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).
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.
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).
→ income that is passive or should be treated as such, being:
→ 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 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:
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:
Additionally, the Draft slightly changes the definition of the beneficial owner. However, it keeps the controversial requirement of having business substance (genuine business activity).
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:
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.
→ 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:
For a company to be a subsidiary of a Polish holding company, it must satisfy the following conditions:
Advantages of the Polish holding company regime:
However, the solution has its drawbacks:
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:
→ 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
News on WHT developments affecting the international Financial Services industry.
If you have any questions about WTS Global or our global services, please get in touch.
We will respond to you as soon as possible.