TAX ALERT: Parliament approves major withholding tax reform in Poland |seven “WHT” key questions to note
On 26 October 2018, the Polish Upper House of Parliament (Senat) passed without any amendments a draft bill introducing some fundamental changes to the Polish tax system. The draft bill was approved just three days after it was passed to the Senat by the Lower House of Parliament (Sejm).
One of the critical changes which will impact international tax groups is a far-reaching reform of the withholding tax (WHT) regime in Poland.
- As at today, payments for interest, royalties, dividends and certain services are subject in Poland to WHT exemptions or lower treaty-based rates.
- Under the new measures, the ground rule assumes collection of 19% or 20% of the payment by the Polish tax remitter, transferred to the tax office, while foreign recipients of the payment will be allowed to request a WHT refund.
A closer look at the WHT changes
Q1: What payments will be subject to the new rules?
- The new rules will cover certain payments which may be subject to WHT in Poland, namely interest, royalties (e.g. for trademarks, know-how, leasing fees for certain equipment / machinery), dividends and certain services, such as advisory, for entertainment, advertising and management
Q2: What will the WHT regime look like?
Qualified payments will be subject to two regimes depending on the value of the payment:
- For qualified payments less than PLN 2 m (approx. EUR 0.5 m) per year per recipient:
- The regime for application of the treaty-based rate / exemption will remain similar to the current one;
- The “verification” bar will however be raised for Polish tax remitters as new pre-conditions to determine the application of a lower WHT rate / exemption will apply, i.a. (i) undertaking of this determination with a “due diligence” (ii) analysis of the beneficial owner status under a stricter criteria
- For payments exceeding PLN 2 m per year per recipient
- A “pay and refund” mechanism will be introduced;
- The Polish tax remitter will be obliged to withhold 19% or 20% of the payment irrespective of the treaty provisions or EU Directive based exemptions unless:
- The Board member of the Polish tax remitter provides a statement that the recipient of the payment fulfils the condition for the lower WHT rate / exemption to apply
- The foreign recipient (in certain cases – Polish tax remitter) applies for an opinion (ruling) from the tax office
Q3: What are the key components of the tax remitter’s statement?
If the tax remitter wishes to apply either EU Directive based exemptions or the given double tax treaty, he needs to provide a statement in which he will certify that:
- He possesses the documentation required by the tax law for the lower WHT rate / exemption to apply
- After having verified, if the conditions for the lower WHT rate / WHT exemption being applied are fulfilled, he is not aware of any circumstances which could influence this benefit, such as in particular non-beneficial owner status, or lack of genuine business activity of the recipient of the payment.
The statement is hedged with personal sanctions for Board members stipulated under the Polish Fiscal Penal Code, and will be valid for approximately two to three months.
The exact details of the statement will be announced by the Ministry of Finance
Q4: Which payments can be secured with an opinion (ruling)?
- Through an opinion (a ruling), issued by the tax office upon request, the taxpayer can secure a WHT exemption for payments which are subject to the Parent Subsidiary Directive and Interest – Royalty Directive, i.e. dividends, interest, royalties;
- The applicant will need to demonstrate fulfilment of conditions for a WHT exemption (i.a., beneficial owner status).
- The tax authorities can refuse to issue the opinion if they suspect that the exemption could be questioned under anti-avoidance rules, or that the recipient does not conduct genuine business activity, or is not a beneficial owner of the payments.
- The tax authorities will have up to six months to issue the opinion
The precise details what should be included in the request for the opinion will be determined separately by the Minister Finance.
Q5: What is the refund procedure if the tax is collected?
- The tax authorities will have up to six months to refund WHT.
- Documentation needed for a refund is very extensive and will cover, i.a.: (i) certificate of tax residence; (ii) wire transfer confirmation regarding the payments subject to WHT or other documents indicating the method of settlement; (iii) related agreements; (iv) taxpayer’s statement regarding fulfilment of the conditions for the exemption; (v) statement that the taxpayer is the beneficial owner; (vi) statement that the taxpayer carries out genuine business activity (vii) the applicant’s justification on fulfilment of the conditions which are subject to the statements under (v) and (vi).
- False statements leading to undue WHT refund can trigger severe fiscal penal sanctions in Poland for taxpayers.
Q6: Is the introduction of the new rules certain?
To be effective as of 1 January 2019, the draft bill has to be signed by the President and announced in the Official Journal of Poland by 30 November 2018. Having observed the Ministry of Finance’s determination to introduce the changes, which is supported by the government, we do not expect any impediments.
Q7: What are the key takeaways?
- The new rules completely change the way payments are treated for WHT purposes;
- There is only a little over one month left to prepare for the changes before the first payment in 2019; so the key focus should be discussion with Polish entities how new rules will influence mutual settlements;
- If no actions are taken, it is likely that starting 1 January 2019 foreign recipients will receive 80% (81%) net payments.
How can CRIDO help?
- We combine our expert knowledge in the fields of domestic and international taxation, as well as litigation – in the past three years alone we have helped our foreign clients recover approx. EUR 90 m of WHT, and we have been 100% successful in this process;
- We can support and secure your decision making process, and explain in a business and practical manner what would be the legal and financial / cash flow impact of those changes on your business;
- We can navigate you through applying for a ruling from the tax office or WHT refund taking into account any potential liabilities connected with such procedures.