As of 1 January 2022 new WHT pay-and-refund has come into force. This means that Polish entity will no longer be entitled to automatically apply WHT preferences but will be obliged to withhold tax at 19% or 20% rate. Only then WHT may be reimbursed through refund application. The alternative is to (i) apply for opinion confirming right to apply the WHT preference or (ii) submit a statement that the conditions for applying the preference are met.
PAY AND REFUND MECHANISM
The pay and refund mechanism applies to payments of a passive nature, such as dividends, interest, royalties and payments for specific services, if the payments made to foreign related parties exceed annual PLN 2M threshold.
Once the threshold is exceeded, payers are required to withhold tax at the applicable rate (19% or 20%) and then apply for a refund.
It is possible to apply the WHT exemption or WHT reduced rate in case of:
- holding WHT opinion issued by the tax authorities,
- submitting a statement on meeting conditions to apply WHT preferences.
I. WHT opinion
A positive WHT opinion of tax authorities on WHT preferences provides a taxpayer/tax remitter with protection with respect to payments covered by the opinion for 36 months from its issuance.
According to the regulations, the authority issues the opinion within 6 months of the application. At present, the Lublin Tax Office is a dedicated office for WHT matters. In practice, we have noticed that the authority often prolongs the procedure for issuing an opinion by asking further questions. Thus, in practice the companies should be prepared to wait longer than 6 months for WHT opinion.
II. Declaration of fulfilment of the conditions for WHT preference
The declaration is made by a designated member of the board. It is necessary to conduct a WHT due diligence in order to make sure that the given preference may be in fact applied, to include beneficial owner status of the recipient under the rigorous BO definition in force as of 2019. It should be underlined that signing the declaration containing false information may result in criminal liability of the members of the management board. Therefore, this solution may be applied in practice only applies when there is no doubt with respect to possibility to apply the WHT preference.
CHANGES OF THE DEFINITION OF BENEFICIAL OWNER
Until 31 December 2016 there was no definition of the beneficial owner in the Polish CIT Act and, therefore, the tax authorities indicated various factors determining whether an entity may be perceived as beneficial owner of the payment or not. The simplified definition of a beneficial owner was introduced on 1 January 2017 and covered entity receiving a given payment for its own benefit, not being an intermediary, representative, trustee obliged to transfer all or part of the given receivable to another entity. From 1 January 2019 extended definition of beneficial owner was introduced, according to which it is an entity that:
- receives the payment its own benefit, decides independently on its destination and bears the economic risk of losing the receivable or part of it,
- is not an intermediary, representative, fiduciary or any other entity required to transfer all or part of the receivable to another entity,
- carries out actual business activity in the country of its seat.
It is important to bear in mind the changes in the BO definition may affect pending litigation proceedings, as tax authorities sometimes issue technically incorrect decisions and rulings based on regulations irrelevant for the given payment.
LOOK-THROUGH APPROACH
There is also a recent tax ruling (ref. 0111-KDIB2-1.4010.128.2022.2.AR) which confirms the possibility of applying the look-through approach towards WHT exemption of dividends paid to a foreign holding company. It is possible to apply the look-through approach to verify the WHT exemption based on the status of the indirect shareholder (the grandmother company), which is not the direct recipient of the dividend but is in fact the BO of the payment. Under this approach fulfilment of WHT preference should be verified at the upper shareholding tier, i.e. with respect to a grandmother company and not a direct shareholder.
The aforementioned approach may have important implications for Polish entities paying dividends to holding companies, which often, due to a lack of business substance, may not be considered the beneficial owner of the dividend and thus not meet the conditions for applying the WHT exemption.
If you are interested in verifying your transactions with respect to WHT or filing an application for an opinion on WHT preferences in order to secure your transactions, our experts, who have many years of experience in the area of withholding tax, will provide you with support in this respect.
Please do not hesitate to contact us if you have any questions.
