Advance tax ruling for preferential Polish withholding tax treatment – who will (not) benefit?

The year 2019 is remembered by most of us as the last one before the – still ongoing (as of March 2022) – pandemic. However, some experts will also recall 2019 as the year of substantial amendments in the Polish withholding tax system.

“New” WHT (as of 1 January 2019)

To quickly recap: as of 1 January 2019, the Polish withholding tax (“WHT”) collection regulations were extended by the obligation to verify the conditions for applying any WHT preferences with well-documented due care.

Also, restrictive provisions encompassing a mandatory pay-and-refund mechanism on payments’ surplus over 2 000 000 PLN (approx. EUR 425 000 per year and recipient) at a default statutory rate (19% or 20%) were introduced, regardless of any exemptions and preferences indicated in special provisions (e.g. EU directives) or respective double taxation treaties (“DTT”).

“New” WHT 2.0 (as of 1 January 2022)

For three years, the pay-and-refund mechanism has had limited practical importance, since its entry into force was being subsequently deferred. Three years and six deferrals later, this rule finally came into force, albeit in a slightly changed format. The mandatory WHT collection at a statutory rate as of 1 January 2022 concerns payments, which jointly meet the following criteria:

• interest, royalty or dividend payments (and other similar titles indicated in art. 21 sec. 1 point 1 and art. 22 sec. 1 of the Polish CIT Act);
• are made to non-Polish related parties;
• the value of all of the above kinds of payments jointly exceeds, in the tax remitter’s fiscal year, 2 000 000 PLN (approx. EUR 425 000) towards the same taxpayer.

Tax refund

Of course, the taxpayer/tax remitter retains the right to apply to the tax office for a refund of overpaid tax.

The provisions define a separate proceeding in terms of the refund of overpaid WHT as a result of this pay-and-refund mechanism. Within this procedure, it must be proven that all of the conditions for applying the WHT preference ex-post have been met.

This, however, entails a strain on cashflows (until the tax is refunded), besides the long and burdensome procedure (the tax office can extend the statutory 6-month refund deadline, demand a multitude of various documents and explanations as well as verify the claim within an official tax audit or tax proceedings).

What about other solutions?

Aside from the refund procedure, there are two ways which upfront give the right to benefit from the WHT preferences (exemption, non-collection or collection at a lower rate), despite technically being obliged to collect WHT. These are:

• filing a statement by a designated board member of the Polish WHT remitter on fulfilling all the conditions for applying the WHT preference

The obvious merit of such a solution is the agility as it can be applied easily and quickly. The statement does, however, entail inter alia a penal and fiscal penal liability risk for the board members in case it is deemed incorrect (additionally to the additional tax liability and penalty interest for the tax remitter). Therefore, such a statement may not always be an optimal solution, in particular in light of the numerous doubts surrounding the WHT preferences (e.g. the identification of the payments’ beneficial owner). Moreover, the statement needs to be filed periodically, which may be burdensome from an administrative standpoint. Both an alternative and supplement to the management board statement could be a…

• tax ruling on applying WHT preferences

Bearing in mind the above, another reasonable solution could be an advance tax ruling on applying WHT preferences, whose scope was extended as of 1 January 2022:

• the application for the tax ruling can be filed by either the non-Polish taxpayer receiving the payments or the Polish tax remitter;
• the tax ruling can cover the application of a WHT exemption based on the EU directives, but also not collecting or collecting WHT at a lower rate based on the relevant DTT.

As a rule, the tax ruling is binding for 36 months from the date of its issue. The deadline for issuing the tax ruling is 6 months from the day of filing the application (though from our experience covering several dozen obtained positive tax rulings, the tax authority usually uses the statutory deadline to the fullest extent or issues the tax ruling shortly before it lapses).

Considering the:

• relatively long waiting period,
• substantial cost (stamp duty per one application is PLN 2 000) and
• complexity of the procedure,

it is usually a helpful to have the support of an experienced advisor in order to maximize the chances of receiving a positive tax ruling as quickly as possible.