Software licenses in the context of international law – cross-border transfers


Software licenses in the context of international law – cross-border transfers

The Law of New Technologies – Blog | September 2020

In recent years, the market of IT services has been growing rapidly, translating into a rising level of revenues earned by entities from the IT sector. Given the global nature of the market, license fees for a wide spectrum of software products, paid to foreign entities, account for a major part of such revenues. However, development of new technologies and the IT industry (including the design of new IT solutions or their delivery models) raises numerous doubts as to the legal aspects of software licensing agreements. These doubts have a direct impact on tax issues, including the withholding tax obligation.

The issue of license fees for foreign licenses

In the traditional distribution model, software is used based on a paid license. In many cases, licenses are granted by foreign entities. This poses a question of whether a licensee from Poland is each time required to withhold tax, i.e. deduct it from the license fees due to a foreign licensor and pay it to the competent tax authority.

As a general rule, in accordance with Polish tax laws entities which do not have their registered seat (place of residence) or management in Poland (so called non-residents) are liable to corporate or personal income tax only in respect of income (revenues) generated in Poland, including in respect of certain revenues which are subject to withholding tax (cf. Article 21.1 of the CIT Act and Article 29.1 of the PIT Act).

The list of revenues which are subject to withholding tax is quite long and includes, among other things, revenues from copyright and neighboring rights, rights to invention designs, trademarks and ornamental designs1, also from the sale of such rights. Revenues from the above sources are collectively referred to as “royalty payments”, which may be misleading from the legal point of view, as the price for the sale of such rights may by no means be regarded as a royalty payment. What is more, withholding tax applies to revenues from the provision of services, such as consulting, market research, advertising, management and governance, data processing and similar. As can be seen, the legislator has provided quite a broad list of payments which are subject to withholding tax. At the same time, the tax laws themselves do not provide clear-cut definitions or other interpretation guidance to facilitate the assessment of whether or not a payment is subject to withholding tax, which may raise some doubts in practice.

Such doubts are particularly serious in the case of license fees relating to the right to use software. The tax laws (CIT and PIT Acts) do not specify whether or not such payments are subject to tax equally with other revenues from copyright or other services, and do not provide definitions of such terms as software or computer program.

Software licenses and withholding tax on “royalty payments”

Polish tax laws do not provide an autonomous definition of copyright (or neighboring rights) the revenues from which are subject to withholding tax. Therefore, it is necessary to refer to the Act on Copyright and Neighboring Rights of 4 February 1994 (the “Copyright Act”). Under Article 17 of the Copyright Act, economic rights include the right to use a work and exploit it in any field of use as well as the right to remuneration for the use of a work. A work is any manifestation of individual creative activity, including but not limited to computer programs (Article 1.1 and 1.2 of the Copyright Act).

Article 21.1.1 of the CIT Act and Article 29.1.1 of the PIT Act stipulate that withholding tax shall be due on “revenues from copyright” and it seems that it should be interpreted as any income earned, on the one hand, on any access granted for a consideration to the copyright monopoly (which in 99% of cases will be tantamount to license granting) and on the other, on the sale of copyright to a specific work.

- Paweł Woronowicz, Managing Associate, Advocate, Deloitte Legal

In view of the foregoing, it should not raise any doubts that revenues earned from licenses (i.e. granting access to the copyright monopoly) to software (which constitutes a kind of a work) may in general be subject to withholding tax under Article 21.1.1 of the CIT Act or Article 29.1.1 of the PIT Act. However, the application of this rule may be limited to a considerable extent if the provisions of a relevant double taxation treaty (“DTT”) between Poland and the country of the licensor’s registered seat apply to a specific payment.

Each DTT lays down special principles of taxation of royalty payments, in addition to providing an autonomous definition of this term. Despite a broad scope of royalty payments, the majority of DTTs to which Poland is a party do not classify payments for the use of software as a category of royalty payments. Only in a few cases such treaties consider payments for the use of software (computer programs) to fall within the scope of “royalty payments”. This is for instance true for the double taxation treaty between the Republic of Poland and Kazakhstan (or was true until 2017 in the double taxation treaty made with Portugal).

Considering these differences among double taxation treaties, it would be reasonable to assume that if a specific DTT does not specify directly that license fees due under a software license are a kind of royalty payments, profits from such licenses should rather be treated as the enterprise’s profits (and consequently, as a rule, subject to tax only in the country of the licensor’s residence) as opposed to royalty payments (which are typically subject to tax in both the licensor’s and the licensee’s countries). However, the approach taken by Polish taxation authorities is different. In their view, payments for computer software should be regarded as royalty payments as they apply to works (computer programs) which are protected by copyright in Poland. According to taxation authorities, this is sufficient to conclude that income from such rights constitute royalty payments within the meaning of DTTs (as these make a reference to payments due under copyright to a literary, artistic or scientific work). However, the stance adopted by taxation authorities has been questioned in (consistent) case-law issued by administrative courts (cf. judgment of the Supreme Administrative Court of 20 march 2018, ref. II FSK 814/16 or judgment of 20 December 2018, ref. II FSK 3521/16). According to case-law, such payments may be regarded as royalty payments within the meaning of DTT only if software (a computer program) is explicitly identified in a treaty.

Both taxation authorities and administrative courts have justified their approach by reference to OECD’s Commentary on the Model Tax Convention on Income and on Capital2. However, it appears that considering OECD’s Commentary the arguments put forward in the case-law of administrative courts should be regarded as correct. The Commentary does not determine conclusively whether or not license fees due under software licenses should be classified as royalty payments for purposes of DTT application. It indicates, though, that according to the Model Convention in order for a license fee to be classified as a royalty payment, the license under which the fee is due should concern a literary, artistic or scientific work. Although under the preceding Copyright Act of 1952, which did not make any direct reference to computer programs, this kind of a work could be classified as a scientific or literary work3, the current version of the Copyright Act explicitly identifies computer programs as a protected work which is different from literary or scientific works.

