On 15 November 2021, the President signed the legislative package introducing a sweeping reform of the Polish tax system, called Polish Deal (Polski Ład). The changes will come into force as of 1 January 2022.
Changes in WHT collection mechanism as of 1 January 2022 and their impact on foreign collective investment schemes
The new law introduces a WHT collection mechanism, which is a hybrid of two systems:
- Pay and refund (tax to be withheld mandatorily regardless of any preferences under double taxation treaties or special regulations)
- Relief at source (Polish withholding agents may apply preferences under double taxation treaties or special regulations)
The particular collection system applied will depend on the type of the payment (the “what” test), the beneficiary status as related vs. unrelated party (the “who” test) and the total amount paid to the given taxpayer (the “how much” test).
One of the major changes is that the Pay and Refund mechanism, as of 1 January 2022, will have to be applied to:
- Passive income:
- 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;
- dividends and other corporate profit distributions;
- income which, for no valid commercial reasons, was not treated as any of the foregoing;
- paid to related parties;
- if the total amount of such payments made to the same taxpayer has exceeded PLN 2M within the withholding agent’s tax year (the tax is withheld from amounts in excess of the PLN 2M threshold). If those conditions are satisfied, the withholding agent must deduct tax at the statutory rate, which is 19% or 20% depending on the type of payment.
The trigger applies, if all of the conditions are satisfied:
For collective investment schemes, the key issue in this context is the definition of a “related party”.
Related parties are:
- entities which exercise significant influence on at least one other entity, or
- entities which are under the significant influence of:
- a single entity which is not one of them, or
- a spouse, or relative by affinity or consanguinity within the second degree, of a natural person exercising significant influence on at least one entity, or
- a company/partnership without legal personality and its partners, or a limited partnership (spółka komandytowa) or partnership limited by shares (spółka komandytowo-akcyjna) with its seat or management in Poland and its general partners, or a registered partnership (spółka jawna) with its seat or management in Poland and subject to CIT and its partners, or
- a taxpayer and its permanent establishment abroad or, in the case of a corporate group, a company that has its member and its permanent establishment abroad.
Further, exercising “significant influence” means:
- having a direct or indirect interest of at least 25%:
- of the capital, or
- of the voting rights in the control, decision-making or managing bodies, or
- of the actual or expected profits, losses or assets or of rights to distributions thereof, including fund units and investment certificates, or
- the actual ability of a natural person to affect the key business decisions of a legal person or an unincorporated organization, or
- being a spouse or a relative by consanguinity or affinity within the second degree.
Given their investment restrictions, most foreign UCITS and UCITS-like schemes that make capital investments in Poland should not fall within the definition of related parties; they should not suffer from the obligatory application of the Pay and Refund WHT mechanism. Thus, for them, there should be no major changes in the WHT collection mechanics after 1 January 2022, compared to the current regime. Still, the potential status of an entity as a related party (direct or indirect) does require verification on a case-by-case basis.
The obligatory withholding mechanism is likely to affect all those collective investment schemes, which under Polish law qualify as related parties in relation to their Polish assets. This could be the case, e.g., for non-Polish private equity funds or real estate funds which hold wholly-owned Polish real estate entities.
Under the new law (as of 1 Jan 2022), any assets making relevant payments via securities accounts or omnibus accounts will have to give the following information to those who operate the accounts:
- whether the relationship between them and the taxpayer is such as described above, so that they are to be treated as related parties, and
- whether passive income payments to the taxpayer have exceeded PLN 2M within the tax year of the withholding agent (not: of the taxpayer).
Such disclosure must be made at least 7 days before payment. The entities making this disclosure must ensure it is updated before payment should any changes occur in the disclosable information.
WHT refund process
After the new WHT collection set-up will have gone live on 1 January 2022, there will be two procedures in Poland for reclaiming overpaid tax:
- the procedure under Article 28b of the CIT Act for payments subject to the Pay and Refund mechanism,
- the procedure under the Tax Code for all other payments.
The WHT refund process will basically remain the same as before, for all those cases where the obligatory Pay and Refund mechanism does not apply.
But for cases falling within the Pay and Refund regulations, the process will have to follow a formalised procedure under the CIT Act. Unfortunately, this procedure has more drawbacks than advantages.
The drawbacks are as follows:
- The list of documents required by the CIT Act for the refund application does not take into account certain peculiarities of collective investment schemes. The documents include, for example:
- a certificate of residence, even though such certificates are not issued in certain jurisdictions for certain types of investment funds,
- a representation that the fund carries on genuine business activities in its home country (business substance test), even though investment funds are in fact forbidden to carry on business activities.
- While certain documents required can concern matters of substantive law, any issues with them or their absence will be treated as formal deficiencies of the refund application, with the result that the application will not be heard on its merits, unless the deficiencies are resolved within 14 days, which is a mandatory time-limit that cannot be extended or renewed (peremptory date).
- The applications will be filed electronically using a logical structure. This is not of practical help due to technical constraints, especially in the situation where applications that are otherwise filed in the customary manner may also be filed electronically but without a rigorous logical structure.
With the WHT refund procedure under the CIT Act being a novelty, its actual drawbacks and advantages will come to light as the new procedure is put in practical use in the near future.
Certificates of residence can be used in copy
The law has become more lenient for certificates of residence. Under the new regulations, a copy (rather than only the original) of such a certificate may be used as evidence of tax residence, provided the details on the copy may not be reasonably doubted representing the facts.
New definition of beneficial owner (no reference to CFC regulations)
The beneficial owner definition has been changed so that now the beneficial owner is an entity that meets all of the following requirements:
- The entity receives the payment for its own benefit, and in particular decides independently on its use and incurs the economic risk of its total or partial loss,
- is not an intermediary, representative, trustee or any other entity required to transfer the payment to some other entity in whole or in part, and
- carries on genuine business activity in the country in which it is established, if the payments are received in connection with business, and whether or not it carries on genuine business activity is to be determined with account taken of the nature and scale of its business in relation to the payment.
The change is in removing the reference to restrictive CFC regulations in the context of the business substance requirement.
Change in the regulation requiring Polish WHT agents to exercise due diligence (the related party status check in accordance with TP law now to be applied to the relationship between agent and taxpayer)
The lawmakers have not given up on the controversial regulation requiring Polish WHT agents to verify with due diligence whether it is indeed lawful to exempt the payment, to forbear collecting the tax or to apply a preferential tax rate (the due diligence requirement). But the law makes clear now, since 1 January 2021, that the question of 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, as before, but also to intercompany relations (the related party status as defined in transfer pricing regulations) with the taxpayer. This revision increases the due diligence standard for payments to related parties.
Since May 2019, Polish WHT agents have been waiting for official guidance from the Finance Minister on the new WHT set-up, especially guidance on how to duly comply with the due diligence requirement. The new law that entered into force on 1 January 2019 has given rise to a number of practical issues which have opened the floodgates for numerous disputes with the tax office and increased the uncertainty of interpretation.
If you wish to discuss these topics, please contact: WTS Saja, Poznan
Read the WTS Global Financial Services Newsletter here.