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Changes in Withholding Corporate Income Tax: pay first, and then apply for a possible refund

On 1 January 2019, an extensive amendment of the Corporate Income Tax Act (hereinafter referred to as the CIT Act) will enter into force, thus introducing very significant, not to say groundbreaking, rules and principles of collecting the withholding CIT. Reduced rates or exemptions from CIT shall continue to apply to the payment of dividends, interest, royalties and fees for certain services; however, there is a number of new formal requirements to be met.

Under the legislation in place until 31 December 2018, if the aforementioned payments are made to foreign entities, the domestic entity may independently, as a CIT remitter, find that the conditions for applying tax preferences provided in a double taxation treaty or the CIT Act have been met, and apply a reduced rate or exemption from the withholding CIT. Thus, a domestic entity is at present not obliged to collect and pay the withholding tax in the amount of 19% or 20% of revenue of the foreign entity.

However, under the legislation in force as of 1 January 2019, if the aforementioned payments are made to foreign entities, the domestic entity shall be obliged, as a CIT remitter, to collect and pay the withholding tax in the amount of 19% or 20% of revenue of the foreign entity. Only afterwards, either the domestic entity or the foreign entity may claim a refund of tax overpaid, over the amount due, under a double taxation treaty or the CIT Act. To this end, the applicant shall be under obligation to attach a number of documents to the application, attesting that the refund of overpaid tax is justified, including but not limited to a tax residence certificate of a foreign entity.

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However, as an exception the tax remitter shall be entitled to apply a reduced rate or exemption from the withholding tax without the obligation to first collect and pay the withholding tax in the amount of 19% or 20% of the revenue of a foreign entity:

  1. if either the domestic entity or the foreign entity files a declaration that the reduced rate or exemption from the withholding tax is justified;
  2. if the domestic entity obtains an opinion from a relevant tax authority that an exemption from the withholding tax can be applied to payments made to the foreign entity.

 

The declaration referred to in item 1 above may be filed with a relevant tax office only by the head of entity within the meaning of the Accounting Act. Should the tax authority find this declaration to be untrue, the tax authority may impose and additional tax liability on the tax remitter in the amount of 10% of the tax base of the payment made to the foreign entity. What is more, the head of the entity may also be held liable for a tax offence. If the furnished declaration is a misrepresentation, they will be subject to a fine of up to 720 daily rates (a maximum fine value in 2018 amounts to PLN 20,160,000) or imprisonment, or both.

The tax authority may refuse to issue the opinion referred to in item 2 above if they decide that there is a reasonable assumption that the general clause on tax avoidance or specific clauses may apply in this case, or that the foreign entity is not actually running any business activity in the country where it is seated.

The new rules and principles of collecting the withholding tax shall only apply to the surplus over the amount of PLN 2,000,000 paid to the same foreign entity in a fiscal year. Thus, the new rules and principles shall not apply if the amount of payments made to the same entity in a given year does not exceed the amount of PLN 2,000,000. However, the tax remitter shall be, in such a case, obliged to observe due diligence when verifying if it is possible to apply a reduced rate or exemption from the withholding tax. Yet, the new regulations fail to explain what should be understood by due diligence and what actions specifically allow to consider that the tax remitter has observed due diligence. They offer only a brief remark that due diligence shall involve the nature and scale of the tax remitter’s business activity. Therefore, observing due diligence when verifying the option of applying a reduced rate or exemption from the withholding tax requires the tax remitter to introduce and apply appropriate due diligence procedures for the verification of foreign business partners. If such procedures are not in place or they are not followed, the tax authority may decide that the tax remitter has not observed due diligence in this respect.

Even a cursory analysis of the new withholding tax regulations in the CIT Act leads to a conclusion that the new rules and principles of collecting this tax are going to be a genuine revolution. Bearing in mind the importance of the new legal regulations for business trading, there is no doubt that the amendment of the CIT Act on withholding tax is going to materially affect the situation of Polish entrepreneurs making payments to foreign recipients. Given the wide scope of changes being introduced and a number of new formal obligations, along with a high degree of complexity and ambiguity of the new legal regulations, we may expect that domestic entities (tax remitters) are going to experience a lot of difficulties when applying the new withholding tax provisions. Therefore, in order to avoid any potential disputes with tax authorities concerning the correctness of withholding tax settlements, it is a good idea to prepare for the introduction of new regulations of the CIT Act and implement appropriate changes in the process of settling the withholding tax. What we recommend, among others, is to implement due diligence procedures for the verification of foreign business partners.

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If you have any questions or need to discuss the topic, you are strongly encouraged to contact our expert, Piotr LISS:

e-mail: ekspert@rsmpoland.pl

tel. +48 61 8515 766

fax +48 61 8515 786