Poland experiences increase in withholding tax collection due to introduction of “pay and refund” regime

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EY Global

22 Dec 2022
Subject Tax Alert
Categories Corporate Tax
Jurisdictions Poland
  • A new, stricter approach of the Polish withholding tax (WHT) remitters to relief at source has been observed in recent months. The above is the impact of changes in the Polish tax legislation, the Polish tax authorities’ approach and, more generally, changes in the tax environment following in particular the Base Erosion and Profit Shifting (BEPS) project.

  • Foreign investors (both corporations and investment/pension funds) may face negative cash flow impact, additional administrative burdens or even the ultimate decrease of return on investment.

  • However, there are a number of measures to secure the payments against the 19-20% WHT, the most effective of which should be taken before the payment is made, such as a tax clearance opinion from the Polish tax authorities or an independent tax advisor opinion.

  • Moreover, if the payment has already been charged with WHT, there are ways to recover the tax paid in Poland, including a full refund.

Executive summary

In 2019, the WHT regime in Poland was significantly amended and a number of new expanded requirements were imposed both on Polish and foreign entities. Further changes to the WHT regime were delayed a couple of times and finally entered into force on 1 January 2022. Due to the changes, an increase in WHT collection has been significant in Poland. The new requirements concern obligatory WHT collection for payments exceeding PLN2m (approx. US$450k) in a calendar year to a related party in respect of interest, royalties and dividends (all added up).

However, non-related party payments also seem to be affected by the new regime indirectly. The tax authorities’ practice in the area related to the WHT in general, e.g., with respect to the beneficial ownership aspect, has developed significantly over the recent months and they tend to apply more scrutiny when assessing current cases. This also leads to a stricter approach of the Polish entities with respect to their WHT obligations as remitters. Therefore, all foreign entities operating and investing in Poland may be impacted, as their payments may start to be subject to 19-20% WHT.

Detailed discussion
Pay-and-refund mechanism

As of 1 January 2022, full WHT reform entered into force, which means that Polish tax remitters are required to collect WHT regardless of the existing basis for applying and exemption under double tax treaties or European Union (EU) Directives, if the total amount of receivables from interest, royalties and dividends to a single related entity exceeds in aggregate PLN2m in a given tax year. The WHT relief at source by a Polish remitter may only be applied upon either:

  • Filing a statement with the tax authorities by the Polish remitter, confirming that the Polish remitter’s management performed a specific due diligence procedure of the payment recipient’s position and in their view all requirements to apply the WHT relief have been met, including the beneficial owner status of the recipient.
  • Obtaining a WHT clearance opinion of the Polish Tax Authorities.
WHT remitter’s statement

The possibility to not withhold tax at source exists if the tax remitter provides the tax authorities with a statement confirming fulfillment of all conditions required to apply the WHT exemption or a treaty rate.

This statement must be submitted by the head of the unit (within the meaning of the Accounting Act) or in cases where there is a management board – a designated person. No proxy is allowed. Any false information provided in the statement may have significant personal penal implications and the Polish remitter’s additional tax liability assessed as a result.

Due diligence of the tax remitters

Starting 1 January 2019 (and continuing under the WHT regime applicable as of 1 January 2022), tax remitters are required to exercise due diligence in verifying the conditions for the application of a WHT reduced rate or WHT exemption. The due diligence level required depends on the scale and nature of the remitter's business activity. However, the legislator gave no detailed guidelines on the criteria applicable for the remitter’s due diligence. According to the Ministry of Finance’s draft guidance on WHT regime, an independent, reputable tax advisor opinion may be used as a proof that the due diligence has been properly carried out. In that case, the remitter may submit a statement to the tax office confirming that they have verified all the conditions to apply the exemption and apply relief at source.

Amended “beneficial owner” definition

Alongside other conditions to apply relief at source, such as a valid certificate of residency of the recipient or relevant holding period, one of the most important conditions to apply relief at source is the beneficial owner status of the payment recipient. The Corporate Income Tax (CIT) Act introduced a new definition of “beneficial owner,” which in particular, requires the recipient to carry on a genuine business activity (assessed in accordance with criteria provided in the CIT Act) in the country of its tax residence. In practice, verification of these requirements by a remitter may be problematic and it is usually difficult for the remitters to eliminate all doubts. This is because they have to verify the actual and legal situation of another entity and assess whether it meets the somewhat vague beneficial owner definition. This may be addressed, however, by obtaining the tax authorities’ clearance opinion or tax advisor’s opinion.

Clearance opinion

The clearance opinion may be applied for by the Polish tax remitters or by foreign payment recipients. If obtained, it is valid for three years, unless the fact pattern described in the opinion changes. The scope of the clearance opinion has been extended to cover application of reduced rates or exemptions provided in double tax treaties. Initially, from 1 January 2019, it was only possible to obtain a clearance opinion for the EU Directive exemptions. From the point of view of foreign WHT taxpayers it is worth reviewing payments of interest, dividends and royalties for which it has not been possible to obtain a clearance opinion until the beginning of 2022, i.e., taxpayers from outside the EU Member States or other countries belonging to the European Economic Area. The clearance opinion - as practice shows - is a legal institution that is beneficial and willingly used by taxpayers and remitters, which is now even more accessible.

Application for the refund of overpaid WHT

To recover overpaid WHT, taxpayers or remitters (in some cases) should apply a special new electronic procedure of WHT refund, i.e., the refund claim should contain all the obligatory attachments listed in the CIT Act (failure to do so will result in the tax refund being left without consideration) and the waiting period for the refund was increased from two months to six months. All refund claims are considered by a new tax office dedicated to the analysis and control of the correctness of WHT settlements. The centralization of competencies in this area is to increase the efficiency of detecting irregularities in the scope of WHT.

Even in the case of significant changes in tax environment and the change of the tax authorities’ overall approach in Poland, it is still possible in practice to succeed in tax proceedings, as many positive overpayment decisions in which taxpayers successfully receive significant refunds of WHT overpaid in Poland have been issued.

Available tax exemptions for foreign entities with Polish investments

The above-described WHT restrictions can be alleviated by foreign entities which may continue to benefit from some specific WHT exemptions.

For instance, such exemptions are available, among others, to:

  • Foreign entities on their income on Polish Treasury bonds
  • Investment funds and pension funds on all of their income from Poland earned from securities

Importantly, such exemptions also may apply to payments obtained within the past five years (statute of limitations in Poland). A WHT exemption for investment/pension funds is subject to certain specific conditions, including the legal nature of the entity, investment strategy, and ownership structure, among others.

For additional information with respect to this Alert, please contact the following:

EY Doradztwo Podatkowe Krupa sp.k., Warsaw
  • Andrzej Broda
  • Marcin Opilowski
  • Magdalena Zalech
  • Michal Koper
EY Doradztwo Podatkowe Krupa sp.k., Wroclaw
  • Sebastian Ickiewicz
Ernst & Young LLP (United States), Polish Tax Desk, New York
  • Sylwia Migdal
  • Marcin Moskal

For a full listing of contacts and email addresses, please click on the Tax News Update: Global Edition (GTNU) version of this Alert.