14.01.2025
Poland: Directive-based WHT exemptions for dividends, interest and royalties
This matter is important for international industry groups where payments from Polish subsidiaries to holding companies should be subject to directive-based WHT exemptions. It is particularly interesting in the case of passive income streams from Poland to recipients in the Netherlands and in Luxembourg.
Since 2019 businesses as well as the advisory profession have been in discussion with Polish Finance Ministry about amended regulations on WHT treatment of passive income.
In November 2024, Finance Ministry published two public tax rulings on the application of certain Corporate Income Tax Act (CITA) provisions implementing PS and IR Directives.
The rulings are concerned with the following statutory WHT exemption conditions for dividends vs. interest and royalties:
| Dividends | Interest and royalties |
|---|---|
|
The exemption under Article 22(4)(2) and 22(4)(4) CITA, saying that WHT exemption applies to a dividend payment where, among other things: Article 22(4)(2): the dividend income is received by a company subject to income tax on all of its world-wide income in an EU or EEA Member State; and Article 22(4)(4): the recipient company does not enjoy an exemption from income tax on its entire world-wide income. |
The exemption under Article 21(3)(2) and 21(3c) CITA, saying that WHT exemption applies to an interest or royalty payment where, among other things: Article 21(3)(2): the interest or royalty income is received by a company subject to income tax on all of its world-wide income in an EU or EEA Member State; and Article 21(3c): the recipient company does not enjoy an exemption from income tax on its entire world-wide income. |
As can be seen, the two regulations sound identical.
The ruling on dividends
In accordance with the ruling on dividends (15 Nov 2024, ref. DD9.8202.1.2024):
- the condition that the recipient must be "subject to income tax on all of its world-wide income" in an EU or EEA Member State should be understood to mean that, for the exemption to apply, the company receiving Polish dividend should be a tax resident of an EU or EEA country; and
- the condition that the recipient "does not enjoy an exemption from income tax on its entire world-wide income" should be understood by reference to CJEU's case C‑448/15 Belgische Staat v. Wereldhave Belgium Comm. VA et. al. (judgment of 8 Mar 2017) as designed to preclude situations involving the possibility that, despite being subject to corporation tax, the company is not actually liable to pay that tax.
The Finance Minister held that a dividend recipient from another EU or EEA country will not violate the requirement of "not enjoying an exemption from income tax on its entire world-wide income" where it is the dividend itself, rather than the recipient as an entity, that is exempt from tax based on national tax legislation implementing the PS Directive.
As such, according to Polish Finance Minister, the second exemption condition in essence means that the recipient should not enjoy income tax exemptions that are personal in nature (ratione personae exemptions, such as entity exemptions, type-of-entity exemptions or similar).
The ruling on interest and royalties
In accordance with the ruling on interest and royalties (20 Nov 2024, ref. DD9.8202.2.2024 ):
- the condition that the recipient must be "subject to income tax on all of its world-wide income" in an EU or EEA Member State should be understood to mean that, for the exemption to apply, the company receiving a Polish interest or royalty payment should be a tax resident of an EU or EEA country; and
- the condition that the recipient "does not enjoy an exemption from income tax on its entire world-wide income" should be understood by reference to the recitals and purposes of the IR Directive and the ratio decidendi of CJEU's judgment in joined cases C-115/16, C-118/16, C-119/16 and C-299/16, i.e. in such a way that the recipient of such interest or royalties must not enjoy in the country of its tax residence:
- an exemption from income tax, whether on its entire world-wide income or on any category of its income; or
- any special tax treatment of income received in respect of such interest or royalties.
Here, in contrast, the Finance Minister held that the second exemption condition depends on whether there is effective taxation of the interest or royalty payment in the recipient's country of residence, which means that the WHT exemption does not apply if the recipient enjoys any income tax exemption, whether available to it as an entity (ratione personae) or due to the nature of the income received (ratione materiae).
However, in both cases use of the exemption will not be precluded by the individual circumstances of the taxpayer, i.e. the fact that it has loss carry-forwards to deduct, unless the situation warrants the application of TAAR with respect to directive-based exemptions.
The rulings, including especially the one on interest and royalties, give a clear signal from the Polish Finance Ministry on how to interpret directive-based exemptions through the lens of CJEU's Danish cases.
Without delving into the details of the rulings, we will make two points:
- Both regulations are the same so interpreting them differently is quite peculiar to say the least, considering that tax law is underpinned by the primacy of linguistic construal.
- The Danish cases were concluded in 2019 while the regulations in question have been in force since about 2011.
What is more, the Finance Ministry seems to have omitted to note that while, also in 2011, the European Commission proposed to change Recital 3 of IR Directive by adding an effective taxation requirement ("It is necessary to ensure that interest and royalty payments are subject to tax once in a Member State and that the benefits of the Directive should only be applicable when the income derived from the payment is effectively subject to tax in the Member State of the receiving company or ..."), that change has not been enacted so far.
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