Effective from 1 January 2019, income tax legislation was amended to introduce revolutionary changes in the Polish WHT framework.
The changes include:
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:
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.
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.
The 2019 amendment also changed the definition of the beneficial owner.
As of 1 January 2019, a beneficial owner is the entity which:
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:
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:
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.
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.
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