Despite the arguments deployed by taxation authorities, one should agree with the stance taken by administrative courts. Revenues from such licenses may be classified as royalty payments within the meaning of a double taxation treaty only in the event that software is explicitly identified in that DTT.

End-user licenses

Notwithstanding the doubts discussed above, OECD’s Commentary specifies that an assessment (in the context of software) of whether a payment should be classified as a royalty payment should also factor in the scope of rights granted to the licensee. If such rights are limited to software copying or the actual use of a program as intended, the relevant license fees should not be regarded as a type of royalty payments within the meaning of the Model Convention at all.

Even though such a differentiation is not found directly in Polish tax laws, it has been recognized by taxation authorities to some extent. According to the prevailing approach of taxation authorities, license fees due under a license granted to an end-user to use a computer program are not regarded as royalty payments, as they are not included in the list provided in Article 21.1.1 of the CIT Act (Article 29.1.1 of the PIT Act), thus they are not subject to withholding tax regardless of the provisions of the applicable DTT.

Such end-user licenses include licenses whereby the licensee is not authorized to distribute the software further, grant further sub-licenses or introduce software modifications (create new versions, updates, upgrades or patches).

The approach taken by taxation authorities to end-user licenses is positive for taxable persons (and taxpayers), as it does not require obtaining certificates of residence (or fulfilling any other duties necessary for the application of an exemption allowed under a DTT). However, the idea that end-user licenses should be viewed separately is to some extent supported by the arguments put forward in OECD’s Commentary on the Model Convention and DTTs as opposed to Polish tax laws themselves, which may raise some doubts and entail the risk that a more stricter approach may be adopted by taxation authorities in the future.

Marcin Frejek, Senior Consultant, Deloitte Legal

SaaS – new challenges, old problems?

Currently, a number of computer programs are distributed in the SaaS (Software as a Service) model. The idea behind this cloud solution is that the user does not copy the software to their own computer/server but gains access to its functionalities through other software – typically an internet browser. In such a case, a considerable part of legal academic writers are of the opinion that as a computer program is not reproduced, the user does not gain access to the copyright monopoly and accordingly, it is not necessary to enter into a software license agreement. With this solution, the user does not have a physical or rather technical ability to distribute the software further or introduce any software modifications (as the user does not have access even to the object code), which only confirms that the copyright to the computer program is not interfered with.

In this arrangement, a contract to use software in the SaaS model would be an innominate contract for the provision of services, to which the provisions governing personal service contracts would apply accordingly.

Paweł Woronowicz, Managing Associate, Advocate, Deloitte Legal

However, some maintain that the SaaS model also gives access to the copyright monopoly and accordingly a license agreement is needed to be concluded.

The tax laws (and DTT provisions) do not lay down different rules applicable to payments for software which is made available in the SaaS model. Therefore, in practice the tax treatment should be a consequence of the legal classification of this form of making software available. The rules discussed above should apply if it is concluded that a license is granted in this model.

Specifically, where a license in the model is an end-user one the related payments should not be subject to withholding tax (in line with the approach presented above). This view is also supported by the latest tax rulings whereby taxation authorities acknowledge that such rules may also be applied to end-user licenses granted in the SaaS model (thus making it possible not to apply withholding tax to such payments). However, the stance taken by taxation authorities in tax rulings is based on a legal analysis (of the legal nature of a specific contract to use software) presented in the description of the factual situation, as provided in the application, which means that the approach that they take in the course of tax inspections may change depending on the payments.

An increased reliance on the SaaS model poses additional license-related challenges. Computer programs which are distributed in the SaaS model may also use license types other than the end-user one mentioned above. For instance, a license may specify the quantity of data stored, the scope of available functionalities, projects (or other elements) created as part of the service, the number of servers used, data transfer or CPU time. Before making a decision to use a specific service, one should consider carefully not only tax and legal issues but also whether the use of an alternative licensing model will be more cost-beneficial and aligned better with the current and anticipated needs of the company.

Bartek Zając, Director, Extended Enterprise

Additionally, attention should be paid to the entirety of the services provided in the complex SaaS model. In practice, it may be the case that key to the arrangement is a service whose core element is for instance data processing (or another, similar service). Such a classification would entail a duty to withhold tax as services of this kind are explicitly identified in the CIT and PIT Acts as subject to tax, unless a DTT applies (enabling treatment of the related payments as the enterprise’s income which is subject to tax in the country of the service provider).

Consequently, an assessment of the tax aspects of the SaaS model is not clear-cut and they should be analyzed on a case-by-case basis, depending on the provisions of the contract to use software.


  1. The term “ornamental design”, as used in Polish law under Regulation of the Council of Ministers of 29 January 1963, has been replaced with the term “industrial design” in the Industrial Property Law of 30 June 2000, which is currently in force. Accordingly, any references in legal provisions to “ornamental designs” should be treated as references to “industrial designs”.
  2. The Model Convention was developed by the forum of OECD member states and it is to be used as a model for drafting treaties between various states, while not constituting a source of law (in contrast to DTTs). What is more, in the course of its work OECD produced an official Commentary on the Model Convention. Although it is not a source of law either, due to its official and comprehensive nature it plays a key role in the interpretation of DTT provisions (drafted based on the Model Convention).
  3. This is how a computer program was classified by the Court of Appeals in Gdańsk in its judgment of 29 January 1993 (ref. I AGCr 369/92).

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