On 26 July 2021, the government published a broad legislative proposal (hereinafter: the “Draft”) to make important amendments in various tax laws, including income tax and VAT regulations. The changes may be relevant for the financial services industry and investors in Poland.
The Draft is currently undergoing the consultation process and its ultimate wording is not decided yet.
Among other proposals, the Draft:
1. Seeks to change the WHT framework as promised by the Finance Ministry;
2. Introduces various relief and incentive measures to spur interest in investing in Poland (including the “Polish holding company” regime);
3. Makes it possible to elect the application of VAT to financial services (previously exempt).
1. WHT changes
The Polish income tax laws were amended, with effect as of 1 January 2019, to change the WHT collection procedures. But the Finance Ministry has already deferred the application of these changes on six occasions for CIT and on five occasions for PIT, with the most recent deferment until 31 December 2021.
The regulations proposed in the Draft are very likely to determine the ultimate structure of the Polish WHT collection framework.
WHT collection mechanism
The Draft proposes a hybrid WHT collection mechanism with both the pay and refund and the relief at source approach. Which of these applies will depend on the payment type (the what test), the status of the payee as a related vs. unrelated party (the who test), and the total amount of payments made to the given taxpayer (the how much test).
The pay and refund mechanism will apply to:
→ income that is passive or should be treated as such, being:
- dividends and other corporate profit distributions;
- interest, copyrights and related rights, rights (or sale of rights) to inventions, trademarks or industrial designs, royalties for the transfer of a secret formula or production process, or for the use of (or the right to use) an industrial device, including a means of transport, or a commercial or scientific device, or for the transfer of industrial, commercial or scientific know-how;
- income which, for no valid commercial reasons, was not treated as any of the foregoing;
→ income paid to related parties, if the total amount of payments in any way subject to Polish WHT which are made to the same taxpayer has exceeded PLN 2 million within the withholding agent’s tax year.
The relief at source mechanism will apply to:
- income other than passive income, such as payments for professional/management services (advisory, accounting, market research, legal, advertising, management and control, data processing, staff recruitment and acquisition, guarantees and suretyships, etc.);
- passive income paid to unrelated parties;
- passive income paid to related parties, if the total amount of payments in any way subject to Polish WHT which are made to the same taxpayer has not exceeded PLN 2 million within the withholding agent’s tax year.
Other WHT changes
The Draft retains the anti-fraud due diligence rules which require the Polish withholding agent to verify if it is indeed lawful to exempt the payment, forbear collecting the tax or apply any tax rate other than the standard one. The only change is that whether or not such due diligence has been exercised is to be determined by reference to not only the nature and size of the Polish agent’s business but also to intercompany relations as defined in transfer pricing regulations.
The Draft modifies the available options allowing the agent to apply WHT collection preferences, such options being:
- a representation by agent’s management, or
- an opinion on preferential treatment (earlier this was an exemption opinion).
The most important change here is as follows:
Currently, an exemption opinion may be requested by foreign taxpayers or Polish withholding agents (with the latter being allowed to do so only if they have incurred the economic burden of the tax) who enjoy the WHT exemption under PS Directive and/or IR Directive.
The solution proposed in the Draft:
- Opinions on preferential treatment may be requested by foreign taxpayers, withholding agents or entities making payments through entities operating securities accounts or omnibus accounts.
- An opinion on preferential treatment may be requested if the taxpayer is entitled to exemption under PS Directive and/or IR Directive and/or if he is entitled to preferential WHT treatment under the double tax treaty.
Additionally, the Draft slightly changes the definition of the beneficial owner. However, it keeps the controversial requirement of having business substance (genuine business activity).
2. Relief and incentive measures to spur interest in investing in Poland (the “Polish holding company” regime)
The Draft proposes a number of investment relief measures, including by introducing what is called the Polish holding company regime.
The regime is designed to create an environment conducive to locating holding companies in Poland.
The proposed solution is intended as an alternative to tax groups and to PS Directive exemptions.
The relief would be available for Polish entities with domestic or foreign subsidiaries.
