How to secure withholding tax relief for payments made after 31 December 2021
With the pay and refund WHT regime finally launched, it is time to reconsider WHT strategy regarding payments from Poland.
In brief, as of 1st January 2022, passive payments (i.e. dividends, royalties, debt financing costs) made to foreign related parties could be subject to the new “Pay and Refund” mechanism. This new mechanism obliges the tax remitter to collect and pay to the tax office 19% (dividends) or 20% (royalties, debt financing costs) WHT on such payments if their value exceeds approx. EUR 430 k per taxpayer per year (the tax is collected on the excess). This can be avoided if the member of the Board of the Polish remitter represented (under penalties from the Penal Fiscal Code) that the recipient may benefit from a reduced rate or the remitter/ recipient received an advanced tax ruling from the Polish authorities. These options are discussed in more detail below as now it the time to decide which one to choose.
The “Pay and Refund” mechanism is irrespective of the provisions of the double tax treaties and EU Directive based exemptions.
Thus, what are the options to maintain the currently applied WHT tax relief?
- The first option concerns a so-called advanced tax ruling (opinion) on the tax preferences. The ruling is issued at the request of the taxpayer or the tax remitter, and as of 2022 can be applicable to secure both exemptions granted under EU Directives or WHT reliefs provided in double tax treaties reliefs. In practice, the positive opinion can be treated as an act of maintaining the due diligence of the tax remitter. Though it is not directly indicated in the law, in our view, there are arguments to say that the opinion could be issued for payments in and out of scope of the WHT “Pay and Refund” mechanism.As of 2019, we have applied for this instrument several times – each time with a positive outcome. Still, the strategy in place should be developed on a case-by-case analysis as a negative ruling could undermine the approach currently applied.It is also worth noting that in practice the process can be quite lengthy (the statutory deadline for issuing an opinion is six months but this is often extended), thus it is worth identifying the streams to be potentially covered, as soon as possible. This concerns in particular payments subject to “Pay and Refund”.
- A Board Member Statement is the second option. Under the amendments to the CIT Act, such statement could be signed accordingly with tax remitters’ representation (it cannot however be signed by a proxy). Such statement is valid in practice for up to two months.The core of the statement is a declaration in the name of the tax remitter that all of the conditions for applying the WHT relief are fulfilled. Worth to note, in case of certain payments a key condition to analyze will be the beneficial owner status of the payment recipient. Here, analysis will also have to cover the economic substance of the payment recipient in the scope of payments received.The Board Members’ Statement could also be a temporary instrument to secure the WHT relief while waiting for the opinion (Option 1) – especially where there is no option to withhold the payment.
We do not rule out that in practice analysis of the beneficial owner status will be treated as a part of tax remitters’ due diligence, hence analyzed in case of any outbound payments (this approach seems to be currently part of the tax authorities’ stance).
- Apply the “Pay and Refund” mechanism and subsequently – apply for a refund to the tax office. The refund should be granted within six months and substantial documentation for the refund could be requested by the tax administration.
Last but not least, tax remitters will be obliged to maintain so-called due diligence to apply any WHT tax relief, i.e. also for payments made to unrelated contractors or to relief at source payments that are subject to WHT in Poland, but are treated as business profits under the relevant double tax treaty (e.g. management costs). Due diligence is not limited by the amount of payments made, but it is assessed taking into account the tax remitter’s scale and business operations. Higher scrutiny is also expected for intragroup payments.
Clearly, WHT tax in Poland is entering a new chapter and securing a safe tax position in this respect, depending on the case, may require some more or less extensive preparations.