tax advisor, Tax Partner at RSM Poland
At the beginning of the year significant changes were introduced in the provisions of the Corporate Income Tax Act, i.a. in the scope of the obligation to charge a flat rate income tax at source in connection with payment of remuneration to foreign entities (under the Act of 5 September 2016 amending the Personal Income Tax Act and the Corporate Income Tax Act; Journal of Laws of 2016, item 1550). The regulations expand the catalogue of situations causing the obligation to withhold the tax at source and introduce entirely new formal conditions required to exempt certain payments to foreign associated entities from withholding tax. However, as has been the case with each new provision recently, doubts as to its application appear immediately.
Income generated on the territory of Poland – the current practice and introduced changes
As a rule, the existing regulations on CIT impose an obligation to withhold tax at source when the Polish taxpayer:
- pays remuneration to a foreign entity;
- the remuneration applies to income referred to in Article 21 section 1 and Article 22 section 1 of the CIT Act;
- the income was generated on the territory of Poland.
At the same time, up to now one of the most significant doubts has been related to the latter condition, i.e. what should be understood by income generated on the territory of Poland. The dispute mainly concerned the determination whether withholding tax is due when it relates to remuneration for services performed entirely outside the territory of Poland. In this regard, two major and, unfortunately, contradictory views have developed.
According to the first of them, to withhold tax at source it is necessary for the foreign entity to perform a service in Poland whereas the issue of remuneration being paid by the Polish taxpayer is of secondary importance. This view was expressed, i.a. by the Supreme Administrative Court in its ruling of 23 April 2010 (Ref. II FSK 2144/08).
The other position, definitely less restrictive, has dominated in the practice of tax authorities and in most recent case law of administrative courts. It is noted that to withhold tax at source it is only important that it is a Polish entity that pays for a performed service. An example of such a position is, among others, the ruling of the Supreme Administrative Court of 19 May 2016 (Ref. II FSK 1577/14).
Tax at source 2017
At the beginning of 2017 the above problem and doubts were clearly dispelled. According to the newly introduced Article 3 section 3 item 5 of the CIT Act, the income (revenue) generated on the territory of the Republic of Poland by taxpayers referred to in section 2 shall be in, in particular income (revenue) from receivables settled, including put at the disposal of, paid or deducted by natural persons, legal persons or entities without legal personality, having a place of residence, registered office or management board on the territory of the Republic of Poland, irrespective of the place of the contract conclusion and service delivery.
The newly introduced regulations have raised to the rank of a legal norm the restrictive view presented so far that the very fact of receiving remuneration from a Polish contractor means that a non-resident has received income (revenue) on the territory of Poland which can be taxed in our country.
Therefore, on the basis of the existing national regulations, it is not possible to exempt the revenues derived by foreign entities from their activity outside the territory of our country from being taxed in Poland. From the taxpayer's perspective, the only condition that may affect obligations in this respect is the application of agreements to avoid double taxation. And this, as we know, is burdened with numerous difficulties, resulting from, for example, the requirement to obtain a foreign entity certificate, or issue an IFT2R form. This will definitely hinder settlements with foreign entities and increase bureaucratic requirements of Polish enterprises.
Definition of "actual owner"
At the beginning of the year Article 4a item 29) was introduced into the CIT Act establishing the definition of the "actual owner". This term (in the nomenclature of agreements to avoid double taxation defined as "beneficial owner"), on the basis of the CIT Acts means an entity receiving given receivables for its own benefit, which is not a broker, representative, trustee or another entity obliged to transfer the whole or a part of the receivables to another entity.
Thus, the "actual owner" will be the entity which actually takes advantage of the privileges resulting from the ownership right (even if the title of ownership states someone else). On the other hand, the "actual owner" will not be an entity which is only obliged to further transfer the obtained receivables.
Verification of a given entity as meeting the statutory definition of the "actual owner" will be of key importance, i.a. when making payments referred to in Article 21 section 1 item 1 of the CIT Act (e.g. from interests, copyright or related rights, trademarks, for use or right to industrial equipment, for know-how) to associated entities.
Until now, such payments – in accordance with Article 21 section 4 of the CIT Act – benefited from the exemption from withholding tax, i.a. provided that: (i) the payer of the receivables was a CIT-paying company with its registered office in Poland, (ii) the recipient of the payment was a company whose entire income was taxable in another EU or EEA country, regardless of where the income was generated, (iii) there was a capital connection between those entities in the amount of at least 25% of shares.
Beneficial owner 2017
Since 1 January, one more condition necessary to apply the exemption from withholding tax has been added to the above. Namely, an entity receiving receivables from sources specified in Article 21 section 1 item 1 of the CIT Act must be the actual owner of the receivables (i.e. it must meet the definition of the "beneficial owner" provided for in the CIT Act).
Moreover, the amended CIT Act regulations impose additional formal conditions for the application of the specified exemption. From the new year on, application of the above exemption by the taxpayer is conditioned by possessing a written statement of a foreign entity that it is the actual owner of the paid receivables. This idea, however, can only be applauded – the Polish taxpayer has no obligation to verify the correctness or the compliance of the contractor's statement with the facts. The very fact of having such a document protects the taxpayer against charges of tax exemption in relation to a foreign entity which is not (perhaps) its actual owner.
Finally, it should be noted that, despite the introduction of the definition of the "beneficial owner" to the Polish law by the legislator, it seems that its application will be limited for the time being. The definition should only be related to situations in which the CIT Act directly uses such wording. In practice, if this concept is not used, e.g. in Article 21 section 1 item 1) and 4) of the CIT Act, i.e. it is not indicated that the obligation to withhold tax at source applies to payments made to actual owners, it may be used as an additional argument in favour of admissibility of withholding tax on remuneration paid to entities acting as intermediaries / agents. Such practice, although with a different justification, may be observed in relation to purchase of airline tickets acquired through travel agents that are Polish tax residents and do not directly provide services of passenger transport.