Although the core elements of withholding tax, sources of revenue subject to WHT and tax rates remain unchanged in Corporate Income Act (further: CITA), the Polish legislator decided to partially depart from the relief at source rule towards refund upon request.
I. Overview of changes
In force as of January 1st 2019
- WHT agent shall exercise and prove due diligence when verifying if conditions for reduced tax rate or tax exemption are met. The assessment of due diligence shall take into account the nature and scale of the activities carried out by the withholding agent.
- When determining rules of taxation, WHT agent shall consider new, extended definition of beneficial owner, i.e. an entity which meets jointly the following conditions:
- receives the payment for its own benefit, including deciding on its own on the payment utilization and bears the economic risk of loss of all or part of the payment, and
- is not an intermediary, representative or trustee or other entity obliged to transfer all or part of the payment to another entity, and
- carries on a genuine business activity in the country of its seat, if the payment is received in connection with that business (with Article 24a(18) CITA to apply as appropriate to any assessment whether genuine business is carried on).
In force as of July 1st 2019
- If the sum of WHT receivables paid to a given taxpayer exceeds PLN 2 million in the tax year, in principle WHT agent is obliged to charge tax from the excess at standard rate (19% or 20%).
- Then it is possible to apply for a WHT refund. The CITA regulations provide for a broad catalogue of documents that must be attached to WHT refund application.
- The WHT should be refunded within 6 months from the date of filing the application with the Polish tax office. Thus, new provisions may have significant impact on cash flow.
- In general the taxpayer is entitled to apply for a refund. Polish withholding agent is entitled only if he has grossed-up agreed net amount and thus incurred the burden of WHT from own sources.
- CITA provides for two exceptions from the rule of standard WHT rates above PLN 2 million:
Exception 1: special representation (applicable to all WHT receivables)
All WHT receivables may be still exempted from taxation or taxed at reduced WHT rate, if whole management board of the WHT agent makes a special statement confirming that the WHT agent:
- holds documents required by tax law for the application of the tax rate or exemption from tax or non-collection of tax resulting from special regulations or double taxation treaties and
- after verification – with due diligence – does not have knowledge justifying the assumption that there are circumstances that exclude the possibility of applying a tax rate or exemption from tax or non-collection of tax resulting from special regulations or double taxation treaties.
In case of false representation, lack of required verification or conducting a verification that is not sufficient given the nature or scale of WHT agent's business, the tax authority will assess, in addition to any tax that may be otherwise payable, a surcharge of 10% of the taxable amount of the payment for or from which the WHT agent applied a treaty rate or did not withhold WHT.
Additionally, any member of management board whose representation is false or conceals the truth may be held liable of committing penal-fiscal crime punishable by fine of up to approx. PLN 21 million, imprisonment or both.
Exception 2: opinion on application of WHT exemption (applicable to selected payments)
Selected WHT receivables (royalties, interest and dividends) may be still exempted from WHT if the taxpayer or WHT agent obtained an „exemption opinion“ issued by the Polish tax authorities after verification of taxpayer's compliance with CITA requirements.
An exemption opinion may be issued at the request of the WHT agent or the taxpayer and in general is valid for a period of 3 years, unless factual background has changed. An exemption opinion should be issued within a maximum of 6 months from receipt of the application by the tax authorities.
- Finance Minister will issue guidance on all WHT changes, presenting their binding interpretation. Neither the guidance nor its draft have been published by mid-April.
II. OUR RECOMMENDATIONS
Bearing in mind the above changes, we recommend the following steps:
- verifying the timeline of payments – it is our experience that many Polish companies have decided to pay dividends, interests and royalties up to 30 June 2019 and use current legal framework,
- carrying out audit of existing agreements in order to determine whether specific receivables are subject to WHT in Poland or appropriate WHT taxation rules are applicable (especially exemption / decreased WHT rate pursuant to given DTT),
- applying for WHT exemption opinions in relation to royalties, interest and dividends,
- applying for WHT refund if the WHT agent is willing to apply standard WHT rate.