The idea is as follows:
- CIT exemption for 95% of dividend amounts received by the holding company from its subsidiaries (with the remaining 5% being subject to Polish CIT at the standard rate for dividends, which is 19%);
- CIT exemption for gains on sale of shares in subsidiaries, on condition the purchaser is not a related party (the exemption will not apply to shares in a domestic or foreign subsidiary if at least 50% of the value of its assets is represented directly or indirectly by real estate or rights in real estate situated in Poland).
However, the exemptions named will apply subject to a number of conditions.
For a company to be considered a holding company, it must have the required legal form, i.e. it must be a spółka z ograniczoną odpowiedzialnością (limited liability company) or a spółka akcyjna (joint-stock company), and must have its seat or management in the territory of Poland.
Further requirements for a Polish holding company:
→ It must directly own at least 10% of the share capital of its subsidiaries for a continuous period of at least one year.
→ It may not belong to a tax group.
→ It may not be tax-exempt under SEZ (special economic zone) regulations or PIZ (Polish Investment Zone) regulations, or have PS Directive exemptions.
→ It must have business substance (genuine business activity).
→ No shares in it may be held, directly or indirectly, by a person who is located or registered, or whose seat or management is located, in a country or territory:
- which is a tax haven (harmful tax competition), or
- which is listed by the European Council as an uncooperative tax jurisdiction, or
- with which the Republic of Poland has not ratified the relevant international agreement.
For a company to be a subsidiary of a Polish holding company, it must satisfy the following conditions:
- The holding company must directly own at least 10% of its share capital for a continuous period of at least one year.
- It must not hold more than 5% of the share capital of any other company.
- It must not hold participations or units in any investment funds or collective investment schemes, or interests in any partnerships, or interests with the right to payment as a beneficiary or founder of any foundation, trust or similar fiduciary structure or arrangement, or any similar interests.
- It may not belong to a tax group.
- It may not have tax exemptions under SEZ regulations or PIZ regulations.
Advantages of the Polish holding company regime:
- shorter required minimum duration of shareholding than in PS Directive;
- 95% CIT exemption for dividends; and
- exemption for gains on disposal of shares in subsidiaries.
However, the solution has its drawbacks:
- The Polish holding company regime is available to the exclusion of the PS Directive exemption (it’s “either ... or”);
- The relief is generally intended for one-level structures (subsidiaries are prohibited from themselves having any meaningful shareholdings or fund units);
- The tax exemption for share deals relating to subsidiaries is limited to transactions with unrelated parties;
- The tax exemption for share deals relating to subsidiaries will not apply to transactions involving shares in real estate companies.
3. New option to elect the application of VAT to certain financial services (previously exempt from VAT).
The Draft offers taxable persons an option to abandon the exemption and elect to apply VAT to certain financial services, more specifically:
→ transactions (including those made in the capacity of an agent) relating to currencies, banknotes or coins used as legal tender;
→ the management of:
- investment funds, alternative investment funds or collective securities portfolios,
- entire or partial portfolios of investment funds or alternative investment funds,
- insurance capital funds as defined by the insurance business legislation,
- public or voluntary pension funds,
- occupational pension schemes,
- the compulsory compensation system or settlement fund created under the public trading in securities legislation, or any other monies or funds collected or established to secure the proper settlement of transactions on a regulated market or commodities exchange by a central counterparty, settlement agent or clearing chamber;
→ money lending services or agency in relation to such services; the management of money loans by the lender;
→ services involving provision of guarantees, suretyships or any other security for financial or insurance transactions, or agency in relation to such services; the management of credit guarantees by the lender;
→ services involving cash deposits, the operation of money accounts, all kinds of payment transactions, money remittances or transfers, debts, cheques or bills, or agency in relation to such services;
→ services involving shares in companies or other legal persons, or agency in relation to such services;
→ services involving financial instruments, or agency in relation to such services.
The right to elect taxation will apply only where such services are provided to other taxable persons (only in B2B settings).
Once taxation of such services is elected, the choice will have to be continued for at least two years. Exemption can be resumed after that time. However, if a taxable person elects to resume exemption after a period of taxation, the exemption, too, will have to be continued for at least two years, counting from the beginning of the first reference period for which the person chose to resume exemption.
The Draft is currently undergoing the public consultation process in which WTS&SAJA is actively involved.
If you wish to discuss these topics, please contact: WTS Saja, Poznan
Read the WTS Global Financial Services Newsletter here.
