1. Supreme Administrative Court’s jurisprudence on the obligation to examine the status of the beneficial owner when paying dividends
As of 1 January 2019, Polish law requires Polish WHT agents to exercise due diligence and verify the applicability of any tax rates other than the standard rate (preferential WHT rates) or of any exemption or forbearance of tax, which may apply under special regulations or a double tax treaty. Whether or not due diligence has been exercised is to be assessed with account taken of the nature and scale of the remitting agent’s business as well as any related party status within the meaning of transfer pricing regulations.
One practical effect of that obligation is that - whenever any payment is to be made which under the Polish CIT Act is subject to WHT but which may also enjoy preferential taxation under special provisions, such as a DTT - the Polish tax authorities require the Polish WHT agent to verify whether the recipient is the beneficial owner of the payment (beneficial owner test).
Such a radical approach has generated an avalanche of disputes over when exactly Polish WHT agents must carry out the beneficial owner test.
Formally, the Polish CIT Act imposes a clear duty to do so on agents who wish to apply exemptions under IR Directive. But the Polish tax authority derives this duty “impliedly” also from law that does not expressly regulate such matters.
That gives special importance to Polish case law on beneficial owner testing in the case of other kinds of payments and tax preferences than those under IR Directive, i.e. in the case of dividend payments and payments for management / professional services.
In its judgment of 27 April 2021 in case no. II FSK 240/21, the Supreme Administrative Court takes the side of Polish WHT agents in a dispute with tax authorities. The case involves the question of whether a Polish WHT agent paying a dividend is required to test the recipient for beneficial owner status. The court holds that the Polish implementation of PS Directive does not require a dividend recipient to be its beneficial owner, thus conclusively resolving that the Polish dividend tax exemption is not conditional on the recipient being the beneficial owner of the dividend. The court further rules that, in the context of income tax on dividends or other corporate profit distributions (dividend tax), it is unacceptable for the authority to exceed the limits of statutory interpretation based on linguistic approach by implying the beneficial owner status as a condition for dividend tax exemption where there is no such condition in the wording of the law that enables the exemption. The court also makes clear that the dividend recipient’s beneficial owner status is expressed as a condition only for the IR Directive exemption.
In addition, the Supreme Administrative Court holds that such a requirement is not provided for anywhere in the CIT Act and that what is necessary for dividend tax exemption to apply is only that the given case meets the statutory test for such exemption and that the Polish agent verifies this with due diligence.
This judgment is a good sign for taxpayers, with the Supreme Administrative Court’s stance being expressed clearly and unequivocally.
However, it remains to be seen whether the court’s interpretation will be shared by other courts to develop into a consistent body of case law that will change the current stringent practice of tax authorities which want WHT agents to run the beneficial owner test on any cross-border payments.
2. The tax haven presumption for TP purposes regarding ”indirect” transactions with tax havens
By way of introduction, Poland requires transfer pricing documentation to be issued also for transactions with unrelated parties who are resident (i.e. have their seat, residence or management) in territories or countries applying harmful tax competition (“tax havens” and “transactions with tax havens”, as appropriate).
Direct transactions with tax havens are sales or purchases made to or from unrelated parties based in tax havens, if their value exceeds PLN 100K (ca. EUR 22K) during a tax year.
With effect of 1 January 2021, Polish law extends the documentation requirement also onto the so-called “indirect” transactions with tax havens.
Indirect transactions with tax havens are transactions which are made by your counterparty with related or unrelated parties, if their value exceeds PLN 500K (ca. EUR 110K) during a tax year and the beneficial owner is based in a tax haven. In such cases, the beneficial owner is presumed to be based in a tax haven if the counterparty makes “settlements” during the tax year with an entity based in a tax haven. The circumstances of such presumption must be established with due diligence.
The presumption may be illustrated as follows:
Ever since its entry into force, this law has been opposed by the consulting industry and businesses. The reason is that it effectively requires Polish taxpayers to fulfil administrative duties of an investigative nature, forces them to obtain trade secrets from their counterparties, and can ultimately mean that the TP documentation requirement will extend to a number of transactions with unrelated parties, whether domestic or foreign.
As the new law on “indirect” transactions with tax havens has generated much controversy among taxpayers, in March 2021, the Finance Ministry started public consultations on a proposed tax guidance document explaining how to apply the tax haven presumption. However, the first such proposed tax guidance came under fire from consultants and businesses who argued that it was “detached” from business reality.
In December 2021, the Finance Ministry published a new, more elaborate tax guidance proposal. According to that proposal:
- the term beneficial owner should be understood according to the statutory definition, i.e. as the entity entitled to amounts due under the transaction;
- the disclosure duty on indirect transactions with tax havens applies only to purchase transactions whose value exceeds PLN 500K;
- the counterparty and a tax haven resident should make a transaction of a substantial value, i.e. at least PLN 500K.
Even though the second guidance proposal makes the controversial regulations more rational in their application, it has also been criticized by taxpayers and tax advisors. In addition to urging for numerous changes to the guidance, tax advisors again recommended that the law should be repealed, temporarily suspended or at least amended.
If the second proposal is enacted without substantial changes over the published draft, taxpayers may be required to obtain beneficial owner representations from their counterparties or, in their absence, carry out a beneficial owner test. Also, where a supplier’s status as a beneficial owner is not sufficiently established, the Polish taxpayer should obtain a representation that the supplier does not make purchases over PLN 500K in tax havens.
Work on the guidance was supposed to be finalized until late March 2022. So far, neither has the final guidance proposal been published nor the controversial law suspended.
Note that:
- the controversial law has formally been in effect since 1 Jan 2021, and
- the transfer pricing documentation for 2021 must be ready by the end of September 2022.
Consequently, to be ready for transfer pricing compliance, Polish taxpayers are formally required to apply the beneficial owner test to their domestic and cross-border suppliers above PLN 500K and, if in doubt about their BO status, must enquire if they engage in relevant transactions with tax havens.
Furthermore, beneficial owner testing may also become a practice pursued in purchase transactions by Polish taxpayers on the financial services market as they may strive to check the BO status of their vendors (e.g. foreign lenders, sellers of real estate or other assets) in case they should be engaged in purchases from tax haven-based entities.
We will keep you updated on these developments in our subsequent Infoletters.
If you wish to discuss these topics, please contact: WTS Saja, Poznan
Read the WTS Global Financial Services Newsletter here.
