As of 1 January 2022, pay and refund has replaced previously effective relief at source mechanism as a way of withholding tax (WHT) collection for certain types of payments made from Polish entities.
According to amended regulations, the pay and refund mechanism applies to payments that collectively satisfy the following criteria:
› income has a passive character or should be treated this way, such as:
- 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 is paid to related parties, as defined by the TP regulations, which are non-tax residents in Poland,
› total amount of payments subject to Polish WHT in any way and made to the same taxpayer exceeds PLN 2 million (roughly EUR 420,000) within the WHT agent’s tax year.
The pay and refund mechanism applies to excess payment over PLN 2 million. In general, it means that for such payments WHT is withheld mandatorily at the basic rate (19% for dividends and 20% for other types of payments) regardless of any preferences under double taxation treaties (DTT) or special regulations. Tax return is further possible only by means of an application for a declaration of overpayment supported by necessary documentation and carrying out a tax proceeding which can realistically equate to six months.
If criteria for the application of the pay and refund mechanism are met, WHT should usually be deducted, Polish CIT Act provides two simplification schemes under which the WHT agent may still apply preferences arising from DTT or special regulations even if the threshold of PLN 2 million is exceeded:
› representation of the tax agent’s Management Board in which it states that it:
- holds the documents required by tax law to substantiate the rightful application of a treaty rate or an exemption or the rightful forbearance of the withholding tax; and
- is not aware of anything that could reasonably arise suspicion that any circumstances would preclude the application of the treaty rate or exemption or the right not to withhold the tax, or
› preference opinion issued by the tax office (statutory waiting period – up to six months) that confirms that the WHT tax agent is entitled to apply the preference indicated in the Polish CIT Act or prescribed in the respective DTT.
Irrespective of the type of simplification scheme, it should each time be preceded by an analysis with reference to the beneficial owner status of the recipient of payments.
The complexity of such an analysis varies depending on the nature of the payment, size of the parties of the transaction, and intercompany relations between them as defined in TP regulations.
In the case of planned payments, it is recommended to conduct a detailed audit of specific transactions (beneficial ownership incl. genuine business activity, proof of exercising due diligence), verify contracts for WHT clauses, establish if any of simplification schemes are applicable and advised, and implement a suitable WHT policy.
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