Effective from 1 January 2019, income tax legislation was amended to introduce revolutionary changes in the Polish WHT framework.
The changes include:
- modifying the WHT process to be applied by WHT agents,
- materially amending the beneficial owner definition,
- imposing an obligation on agents to follow a “due diligence” process to verify whether they may abstain from levying WHT or apply an exemption or a lower rate.
New WHT mechanism
Polish WHT rates range from 10% to 20%, depending on the nature of the payment.
Under the old law, a WHT agent was allowed to not levy WHT or to apply a reduced WHT rate or an exemption, if authorised by special regulations, including DTTs.
After the changes, to the extent that the payments made by a WHT agent to a non-resident exceed PLN 2 million in aggregate during a tax year, the WHT agent must levy WHT at the standard rate (usually 19% or 20%) in all cases. The foreign taxpayer may then seek a refund of any of the WHT that represents excessive (double) taxation.
With such a low threshold (PLN 2 million in total gross amount of payments made to a single foreign recipient during one tax year of the Polish WHT agent), the relief at source method has in practice been replaced with the pay and refund mechanism.
However, the law offers two options for relief at source:
- Representation by the Polish WHT agent’s management that it has:
- the documents required under tax law to forbear levying WHT or to apply a reduced rate or an exemption; and
- conducted a due diligence verification of the right to apply an exemption or a reduced rate, or not to levy WHT, under special regulations, it is not aware of anything that could reasonably give rise to a suspicion that any circumstances exist which would preclude the application of such rate or exemption or the option not to levy WHT.
However, together with amending the income tax legislation, the new law also amended the Polish Fiscal Penal Code to impose personal criminal liability on members of the WHT agent’s management if their representation turns out not to be true to facts.
- Exemption opinion issued by tax authorities. However, this is available only for exemptions under PS Directive or I&R Directive and is difficult to obtain by foreign taxpayers for formal reasons when they do not have a Polish tax ID (NIP).
While the changes are fundamental, they have generated plenty of controversy as to their practical application. The Finance Ministry has therefore deferred the new law for as many as five times for CIT and four times for PIT. The last such deferral applies until 30 June 2021.
According to news from the Finance Ministry, they are planning to defer the new law again (apparently for the last time), this time until the end of 2021. The Ministry is working on, quote, “revamping the statutory regulations on the WHT mechanism, including the scope of application of the said WHT refund procedure.” This work is supposed to be finished in 2021.
New definition of beneficial owner
The 2019 amendment also changed the definition of the beneficial owner.
As of 1 January 2019, a beneficial owner is the entity which:
- receives the payment for its own benefit, and in particular decides independently on its use and bears the economic risk of its total or partial loss,
- is not an intermediary, representative, trustee or any other entity legally or contractually required to transfer the payment in whole or in part to another entity, and
- carries on genuine business activity in the country in which it is established, if the payments are received in connection with the business.
The genuine (substantive) business activity test is to be carried out by reference to the criteria in the controlled foreign company regulations. This means that the test must consider the following requirements:
- whether the registration of the entity entails the existence of an enterprise through which it genuinely pursues business activities, and in particular it has premises, qualified personnel and equipment used in its business;
- whether the entity forms a structure that operates without economic reasons;
- whether there is a proportionate relationship between the scope of the entity’s business and its actual premises, personnel or equipment;
- whether the agreements made by the entity reflect economic reality, have a valid commercial rationale and are not manifestly contrary to general commercial interests of the company;
- whether the entity autonomously performs its basic economic functions using its own resources, including managing persons on the site.
The new definition intends to put a stop to treaty shopping and similar practices.
However, the way it is used in Polish income tax law as well as its over-sophistication has led to a situation where:
- there is plenty of controversy mainly about whether the test is really applicable to all payments to non-residents (including corporate profit distributions) and about its application to such entities as holding companies, shared services centres, and collective management or investment schemes;
- Polish WHT agents have a number of additional duties associated with finding the status of the recipient as the economic owner of the payment (one who decides independently on its use and incurs the economic risk of its loss or diminution in value), including through the substantive business test.
Despite severe criticism of business and advisory circles, the amended definition of the beneficial owner has remained in force since 1 January 2019 and its application has not been postponed.
Responding to critical comments, the Finance Ministry attempted to offer an official construal of the definition by publishing a draft of dedicated tax guidance on 19 June 2019.
However, the proposed guidance came under fire from businesses and the consulting industry and has never been finalised. Neither has the Finance Ministry come through on its promise to issue a public tax ruling that would provide a reasonable framework for applying the definition in various real business situations.
“Customer due diligence” by Polish WHT agents
For all practical purposes, this law shifts control functions and responsibilities, including the new beneficial owner test, from tax authorities onto the entities making payments to non-residents, i.e. to WHT agents exposed to considerable risk.
Vaguely defined compliance duties are accompanied by dedicated penalties, such as where the Tax Code was amended to introduce a tax surcharge that may be imposed on the Polish WHT agent, if the relief at source representation by its management proves untrue, or if the agent fails to carry out the required customer due diligence or if its due diligence process was inadequate given the nature or scale of its business. Such tax surcharge is imposed at the standard rate of 10% of the gross payment, but may reach 20% or even 30% in extreme cases.
If you wish to discuss these topics, please contact: WTS Saja, Poznan
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