Tax changes 2019 – withholding tax
March 13, 2019
Subject of taxation
The principles of withholding tax have been regulated in Polish tax regulations and agreements concluded by Poland on the avoidance of double taxation. According to art. 21 of the Act of Corporate Income Tax (CIT), income categories subject to WHT include interest, license and dividend claims, as well as revenues from intangible services.
What is included in them?
- Dividend receivables include dividends and other revenues from participation in profits of legal persons.
- The license fees include receivables from copyright or related rights, rights to invention projects, trademarks and ornamental designs, including the sale of these rights.
- Another category that causes the most difficulties probably due to the wide range of services in their composition are tangible services. According to art. 21 of the CIT Act, both in the wording currently in force and after the amendment, income from advisory and accounting services, market research, legal services, advertising services, management and control, data processing, employee recruitment and recruitment services, guarantees and sureties, and benefits of similar nature are subject to the WHT tax.
Due diligence
In order to benefit from a reduced rate or full tax exemption in accordance with the new regulations, regardless of the value of payments made, taxpayers will be required to exercise due diligence.
The term “due diligence” is a general clause which does not have a clearly defined statutory legal meaning. Therefore, it should be based on the criteria used by tax authorities when assessing the due diligence accompanying the payment of liabilities to foreign contractors. The obligation to exercise due diligence refers to the verification of the application of a reduced tax rate or an exemption from WHT. According to the regulations, in order to apply preferential terms, the recipient of the payment must be their beneficial owner.
When assessing due diligence, tax authorities will also take into account the nature and scale of operations carried out by the taxpayer.
If the tax authorities find that due diligence has not been observed, the taxpayer must incur tax liability for the tax not collected, and in the case of related entities, it is not possible to transfer the liability from the payer to the taxpayer. The payer may also be charged with a sanction of 10% rate of additional tax liability.
Definition of the beneficial owner
Based on the justification to the Act, in order to introduce the concept of the beneficial owner and the clause on tax avoidance in the CIT Act, this concept needs clarification. The institution of a beneficial owner is aimed at combating the phenomenon of treaty shopping, which consists in creating economically unjustified structures in order for the subject who is not a tax resident of the countries constituting the parties to the tax convention to benefit from this agreement.
The new regulations require the analysis of such status also for the recipient of dividends or intangible services, and not just the recipients of interest and royalties. Therefore, payers making withdrawals to foreign contractors will first of all have to carefully verify whether the recipient of the payment is their ultimate owner and properly document the analysis. There is no precise indication of the types of documents to be analysed, so it would be advisable to follow the provisions of the CIT Act regarding the documentation necessary to release the dividend from WHT. In addition, the taxpayer should collect certificates of tax residence of the payment recipient, contracts from which the payments resulted and the calculation of amounts paid, confirmations of transfers of payments made, contracts concluded by the recipient of the receivables, contracts of the company and financial statements of the recipient, or information about the scheme of company’s connections, etc.
Security opinion
According to the new regulations, in principle, payments subject to withholding tax, on the basis of art. 21 par. 1 or 22 par. 1 of the CIT Act, in the amount exceeding 2 MPLN annually to one contractor will be subject to a withholding tax at the rate of 19% (dividend) or 20% (interest, royalties, remuneration for indicated intangible services). However, the legislator provided for exceptions to the WHT collection rule and so the payers will be entitled to apply a lower WHT rate (resulting from the relevant double taxation agreement) or full withholding tax (resulting from the contract or directives – subject to appropriate conditions) in securing the payment opinion or statement.
The security opinion is to confirm that the foreign contractor is an entity qualified to receive specific payments from the Polish taxpayer without WHT. This opinion may only apply to payments related to the dividend, interest and royalties. An application for an opinion release may be made by a taxpayer, i.e. a foreign recipient of a payment or a payer, but only in a situation where he bears the economic load of WHT in connection with the grossing up of payments.
The body will have 6 months to issue an opinion. Submitting an application for an opinion is subject to a fee of PLN 2.000. The opinion is valid for a period of three years from the date of its issuing or until the end of the month in which significant changes occurred that affect the non-fulfilment of the conditions for applying the WHT exemption.
Declaration of the payer
The declaration submitted by the payer is the solution provided for payments which, according to the double taxation agreement, may be subject to a lower WHT tax rate or be exempted. Payers deciding to make use of the declaration should know the contractor well for whom they make a foreign payment (or dividend to a Polish shareholder), because by submitting the declaration the payer confirms that:
- he/she has documents provided by the provisions of the CIT Act enabling the application of a reduced WHT rate/WHT exemption,
- he/she does not have knowledge justifying the assumption that there are circumstances that exclude the possibility of applying a reduced WHT rate/WHT exemption.
Bearing in mind the above criteria, it should be stated that in order to submit a declaration, the payer must have at least the following documents and information:
- Certificate of residence of a foreign contractor,
- A statement of the foreign contractor that he/she is subject to taxation on all of his income and that he/she is an actual recipient of the payments received (for payments exempt from WHT based on the EU directives),
- Information that a foreign contractor meets the conditions for WHT exemption from taxation – for payments subject to such exemption under the EU directives,
- Information that a foreign contractor is conducting an actual activity in the country of his/her residence.
The declaration of the payer should be submitted to the tax office at the latest on the day the payment is made to the foreign contractor, although the relevant information on the collection or non-collection of WHT to the tax office is submitted only in the following month. In addition, the content of the statement, as in the case of opinions, should correspond to the “logical structure”, which will be made available online in the Public Information Bulletin.
However, it should be noted that the provisions of art. 21 par. 7 of the CIT Act and Double Tax Conventions, which state that if interest paid (royalties or receivables for intangible services) to an entity abroad is not on the market level, the preferential WHT rate or WHT exemption might not apply.
