Withholding tax regime in Poland – Sixth suspension of the “Pay and refund” mechanism and the tax administration’s new disturbing practice on WHT due diligence
In 2019, Poland introduced a rigorous WHT regime, including a “Pay and refund” mechanism. Due to its complexity, the mechanism was immediately suspended for six months. Since then, the suspension has been extended six times (each time for six months). The last suspension was signed on 28 June 2021 and is valid until 31 December 2021.
The WHT “Pay and refund” mechanism covers the payments made to the taxpayer for passive and certain intangible services on the excess of PLN 2m (approx. EUR 460k) in a given year. Polish WHT remitters [are exempt from] the above regime only if they have first obtained a special advance tax ruling, or their Board members have signed a statement whereby they pledge to have fulfilled all the conditions for WHT relief (on pain of fiscal penal liability), which also applies to domestic dividend payments.
The new law has also introduced (i) an unclear and thus disputable condition that applying WHT relief is dependent on tax remitters’ due diligence, as well as (ii) a new definition of Beneficial Owner (see below). This part of the WHT regime was not subject to suspension, and has been applicable as of 1 January 2019.
The New WHT regime (both “WHT pay and refund”, as well as remitters’ due diligence obligations and Beneficial Owner definition) was highly criticized from its first drafts, and numerous discussions and meetings with the Ministry of Finance (MoF) on this topic have taken place over the past two years. MoF officials have declared their desire to amend the law.
This intention was recently upheld by the MoF via an official response to one Member of Parliament’s questions. In this response, the Undersecretary of State in the MoF confirmed that within “upcoming weeks” the amendment of the law will be presented for public consultation and its scope will cover, i.a., “subjective and objective” elements.
The scope of amendments previously discussed, assumed exclusion from the WHT pay and refund regime of non-related party payments and payments made for intangible services. In such a case the WHT pay and refund regime would be limited to payments made to related parties from passive sources (i.a., dividends, interest, royalties). It is now planned that the new law will enter into force as of 1 January 2021.
However, the due diligence of the remitter while making outbound payments subject to WHT and the definition of beneficial owner (BO) of the payment will likely remain unchanged.
The current definition of BO also contains a “substance test”, i.e. the BO status could be granted if, i.a., the payment recipient conducts “genuine business activity”. Moreover, the tax remitter is obliged to exercise due diligence while applying the WHT relief at source (lower double tax treaty rate or WHT exemption), irrespective of the amount of payments.
In this respect it is worth noting the current disturbing practice of the tax administration - sending reminders to tax remitters on the necessity to maintain such due diligence.
In the letters being sent out by the Lubelski Tax Office (responsible for WHT settlements in Poland), the Tax Office reminds that, i.a.:
- Tax remitters should take into account several factors before WHT relief at source is granted. These factors include, i.a. analysis of the genuine business activity of the payment recipient in order to prevent granting the relief in case of artificial structures,
- Securing correct application of the WHT relief at source burdens the Polish tax remitter. The Tax Office warns that in case granting the relief is found to be incorrect, the tax remitter could not only face the obligation to pay tax along with penalty interest, but also that persons responsible for the company’s tax settlement could be subject to fiscal penal liability,
- Such liability can be avoided via voluntary disclosure and correction of tax settlements.
At the same time, the tax authorities have significantly lengthened the timing for granting the above-mentioned security opinion on application of the WHT exemption (available for EU Dividend based payments only). Instead of six months, taxpayers currently wait for over one year for it to be granted.
This means that despite planned amendments aimed at “softening” the WHT regime, WHT settlements will remain the object of intense scrutiny in Poland, and companies should put analysis of the WHT subject flows high on their tax agendas.
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