Polish Ministry of Finance issues draft explanations illuminating Beneficial Owner concept

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EY Global

19 Oct 2023
Subject Tax Alert
Jurisdictions Poland
  • Poland's Ministry of Finance has published a long-awaited draft of new withholding tax (WHT) explanations (Draft Explanations).
  • The contents of the Draft Explanations will likely translate into the practice of tax authorities.
  • Multinational groups with presence in Poland should review their Polish-sourced payments and group structures in light of the Draft Explanations to make sure that Polish WHT relief will continue to apply and evaluate whether new WHT opportunities arise.


On 28 September 2023 the Ministry of Finance (MF) published a draft of new withholding tax (WHT) explanations (Draft Explanations). The Draft Explanations offer, among other things: (1) an interpretation of the Beneficial Owner (BO) definition; (2) an explanation of how the so-called "look-through approach" (LTA) should be applied; and (3) requirements for the effective taxation criterion. Although not legally binding, the contents of the Draft Explanations will most likely contribute to the practice of tax authorities. A consultation on the Draft Explanations began on 28 September 2023 and is open to all interested parties until 24 October 2023.


In 2019, the WHT regime in Poland was significantly amended and a number of newly expanded requirements were imposed on both 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. Since that date, Polish tax remitters have been required to collect WHT regardless of the applicable exemptions and reduced WHT rates under double tax treaties (DTT) or the European Union's (EU's) directives if the total amount of interest, royalties and dividends paid to a related recipient exceeds, in aggregate, 2 million Polish zloty (PLN 2m) in a given calendar year. Due to these changes, an increase in WHT collection has been significant in Poland.

(For details, see Global Tax Alert, Poland experiences increase in withholding tax collection due to introduction of "pay and refund" regime, dated 22 December 2022.)

To apply the preferential WHT treatment, certain conditions must be met by both the tax remitter and taxpayer, including demonstrating that the recipient of the payments constitutes their BO. Nevertheless, the BO definition is rather general and, so far, its interpretation has been disparate, with no uniform practice of authorities and courts.

The first draft of WHT explanations was published in June 2019, but was never finalized and only served as an auxiliary in the application of the new obligations.

More than four years later, on 28 September 2023, the MF published the Draft Explanations. Their scope includes:

  • Interpreting the BO definition
  • Applying the LTA
  • Understanding requirements for the effective taxation criterion
BO definition

Under the primary definition provided in the Corporate Income Tax Act (CIT Act) and Personal Income Tax Act (PIT Act), a BO is specified as an entity that meets all of the following requirements:

  • Receives the payment for its own benefit, as well as independently decides how to use the payment and bears the economic risk of losing it
  • Is not an intermediary, representative, fiduciary or other entity obliged to transfer all or part of the payment to another entity
  • Conducts a real economic activity in the country of its seat

Detailed considerations

Interpretation of the BO premise
(a) Obligatory verification of BO status

The Draft Explanations specify that, in applying the WHT preferences, the remitter's duty of care is the same, whether or not the applicable DTT makes direct reference to the BO. Similar obligations apply when the Polish remitter verifies the BO status of the payment recipient when applying (1) the WHT preferences under the Council Directive 2011/96/EU of 30 November 2011 on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States (PS Directive) or (2) Council Directive 2003/49/EC of 3 June 2003 on a common system of taxation applicable to interest and royalty payments made between associated companies of different Member States (IR Directive) (also in case of dividend payments).

(b) Exclusions from the BO status

Following the Draft Explanations, the premise of receiving the payment for "own benefit" and the absence of an obligation to transfer receivables to another entity, should be interpreted jointly. As a result of this approach, the Draft Explanations indicate that the BO definition excludes so-called "administrators of the income." Although, due to its nature, the definition of administrator of the income is not exhaustive, the Draft Explanations provide some examples of premises, which exclude the fulfillment of the BO status:

  • Intermediary entity applies a small margin on the payments transferred
  • Lack of effective income taxation on the payments received at the level of the intermediary
  • Sole business activity of the entity is to receive and further transfer payments
  • Payments are transferred to another entity at short intervals
  • Majority of the entity's revenues are derived from cross-border financial payments made by related parties
  • There is a multi-level non-transparent structure under which subsequent shareholders of the entity constitute further intermediaries
  • Payments are transferred to an entity that would not benefit from the preferential taxation provided by DTTs or IR/PS Directives
  • There is a temporal link between the establishment of an entity and a change in tax laws providing tax benefits in another country
  • WHT on payments to nonresidents does not apply in the recipient's jurisdiction or applies to a very limited extent
  • An entity has its residence in a country ranked high on the list of foreign direct investments in the territory of Poland, mainly due to the cross-border financial payments made rather than commercial or manufacturing activities and, at the same time, the country's gross domestic product and the scale of investments carried out from its territory are not commensurate
(c) Obligation to transfer the receivables

According to the Draft Explanations, an entity's legal obligation to further transfer the payment may arise from its actual receipt of the payment (so-called connected obligations) or be autonomic (i.e., even without receipt of the payment (so-called unconnected obligations)). Thus, a legal obligation may occur even if the intermediary does not possess sufficient funds to terminate or modify the obligation.