The so-called beneficial owner
Bearing in mind the justification to the Act, it should be expected that the issue of the beneficial owner of the paid receivables will be one of the key criteria subject to detailed analysis by tax authorities when assessing the legitimacy of tax refund or during the opinion issuing procedure. The justification to the amendment indicates that the national definition of the beneficial owner has not only been “clarified”, but also expanded. This requirement will be a condition for the application of the exemption or reduced rate for all categories of payments subject to withholding tax.
Based on the revised statutory definition, the beneficial owner means an entity that together fulfils the following conditions:
- receives a receivable for own benefit, he/she decides on his/her own on its use and bears the economic risk related to the loss of this amount due or its part,
- is not an intermediary, representative, trustee or other entity legally or actually obliged to transfer all or part of the receivables to another entity,
- conducts a real economic activity in the country of residence in the case of receivables obtained in connection with the conducted business activity.
The first two criteria mostly correspond to the definition, which entered into force on January 1, 2017 under the Corporate Income Tax Act and was a mapping of the definition from the Council Directive 2003/49/EC of June 3, 2003 on the common system taxation applicable to interest and royalties between related companies of different Member States.
Based on this definition, an important element for distinguishing between the actual and non-actual beneficial owner is receiving receivables “for own benefit”. If the circumstances of the transaction indicated that the recipient of receivables does not actually bear the economic risk associated with the payment and the beneficial owner bears the economic consequences of the success of the undertaking, such an entity should not be considered the beneficial recipient. The legislator supplemented this premise with the requirement to independently decide on its designation and to bear the economic risk associated with the loss of this receivable or its part.
Payer’s entitlements to apply for a WHT fund
The provisions stipulate that a taxpayer, i.e. foreign entity (Polish recipient of the dividend) may apply for the tax refund, on behalf of which the payer has collected the tax. According to art. 28b par. 2 point 2 of the CIT amendment, a taxpayer (…) or a payer may apply for tax refund if he has paid tax from his own funds and has borne the economic load of that tax. Similarly, if there are reasons to issue a securing opinion, then in the situation of a grossed up tax, this time the payer will be entitled to run this procedure. Thus, the amendment explicitly stipulates that the payer may also apply for a refund of WHT, if he/she has been economically burdened with the tax, and it may take place in a situation where the contract combining the payer and the taxpayer provides for the so-called grossing up, and therefore a guarantee that the recipient of the receivables will receive the whole amount of remuneration, without deducting and fees.
Application for a refund of the collected WHT
The amendment to the CIT Act introduces a new procedure under which taxpayers, as well as payers, when they bear the economic cost of tax, will be entitled to claim a refund of the collected tax. A change in the WHT legislator’s approach from the principle of relief at source to tax refund, results in a relatively large number of requests for reimbursement, and tax authorities will have real control over the payment of WHT.
According to new provisions, the taxpayer (the payer in the case of a grossing clause) must submit an application, together with documentation confirming its legitimacy, in an electronic form, to the head of the tax office competent for the taxpayer. In a situation where the taxpayer is a tax non-resident, then the application should be directed to the competent body in cases of taxation of foreign persons.
The Act contains a catalogue of sample documents that should be attached to the application and these are:
- documents confirming the tax residence;
- information on the method of settling receivables (confirmation of a bank transfer/documentation being the basis for non-cash settlement, e.g. deductions);
- an agreement;
- a declaration of the taxpayer, together with justification, indicating that in relations to the payment, the taxpayer is its beneficial owner and that he/she conducts actual economic activity in the country of residence.
Responsibility of payers and taxpayers
One of the derivatives of introducing changes in the methods of settling the withholding tax is a change in the sphere of criminal liability of payers and taxpayers of this tax. Under the legal status, until the end of 2018 the risk of fiscal penal liability related to WHT was limited only to the payer who, using the wrong tax rate, could lower the amount of collected tax due and as a consequence could apply art. 78 of the Penal Tax Code (PTC) to it.
The amendment introduces a significant change in this matter both in the subjective and objective scope. First, new regulations were introduced into the PTC that regulate the penal consequences related to declarations that taxpayers/payers would have to submit if they want to benefit from a lower withholding tax or applying for a refund of that tax. The newly implemented art. 56c of the PTC provides for four situations in which the taxpayer/payer may suffer the consequences of fiscal penalties in connection with providing false data to the tax authority, where the person who provides false information or conceals the truth in the following will be subject to fiscal penal liability:
- a declaration of due diligence when verifying the conditions for applying a reduced rate or exemption,
- a declaration on the verification and possession of documents proving the legitimacy of applying a reduced rate or exemption,
- a declaration attached to the application for WHT return, on the truthfulness of the circumstances provided in the application,
- a declaration for the issuance of the opinion on the payer’s use of exemption from the flat-rate income tax collection.
In conclusion, a much greater risk rests on the payer, as he/she submits all of the aforementioned statements, as well as the request for the issuance of the opinion. In this respect, the taxpayer’s risk is limited only to the declaration attached on the tax refund and the application for the issuance of the opinion.
Art. 56c of the PTC provides that the maximum penalties provided for making a false statement will amount to 720 daily rates (in 2019 it is 21.6 MPLN) and up to 5 years of imprisonment, so these are the upper limits resulting from the Fiscal Penal Code.
Ordinance
On January 1, 2019, the Regulation of the Minister of Finance of December 31, 2018 entered into force on the exclusion or limitation of the application of art. 26 par. 2e of the Income Tax of Legal Persons Act. According to its wording, the Ministry of Finance extended deadlines related to the fulfilment of certain obligations resulting from the new rules for collecting withholding tax until June 30, 2019 and effective exclusion of payments to certain entities from the scope of the new regulations.
