New, approach of tax authorities to advanced tax rulings on withholding tax preferences
As of January 2022, the so-called withholding tax Pay and Refund mechanism (PR Mechanism) entered into force in Poland (click here for more details).
In general, the PR Mechanism applies to passive outbound related-party payments (debt financing costs, royalties, dividends) irrespective of the double tax treaty / implemented EU Directives provisions. If the PR Mechanism is applicable, WHT is collected at a 19% or 20% standard rate if the value of payments exceeds approx. EUR 430 k per taxpayer per year (the tax is collected on the excess).
There are however two instruments to secure the WHT preferences on in-scope payments:
- A Board Member Statement - a declaration in the name of the tax remitter that all of the conditions for applying the WHT relief are fulfilled (these may also include beneficial ownership status of the tax payer). A false statement can trigger personal and financial liability (up to approx. EUR 6 mln) of the Board member.
- The second – quite a popular option so far – is to apply for a so-called advanced tax ruling on tax preferences. An application can be submitted by either a tax payer or tax remitter and can secure both the exemptions granted under EU Directives or WHT reliefs provided in double tax treaties. A ruling should be issued within six months, but practice shows that this can take longer (even up to one year).
Another option is application of the PR Mechanism and subsequently - applying for a refund to the Tax Office (which can take up to six months).
Although the PR Mechanism has been in place since 2022, in practice it was possible to apply for an advanced tax ruling in 2019. Since then, we have observed a rather positive approach of tax authorities towards granting such rulings. The situation changed however during 2022.
So far, we are aware of several applications where the Tax Authority in Lublin (which since 2022 is designated for withholding tax matters) rejected to issue an advanced tax ruling and the Administrative Court in Lublin upheld such decision (although we also still obtain positive rulings).
The facts differed in the respective cases, however there were certain issues that were pointed out by the tax authorities and the court:
- The tax payers were “pure” holding / financing companies
- There was a back-to-back financing in place / significant IC financing
- No liabilities / business relationships with third parties
- No fixed assets / no significant assets
- Low share capital
- No employees, not enough employees
- sharing of resources with other group entities
This developing approach may influence the strategy on what should be the best way to ultimately secure the WHT tax preferences. Depending on the facts of the case, amounts at stake, nature of payment (recurring vs one-off), one should compare an advance tax ruling with applying for overpayment. Due to the nature of the overpayment approach, the tax authorities should conduct a thorough evidentiary proceeding. In case of an advanced tax ruling, it is sufficient for the tax authorities to have “justified doubts” to refuse to give a ruling.
On the other hand, it seems that this negative approach does not concern the cases where a tax payer conducts an operational activity (i.e. its economic substance is more complex than needed in case of holding / financing companies). Taking into account the potential aspects of fiscal penal liability, it seems crucial that in case of material outbound payments one should carry out a more in-depth analysis to find the best time and cost wise approach.