Withholding tax regime in Poland
Should we expect another deferral or amendment of the provision?
REal Knowledge about the Polish real estate market 1/ 2021
Although new WHT regime has been introduced in Poland in 2019, pursuant to Ministry of Finance’s regulation issued on a semi-annual basis, certain provisions thereof are deferred until 30 June 2021. Should we expect another deferral or amendment of the provisions? If not, as of 1 July 2021, Polish tax remitters and foreign taxpayers of the Polish WHT should check if there are any additional obligations and requirements that need to be addressed.
Withholding tax regime in Poland
As of 1 January 2019, the Polish WHT provisions have undergone significant changes. According to the new rules, the “relief at source” mechanism has been replaced with a “tax refund” one, under which WHT has to be paid and reimbursed. The mechanism is applicable to payments received by the same taxpayer, exceeding PLN 2m in a given tax year.
However, the application of WHT exemption or reduced WHT rate without the use of the a “tax refund” mechanism, is still possible, if:
- a tax remitter provides tax authorities with a statement confirming that all conditions for applying a WHT exemption or a reduced WHT rate have been fulfilled (making such a statement involves personal penal-fiscal liability and results in the risk of additional tax liability for the tax remitter); or
- an advance tax ruling is obtained from tax authorities (applicable to exemptions resulting from EU Directives, including interest payments).
This is a good opportunity for all of us to recall that provisions implemented back in 2019 imposed the obligation of due care regarding payments made to foreign entities.
Consequently, if Polish tax remitters want to apply the WHT exemption or the reduced WHT rate (from a DTT), they need to exercise due care, even if such payments do not exceed PLN 2m per taxpayer in a given fiscal year (in which case the threshold applicable to the “tax refund” mechanism is not exceeded).
Importantly, this obligation has not been waived and needs to be addressed starting from 2019.
The due care process executed by tax remitters should be also properly documented. In practice, to fulfil this condition, tax remitters may obtain reports from external advisors and request relevant statements from taxpayers under the implemented risk mitigation policies/procedures.
The scope of due diligence depends on the scale and character of business activities carried out by a given tax remitter. In practice, however, tax authorities may impose higher due care standards with regard to payments made between related entities.
Who is a beneficial owner?
Further, effective as of 2019, the statutory definition of a beneficial owner has been amended; beneficial owners are required to provide a proof of business activities actually performed in the country of residence and assume the economic risk associated with the loss of amounts receivable.
Based on the amended definition, a beneficial owner should be understood as an entity that:
- receives payments for its own benefit, uses them at its own discretion and bears the economic risk of losing these payments (or part thereof);
- is neither an intermediary, nor a representative, trustee or any other entity legally or actually obliged to transfer the received payments (or a part thereof) to another entity;
- conducts genuine business activity in the country of its residence, if payments are received in relation to the business operations performed (this is a new condition effective as of 1 January 2019).
In practice, tax authorities have not developed a clear interpretation of the beneficial owner’s definition effective as of 1 January 2019, in particular regarding the genuine business activities. The Ministry of Finance has decided help taxpayers by issuing draft explanations on 19 June 2019; however, several questions have remained unanswered.
Although certain provisions are deferred, currently Polish tax remitters must fulfil additional obligations while making payments subject to WHT to foreign entities. Therefore Polish tax remitters should make sure the current level of due care is sufficient, the beneficial owner’s status is correctly identified and decide what measures to undertake to secure their position.