The concept of “entrepreneur” in recent case law – controversy

The concepts of “entrepreneur” and “business activity” are defined in the Law of Entrepreneurs of 6 March 2018 (Journal of Laws 2018.646). A number of other specific acts clarify those concepts for the needs of particular legal disciplines and various spheres of state activity, recognizing certain types of activities and entities as having the status of entrepreneurs or denying them this status. A clear distinction between what is and what is not a “business activity”, as well as who can enjoy the status of “entrepreneur” and who cannot, seem to be crucial for the efficient economic functioning of the state and transparent activities of market entities, but they still give rise to controversy.

In recent months, those concepts have been of particular interest to common and administrative courts. The cases I wish to mention concerned various aspects of that issue and different disciplines of law, but they nevertheless seem interesting for outlining the problems that may arise when classifying market entities as “entrepreneurs” or their activities as functionally corresponding to the definition of “business activity”.

These are not only theoretical speculations, because in matters I discuss here, significant financial burdens and potentially significant risks related to contractors’ claims depended on the correct classification of the status of an entrepreneur.

At the same time, I would like to point out that the purpose of this paper is not a comprehensive analysis of the issue, but only a review of the latest case law as indicated above.

Definition

The definitions of “business activity” and “entrepreneur” are formulated in the Law seemingly clearly. Pursuant to Article 3 of the Law on Entrepreneurs:

‘A business activity is an organised gainful activity, carried out in one’s own name and on a continuous basis.”,

On the other hand, pursuant to Article 4(1) and (2) of that Law:

1. An entrepreneur is a natural person, a legal person or an organizational unit that is not a legal person, which is granted legal capacity by a separate act, and which conducts business activity.
2. Partners  in a civil partnership are also entrepreneurs  within the scope of their business activity.

Entrepreneurs according to the “PFR Shield”

The first group of judicial decisions I would like to discuss concern the qualification of bailiffs’ offices as entrepreneurs for the purposes of obtaining subsidies under the Financial Shield of the Polish Development Fund for Small and Medium-sized Enterprises” (“Programme”).

The Programme assumed that only entrepreneurs within the meaning of Article 4(1) and (2) of the Law on Entrepreneurs could be its beneficiaries. Many members of the professional association of court bailiffs applied for the subsidy. Their applications were positively verified by the institution providing the subsidy on behalf of the government, and the subsidies were paid.

Then, in accordance with the regulations of the Programme, the entity implementing the Programme for the Council of Ministers applied for the return of the subsidy, arguing that the bailiffs had received the subsidy on the basis of providing false data – as they did not have the status of entrepreneurs.

In fact, pursuant to Article 33(1) and (2) of the Act on Court Bailiffs of 22 March 2018 (Journal of Laws 2018. 771), bailiffs were explicitly excluded from the category of entrepreneurs within the meaning of the regulations governing the establishment, performance and termination of business activity and prohibited from conducting business activity.

Cases brought by a government unit implementing the Programme were pending before the District Court in Warsaw, which, as a court of first instance, granted protection to bailiffs in several cases and dismissed the claims, despite the clear wording of the above-mentioned provisions of the Act on Court Bailiffs, according to which bailiffs did not have the status of entrepreneurs and did not carry out business activity.

When analysing the facts, the District Court in Warsaw focused on the actual manifestations of the bailiffs’ activities and determined that although court bailiffs were not classified as entrepreneurs under the provisions of the Act on Court Bailiffs, the following apply to them:

• provisions of the Personal Income Tax Act of 26 July 1991,
• the Act on Social Insurance System of 13 October 1998, and
• the Act on healthcare services financed from public funds, concerning persons conducting business activity of 27 August 2004.

Moreover, bailiffs (iv) organize and run bailiffs’ offices, (v) hire employees under contract of employment, mandate contract or contract for specific work or service contract, and (vi) cover the costs of enforcement activities from commissions obtained in the form of enforcement fees. Therefore, the legislator placed them in many respects on an equal footing with persons conducting non-agricultural business activity, so they should benefit from assistance similar to that received by other employers during the coronavirus pandemic.

This position was shared also by the Ministry of Justice, which expressed its opinion on the case. Interestingly, this position was later changed to the detriment of bailiffs.

The above analysis led the court to a firm conclusion that it cannot be assumed that a bailiff provided false information by assigning itself the status of an entrepreneur when submitting an application for payment of the subsidy – contrary to the literal wording of the provisions of the Act on Court Bailiffs.

From the above facts, the court concluded that the plaintiff had abused the legal right based on Article 5 of the Civil Code and conducted an extensive analysis of the functional aspects of qualifying entities for the Programme, which should be treated as entrepreneurs.

For the purposes of this paper, however, another important conclusion can be drawn, namely that in business transactions, the definition and status of an entrepreneur may be treated differently for the purposes of different aspects of business activity.

It is possible to recognize the status of an entrepreneur in the functional sense as well as in the formal sense of registration. It is not possible to unambiguously define this status in a “universal” way and extend it to all spheres of business activity and relations with public and local authorities, but on the contrary – every sphere of business activity that requires the use of the entrepreneurial attribute should be subject to independent analysis.

[decisions of the Regional Court in Warsaw: I C 502/22 of 20.11.2023, III C 1417/22 of 27.10.23, I C 243/23 of 25.10.2023].

