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The Polish Deal clarifies the withholding tax (WHT)

Reading time: 4 minutes.

From this article you will learn:

  • What changes to withholding tax rules are planned by the government;
  • Pay and refund: how to change regulations that have not yet entered into force;
  • What new criterion of due diligence will be introduced;
  • How the definition of a “beneficial owner” is going to change;
  • Who can sign the remitter’s statement.

Katarzyna SADOWSKA
Tax Supervisor at RSM Poland

Emilia KOWALCZYS
Senior Tax Assistant at RSM Poland
 

The last major amendment to withholding tax regulations was supposed to take effect on 1 January 2019. However, the Ministry of Finance has continued to push back the date of their final implementation by way of successive regulations. They have also announced that they are already working on some new amendments. Thus, Polish entrepreneurs and their foreign contractors still do not know for sure when the announced regulations will become effective nor what they will actually entail.

Polish withholding tax so far

As a reminder: the regulations impose a withholding tax (WHT) in situations where a Polish taxpayer makes a payment to a foreign entity earning income in Poland. Withholding tax applies, among others, to dividends, interests, royalties and payments for certain intangible services, such as legal and consultancy services or management services.

Since there was a need to introduce a comprehensive amendment of WHT regulations, relevant amendments were included in the Polish Deal package.

Changes in the pay and refund mechanism

From the perspective of taxpayers, an important change planned in the aforementioned draft is that the “pay and refund” mechanism will be narrowed down to types of payment that meet all the three conditions presented below:

  • passive payments, listed in Article 21 par. 1 item 1 of the CIT Act (which include, but are not limited to, interests, licence fees, fees for the use or the right to use industrial equipment) and Article 22 par. 1 of the CIT Act (dividends): this means that payments for intangible services shall be excluded;
  • receivables paid to related entities,
  • payments to non-residents.

Opinion on applying the exemption also for preferences under double taxation treaties

Another important change planned under the Polish Deal is that the scope of the opinion on exemption from the withholding tax shall be wider. Under the new regulations, it shall include preferences provided for in DTTs. At present, the opinion on applying the exemption is used only for exemptions provided for in the CIT Act. Extending the scope of application of this instrument to DTTs means relevant regulations will have to be added to the PIT Act and the name of the instrument itself will have to be changed to an opinion on applying a preference.

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New criterion of due diligence

Under the current wording of the regulations, the exercise of due diligence is required for the verification if either an exemption or a reduced rate of WHT can be applied. According to the regulations in place, two factors must be considered when assessing due diligence, i.e., the nature and scale of the remitter’s business activity.

The amendments introduce the third criterion, namely the relationship between the remitter and the taxpayer.

Beneficial owner: new definition

The Polish Deal and the related amendment provide a new definition of the beneficial owner. In the current wording of the regulations, the recipient of receivables cannot be an intermediary, representative, trustee or any other entity obliged, either in law or in fact, to transfer the receivables, either in their entirety or in part, to another entity. In the draft of the amendment, the words “either in law or in fact” have been removed.

Statement by the tax remitter

According to the discussed draft, the statement by the tax remitter is also going to be different. For the purpose of applying the “relief at the source”, it can only be submitted by the head of the entity; yet, if the entity is managed by a body consisting of more than one person, it can be submitted by one or more persons authorised to represent the entity (in accordance with the principles of representation). However, the option of having this statement submitted by the company’s proxy will continue to be denied.

Are we finally going to get the withholding tax explanations?

Once the amendment enters into force, the Ministry of Finance is planning to issue the final version of the tax explanations on withholding tax regulations, which Polish entrepreneurs and tax advisors have been waiting for so long. It really is high time to get it done: after all, the initial draft of the explanations was published more than two years ago, namely on 19 June 2019.

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