In this part of our series of posts concerning amendments to the regulations covering withholding tax (WHT) that came into force as of 2019, we will attempt to provide a new definition of “beneficial owner” of cross-border payments, as well as explain what the payment recipient should conduct “genuine business activity” means.

Effective as of 1 January 2019, in the situation where payments from qualified titles in favour of a single non-resident recipient exceed PLN 2 M annually, in principle, the tax remitter is obliged to firstly withhold tax at the statutory rate of 19% or 20%, and, subsequently, the tax remitter or taxpayer may apply for a WHT refund to the extent that the payments were subject to exemption from WHT or could benefit from a reduced rate of tax on the basis of a double taxation treaty (DTT). A failure to withhold tax or application of the reduced tax rate in the event of a payment above PLN 2 M / annually – will only be possible in the situation where the taxpayer makes the remitter’s statement of knowledge or obtains an advance (protective) tax ruling [which is discussed in more detail here: Advance tax ruling / opinion or the remitter’s statement - a difficult choice?

The question whether the taxpayer is the beneficial owner of the payment will be one of the elements that will be subject to detailed assessment by the fiscal authorities when they  assess the justificationof a tax refund, issuance of an advance (protective) tax ruling and/or inspection of whether the tax remitter complied with the new law. The statutory definition of beneficial owner as of the beginning of 2019 will not only be specified in more detail, as noted by the legislative authority in the statement of grounds to the amendment to the CIT Act, but also substantially broadened. Furthermore, the requirement will be a precondition to application of the exemption from tax or a reduced tax rate with respect to all categories of payments that are subject to WHT, such as interest, license, or dividends receivable, as well as payments for intangible services.

In accordance with the amended statutory definition, beneficial owner means an entity which jointly meets the following conditions:

  1. Has received the amount receivable for its own benefit; in particular has independently decided about its purpose and bears the economic risk related to a loss of the sum or a part thereof;
  2. Is not an intermediary, finder, representative, trustee, fiduciary, or another entity that is legally or actually obliged to remit the entire or a part of the sum to another entity; and
  3. Conducts genuine business activity in the country of its place of residence in respect to amounts receivable obtained in connection with the conducted business activity.

The first two conditions broadly correspond to the definition that came into force as part of the amendment to the CIT Act as of 1 January 2017, and reflected the definition included in 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.

On the basis ofthe definition, an element that is important to distinguish between beneficial and non-beneficial owner is receipt of the amount receivable for “one’s own benefit”. As part of the amendment to the CIT Act, the legislative authority supplemented this premise with the requirement that a beneficial owner must be able to independently decide about the purpose of the amount receivable and bear the economic risk related to a loss of such sum or a part thereof. However, if it were not for the amendment to the legislation, it had been assumed that receipt of the amount receivable for one’s own benefit was understood as the possibility to decide on one’s own discretion regarding the method of disposal of the received sum. On the other hand, in the event that the circumstances of the transaction showed that the recipient of the amount receivable does not actually bear the economic risk related to the payment because of their relations with the actual beneficial owner, and it is the beneficial owner who bears the economic consequences of the success [or failure] of the undertaking, the first of the abovementioned entities should not be recognized as a beneficial owner.

The legislative authority has also expressly excluded, from the definition of beneficial owner, certain categories of entities by directly depriving them of the status of beneficial owner, such as intermediary, finder, trustee, fiduciary, and/or other entities that are obliged, whether legally or actually, to remit the amount receivable, in whole or in part to another entity. The above-specified entities operate on behalf of a principal (representative), and/or in their favour (intermediary, trustee, fiduciary). However, the catalogue of such entities is open ended and other entities (for example, an agent or commission agent) may also be recognized as other entities who are obliged to remit the amount receivable.

In Poland, the definition of beneficial owner in the jurisprudence has mainly been focused on participation of the taxpayers in the international system of financing of the cash pooling type. The Supreme Administrative Court has argued that the status of a beneficial owner may be attributed to the economic owner of equity that has been made available rather than by the formal recipient of the interest [1]. In the event that the amount receivable is paid to a recipient who concurrently is not its owner, and such recipient’s role is only limited to management of cash, such entity may not be considered as a beneficial owner.

Under the previous regulations, doubts appeared, for example, upon assessment of the status of a beneficial owner in the event of consortium loans granted by foreign banks. A consortium agent derives no revenues from interest in the part in which it is remitted to other banks which are consortium members. Therefore, it may be assumed that each of the banks has the status of a beneficial owner within the scope of the part of the payment of interest that corresponds to the part of the equity made available as part of the credit line [2].

As far as payments other than interest are concerned, the question of beneficial owner status was analysed by the Attorney Advocate General [3] with regard to disbursement of dividend to non-resident shareholders. In the opinion of the Advocate General, the obligation to prove the status of a beneficial owner does not apply under 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, since the Directive does not introduce such a condition.

In the event of intangible services, the question of who is the economic owner with regard to the disbursed consideration for the services may need to be resolved in the event where payments are made to an international cost centre being a part (member) of a capital group that, at its level, consolidates the costs of subcontractors and charges the costs to the companies of the group on the basis of a contractually defined allocation key.

Additionally, as part of the amendment to the CIT Act, a reservation was added that the status of beneficial owner may only be enjoyed by the entity who engages in a “genuine business activity” within the meaning of the regulations of the controlled foreign company (CFC).

Pursuant to the regulations, when assessing whether a controlled foreign company engages into a genuine business activity, it will be necessary to verify, for example, whether the company has premises, qualified staff and equipment used in the business activity, whether the company’s structure is not departed from the economic reasons, the agreements entered into by the company are consistent with the economic realities, and whether the company performs its functions and makes business decisions by itself.

At the same time, we should remember that starting from 1 January 2019, it is no longer possible to confirm, as part of an application for an individual tax ruling, whether the condition of being the beneficial owner (including engaging into genuine economic activity) has been met. On the other hand, the individual tax rulings issued so far in this respect will expire by virtue of law within three (3) months from the date of promulgation of the new Act.

Public consultations regarding explanation of the new principles of collecting WHT, including in particular the issues regarding the amended statutory definition of beneficial owner are now closed. Considering that we still do not have abundant case law and/or a well-developed approach of the fiscal authorities with regard to the above, we should hope that explanations still to be issued will acknowledge the existing doubts at least to some extent.

[1] Judgment of the Supreme Administrative Court of 18 March 2016, court file case No. II FSK 82/14. [2] Individual tax ruling issued by the Director of the Fiscal Chamber in Warsaw of 6 February 2017, No. 1462, Ref. No. :-IPPB5.4510.1049.2016.1.JC. [3] Opinion of the Advocate General Juliane Kokott presented on 1 March 2018 in the “Beneficial Ownership Cases” (C-115/16, C-116/16, C-117/16, C-118/16, C-119/16 i C-299/16).