contractor receives in his pocket approx. 11.000 PLN, remaining amounts are taxes (we assumed 12% flat tax typical for IT programmers) and contributions.

It is worth mentioning that in case of employment contracts all above figures shall be calculated and withheld by the employer; while in case of B2B provider all the above figures shall be calculated and withheld by the B2B provider himself.

As a result, the administrative / payroll burden stays on the side of: employer – in case of employment contract; B2B provider – in case of B2B contract.

What is the cost of software developer in Poland?

Cost of junior software developer in Poland starts from approx. 25.000 USD annually, while senior developer costs approx. 75.000 USD annually.

Small businesses – how they outsource software development to Poland?

Small businesses aiming to hire 1 to 10 software developers in Poland typically do so without establishing a local company or branch.

This is often achieved through one of two methods:

1. Concluding B2B contracts with local software developers.
2. Hiring employees under employment contracts.

The second option is feasible without registering a local company but requires the foreign business to register as an employer with ZUS (the Polish Social Security Institution) and engage a Polish payroll provider to manage monthly taxes and social security contributions.

This usually triggers the obligation to open a bank account in Poland to facilitate tax and contribution payments through specific payment channels.

Due to legal concerns and risks, using an Employer of Record (EOR) in Poland is not recommended and therefore not discussed here.

When should we establish our own registration in Poland?

Determining the right time to open a local company or branch in Poland depends on the specific circumstances of your business. However, our legal experts generally advise considering this step if:

• Your team grows to 10 or more software developers, or
• You rent an office in Poland for your staff, regardless of headcount.

These situations may be considered as creating a Permanent Establishment (PE) in Poland, which would trigger tax, accounting, and reporting obligations.

Furthermore, we recommend establishing a local company if your software developers are or will be hired under employment contracts.

Setting up payroll in Poland by a foreign entity requires several steps, including foreign employer registration and opening a bank account, as well as incurring expenses such as payroll provider fees. Therefore, opening a local company can streamline these processes and make management more efficient.

Establishing your own software development company in Poland

When you decide to start business in Poland by establishing a local software development service center, you will have two primary legal structures to choose from:

• Limited Liability Company (LLC)
• Branch Establishment

Other legal forms are not commonly used, and thus, not worth detailed consideration. Statistics indicate that 95% of investors in Poland prefer LLCs for their business ventures, 3% opt for Branch Establishments, and the remaining 2% use other legal forms.

Which legal form offers more advantages for a business – a branch or an LLC?

The choice between establishing a branch or forming a Limited Liability Company (LLC) depends on various factors, including the nature of the business, legal and tax considerations, and the strategic goals of the company.

However – LLC is usually a better option as it provides liability limitation, operational flexibility, and enhanced credibility in the local market.

A branch is typically chosen by companies that wish to leverage foreign licenses or insurance already granted to the parent company.

Disadvantages of Establishing Separate Software Development Registration

Establishing a separate registration for a software development entity can present several challenges. Two primary disadvantages stand out:

1. Formalistic Accounting and Tax Regime

The process involves adhering to a highly formalistic accounting and tax regime, which requires attention to deadlines and accuracy in recording even the smallest expenses. This can be particularly cumbersome, as it demands significant administrative effort to ensure compliance with stringent regulations.

To manage this complexity, businesses often rely on professional accounting outsourcing companies, which can help simplify these processes. However, this adds an additional layer of expense and dependency on external providers.

2. VAT Refund

Another minor challenge might be the process of obtaining VAT refunds. Local software development companies usually are forced to apply for VAT refunds periodically, which can lead to a portion of their funds being temporarily frozen.

This is due to the fact that local subsidiaries pay VAT (in the prices / fees they cover), but do not accrue it (as they do not sell locally). I.e., contractors invoice the local company with a 23% VAT, which is reimbursable but necessitates submitting a refund request and waiting for the reimbursement.

Reimbursement normally can be done by offset, but it is most usually not available for local cost centers which do not sell goods locally. This is a standard procedure for software development companies in Poland, potentially impacting cash flow and financial planning.

It is important to note that these disadvantages apply equally to both forms of registration: a Limited Liability Company (LLC) and a branch office.

Typical tax and financing set-up. Relationship between Parent company and Polish software development center

1. Financing

Financing of the local Polish software development subsidiary is usually done by:

• Prepayments for future services and monthly or quarterly settlements; or
• Intercompany loans with reasonable interest rate;
• Capital injections with usually involve 0,5% transaction tax.

2. Intercompany payments

Polish software development company shall receive remuneration for the services it provides to the parent company, hence the relationship between Polish subsidiary and Parent company is usually based on the following principles in order to meet tax requirements:

• Relationship between mother company and Polish subsidiary is based on intercompany agreement.
• Polish company invoices Parent company monthly or quarterly for the services it provides to Parent company.
• Service invoice includes the mark-up which frequently is calculated on a cost plus basis, i.e., cost plus reasonable margin.
• Should the services exceed transfer pricing thresholds (2.000,000 PLN for services) – transfer pricing documentation, incl. benchmark study for the margin shall be prepared.

Poland: Your next prime destination for investment and software development outsourcing

Poland has emerged as a prime destination for foreign investments and software development outsourcing due to its strategic location, advanced infrastructure, legal and political stability, and a large pool of skilled talent.

The country’s IT sector is thriving with major hubs in Warsaw, Kraków, and Wrocław, attracting major tech firms such as Google, Microsoft, and IBM. Most software developers in Poland work under B2B contracts, offering cost-effectiveness and flexibility.

For businesses looking to establish a local presence, forming a Limited Liability Company (LLC) is generally more advantageous than setting up a branch, providing liability protection and operational flexibility.

Contact us to explore how your business can benefit from Poland’s strategic location, advanced infrastructure, and skilled talent pool.

FAQ – Establishment of software development center in Poland