Registered entrepreneur – real estate tax

Another, albeit equally problematic, aspect of defining the status of an entrepreneur emerged in the case examined by the Voivodship Administrative Court in Białystok (decision of 29 November 2023, I SA/Bk 338/23).

So, the Town Mayor initiated ex officio tax proceedings against P. Spółka z ograniczoną odpowiedzialnością in S., to determine the amount of real estate tax liability. The reason for initiating the proceedings was that the company’s tax return showed a part of the plot and building properties at the rate as for “other” land, and not at the rate related to “conducting business activity”. The Mayor finally determined the amount of tax liability, which was appealed by the taxed company.

The company explained that it was an entity which, despite being entered in the National Court Register, meets the requirements to be recognized as an entity performing public tasks – a municipal company of public utility. Although it is a commercial law company, it cannot be placed on the same footing with an entity conducting business activity in the strict sense, because according to § 1 section 2 of the founding deed: “The purpose of the Company is to perform the public utility tasks entrusted to it by the District of S., consisting in the provision of services in the field of ongoing maintenance of county roads and buildings owned by the District of S.”.

Moreover, pursuant to Article 10(1), (4) and (5) of the Act on Municipal Management of 20 December 1996 (Journal of Laws 2021.679, as amended), district companies were excluded from the possibility of conducting business outside the public utility zone, leaving such a right to municipal companies run by municipalities and voivodships. Therefore, a municipal district company may not in any way conduct profit-making business activity.

The local government appeals board (SKO) did not grant the appeal and upheld the Mayor’s decision. The SKO held that it is irrelevant for the recognition of real estate as related to business activity if it is not profitable or if it is allocated for statutory purposes. In the opinion of the appeals board, the concept of an entrepreneur under the Local Taxes and Fees Act is linked to having an entry in the relevant register of such entities, therefore the appeals board concluded that the real estate in question held by the party is related to the conduct of business activity by this entity and the decision of the authority of the first instance to tax them at the highest tax rates was justified.

The company lodged a complaint against this ruling, arguing that despite being entered in the National Court Register, the nature of its activity, contrary to the position of the SKO, does not allow it to be considered an entrepreneur in the conditions obliging it to pay tax at the highest rate, due to specific factual circumstances resulting from the type of activities actually undertaken by the company.

The Administrative Court did not agree with the company’s position and held that the concept of an entrepreneur under the Local Taxes and Fees Act (Journal of Laws 2019. 1170, as amended) is autonomous and the Act does not refer to the Law of Entrepreneurs in terms of understanding the term of “entrepreneur”.

The court agreed with the appeals board that this means that the concepts of an entrepreneur and an entity conducting business activity should be defined for the purposes of this tax act, taking into account the distinctiveness of tax law and the internal scheme of this provision.

There is no doubt that tax law is a separate branch of law and the definitions contained therein, if they do not refer to the content of provisions defined in other areas of law, may be interpreted taking into account the specific character of this type of law.

The court held that by referring to the Law of Entrepreneurs in Article 1a(1)(3) of the Local Tax Act only in the scope of “other entity conducting business activity”, the legislator adopted a formal definition of an entrepreneur. This means that it is necessary to assume that an entrepreneur is one who has an appropriate entry in the relevant register, i.e. an entry in the business register of the National Court Register makes the company an entrepreneur.

Moreover, the court agreed with the position of the legal literature on the basis of the provisions of the Local Taxes and Fees Act and stated that even if a limited liability company or a joint-stock company has not been established for the purpose of conducting business activity, they have the status of a registered entrepreneur by being entered in the business register of the National Court Register.

In the opinion of the court, the fact that a district company performs activities exclusively in the sphere of public utility does not preclude the assumption that the company conducts business activity. The court therefore disagrees with the appealing company as the nature of the company and its activities do not allow it to be regarded as an entrepreneur. The argument about the sources of financing of the company, i.e. from the compensation received from District S., is irrelevant.

Conclusions

The two judicial decisions cited here were issued in different factual situations, different areas of law and by courts with different material jurisdiction. The common denominator, however, was the interpretation of the concept of business activity, the definition of an entrepreneur and the arguments of the parties.

In both cases, the parties argued that the decisive factor in determining whether a party conducts business activity or not is the actual scope of its activity and not a rigid letter of the law.

As can be seen, the above arguments have met with a fundamentally different assessment by the courts. The Regional Court agreed with the defendants that the actual manner in which the business is carried out is crucial. On the other hand, the Voivodship Administrative Court took the opposite position, recognizing the priority of formal interpretation and holding that it is not the activity but the entry in the register that determines the status of an entrepreneur. On the one hand, we have a functional view, and on the other, a purely formal aspect.

Although those cases should not be directly juxtaposed within the scope of substantive law arguments, and even taking into account the fact that those decisions are not final, the conclusions that flow from this analysis are significant.

Namely, the definition of an entrepreneur and the pursuit of business activity, despite its seemingly clear location in the legal system, is not universal, but should always be interpreted individually, taking into account the branch of law and a given factual situation.

What is more, the analysis of the above-mentioned judicial decisions shows that even the argumentation seemingly contra legem does not preclude the ultimate success in a complicated and ambiguous system of polish law on entrepreneurs, hence it is worth to make analysis and defend oneself even in difficult situations – to which we encourage you.

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