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From this article you will learn:
- How does the pay-and-refund mechanism work?
- Why it is a good idea to apply for a preference opinion?
- What regulations do you need to refer to when accounting for your withholding tax?
Senior Tax Assistant at RSM Poland
Recently, the tax offices have been more into withholding tax, which results in a growing number of inspections of how this tax is being settled. Even though new withholding tax regulations have been in force for nearly a year now, they seem to remain quite problematic both for remitters and taxpayers. What appears to be most difficult?
What are the errors made by remitters?
In our experience, the most common withholding tax errors are the following:
- failure to verify if the payment is subject to WHT,
- failure to verify the status of payee as the beneficial owner,
- no sufficient documentation to apply the WHT exemption or reduced WHT rate,
- failure to verify the thresholds for the pay-and-refund mechanism.
What is more, taxpayers and remitters are often confused about the operating principles behind the pay-and-refund mechanism, including the options and timing of remitter’s statements, requests for preference opinion or WHT refund requests.
The legislation introducing the pay-and-refund mechanism entered into force in 2019; however, their application kept being deferred by the Ministry of Finance. Since 1 January 2022, this mechanism is applied if the total amount of paid receivables from passive sources (e.g. interests, royalties or dividends) subject to WHT has exceeded a total of PLN 2,000,000 in the tax year applicable to the remitter of such receivables, and the payments were made to the same taxpayer, namely a foreign related party.
In such a case, the remitter is under obligation to withhold tax on any amount above PLN 2,000,000 at the rate specified in the act, even if the remitter is entitled to apply a lower WHT rate under a double taxation treaty or a WHT exemption. Then, if the remitter has the necessary documents, they may request a refund of the overpaid tax.
In our experience, remitters tend to have problems calculating the PLN 2,000,000 threshold.
Example: Polish company A paid PLN 1,400,000 in dividend and PLN 700,000 in royalties to German company B during the year. The A Company is required to withhold tax on the amount in excess of PLN 2,000,000, because the aggregate value of dividends and royalties paid to one entity exceeded the amount of PLN 2,000,000.
It should be pointed out, however, that in practice it is often the case that it is difficult to classify the payment title correctly. This problem is largely about the concept of royalties, the broad scope of which generates a number of interpretation concerns, in particular whenever it needs to be juxtaposed with the provisions of a commercial contract, the objects of which is or can be the licence.
Submitting a statement is one the two ways the remitter can avoid the pay-and-refund mechanism. In the statement, the remitter declares that:
- they are in possession of documents required under the regulations for the preferential tax rate or the exemption or non-collection of tax,
- after verification, they have no knowledge justifying the presumption that there are circumstances excluding the option of applying a rate or exemption or non-collection of the tax.
As the law currently stands, such a statement must be made no later than the date when the tax payment is made for the month in which the aforementioned threshold is exceeded. If this deadline is not met, the remitter must withhold the tax and apply the pay-and-refund mechanism. However, the amendment to the CIT Act provides for an extension of the statement deadline. The deadline for the remitters shall now be the last day of the second month following the month in which the threshold of PLN 2,000,000 was exceeded. In line with the transitional provisions, this amendment shall apply to receivables made available or paid after 31 December 2022.
Previously, the remitter would make further payments without withholding the tax until the end of the second month following the month in which the statement was submitted. Then, by the 7th day of the month following the month in which the aforementioned period expired, the remitter was required to submit another (second) statement declaring that they had the documents and carried out a verification at the time of further payments of receivables.
Following the amendment of the CIT Act, the validity of first statements submitted by the remitter has been extended until the last day of their tax year, which will allow the pay-and-refund mechanism not to be applied until that day. If there are any further payments, the second statement shall be submitted by the last day of the month following the end of the tax year.
The provisions about the statement deadline that were in force before the amendment were definitely a major problem for remitters as they were imprecisely constructed and strictly interpreted. Yet, the amendment has not dispelled all doubts as there is no indication of the documents and information that should be verified by the remitter in order for them to apply a reduced rate or exemption, despite the fact that the remitter is required to perform this verification under the act.
Requesting a preference opinion is the second way you can avoid the pay-and-refund mechanism. Both the remitter and the taxpayer can apply for an opinion. Submitting a request for a preference opinion is subject to a fee of PLN 2,000.
The preference opinion is issued without undue delay, no later than within 6 months from the date the request is filed with the tax office. As a rule, the opinion is valid for 36 months from its issuance, unless there is a material change of the facts during that time that may affect meeting the preconditions for either an exemption or a reduced tax rate.
The preference opinion is considered to be a safer solution than the statement, because the remitter’s liability for a failure to withhold the tax and certification of untruth are limited.
How to prevent irregularities?
Any problems with the withholding tax are surely caused by vague regulations along with inconsistent and mostly stringent interpretation of these regulations by tax authorities. Furthermore, the fact that their entry into force had been postponed (from 2019 to 2022) and they were often amended means remitters are more likely to make errors when settling their WHT.
In order to minimise the risk of irregularities, it is a good idea to control the amounts of payments to foreign related parties if you want to avoid the obligatory pay-and-refund mechanism (meaning your funds are frozen) and make a timely statement or request a preference opinion.
What is more, being in control of and managing your payments subject to the withholding tax (as well as using methods to avoid the pay-and-refund mechanism) can have a positive impact on your organisation’s cash flow.
We therefore recommend solutions that will reduce the risk of withholding tax irregularities. These may include, among others, due diligence procedures or a withholding tax settlement manual. What is also crucial is to monitor your payments of receivables to each related party.
Should you have any questions or concerns, please feel free to contact us.