On the other hand, in principle, the obligation to transfer the received payment does not apply in the case of collective investment schemes, pension funds, or banks, which, while utilizing the received interest payments (via, e.g., repayment of the interest on deposits), do not have a top-down obligation to transfer the received funds to a specified entity.

(d) Actual business activity

The Draft Explanations indicate that the assessment of whether an entity conducts a real business activity in the country of its seat should not be limited solely to the entity's physical presence in its country of residence, following the elevated artificiality standard indicated by the Court of Justice of the EU (the Draft Explanations refer in this respect to Cadburry, Deister, Thin Cap).

Furthermore, the Draft Explanations expressly specify that any "wholly artificial arrangements" or "artificial arrangements in part" will not meet the actual business activity premise under the BO definition.

For entities conducting limited economic activity, the following circumstances may, among others, indicate a structure's potentially artificial character, even if the entity meets the minimal business substrate:

  • Inability to perform significant management functions in relation to its assets
  • Limited revenue from the conducted business activity
  • Failure to meet the effective management criterion, because only day-to-day administration is executed in the country of the entity's seat
  • Lacking sufficiently important economic or commercial considerations to justify the attribution of profits to the entity, thus not reflecting economic reality
  • Failure to perform the entity's core economic functions independently, as well as not using own resources
(e) WHT Specific Anti-Abuse Rules (SAAR) Clause

Under Draft Explanations, the remitter is obliged not only to verify the BO status of the payment recipient, but also to assess whether the payment made to it or to the payment recipient fulfills any of these negative premises set out in Art. 22c of the CIT Act (WHT SAAR Clause):

  • Application of exemption was contrary to the object and purpose of the tax law
  • Application of exemption was the main, or one of the main purposes of the transaction(s)
  • Other action(s), and the way of conduct was artificial
Application of LTA by tax authorities

The Draft Explanations refer to the EU's case law, stating that there is no direct obligation for tax authorities to apply the LTA as regards the BO concept under the IR/PS Directives. It is further specified that the possibility to apply the LTA is exclusively limited to situations in which the following premises are jointly met:

  1. Use of an intermediary between the remitter's country and the BO's country does not result in a reduction of WHT levied in the remitter's country
  2. Payments are identical in type to payments made from foreign intermediary to foreign BO
  3. Entire structure or the payment itself are not artificial within the meaning of Article 22c of the CIT Act
Effective-taxation criterion

One condition for applying the WHT exemption based on the CIT Act is the effective taxation as regards the received payment.

In particular, this criterion requires that no subjective (income-related) or objective (recipient related) tax exemptions are applied to the payments received in the hands of the recipient. Further, the criterion requires that recipient's income resulting from the payment is not decreased by hypothetical costs. Another requirement is that the tax recipients paid on the payment in the country of their residency are not refunded or credited for other purposes.

For application of PS/IR exemptions, the condition should be understood in the sense that the entity receiving the payment should be subject to effective taxation in the EU/European Economic Area. It is not entirely clear under the Draft Explanations how this condition should be understood with respect to dividend payments and their potential subjective exemption applied by the recipients. However, the condition might be interpreted to mean that such exemptions (as opposed to objective exemptions) should not affect BO status.


Consideration should be given to safeguarding the Polish WHT position of multinational groups. In particular, profit distribution structures should be safeguarded if the distribution is made at multiple levels of the group.

In particular, cross-border payments and group structures should be reviewed in the light of the Draft Explanations to ensure that Polish WHT relief still applies and to determine whether new opportunities may arise (e.g., due to application of the LTA). Further, the following actions may be considered:

1. Review the approach to payments under pay-and-refund mechanisms (and measures applied) and select the most suitable solution:

a. Applying relief at the source

b. Requesting a tax opinion from the Polish tax authorities

c. Paying WHT at the source and applying for a refund

2. Review the fulfilment of due-care obligation for past payments from the perspective of Polish tax remitters and consider updating the WHT procedures

3. For a taxpayer or remitter who already applied for tax opinion or refund — reassess chances for a positive outcome and consider of alternative options


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

Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor

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