During verifying withholding tax (WHT) settlements, different criteria are taken into account to determine whether the entity receiving the receivables is their beneficial owner. One of them is the substantial economic presence criterion, which in practice means assessing whether the economic substance of the receivables recipient corresponds to the scale and nature of its business activity. This criterion overlaps with the assessment of the “personal and asset substance”, although it has its own distinct features.

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How to understand "substantial economic presence"

The idea of economic presence is originally linked to the concept of a permanent establishment. It serves to determine whether an entity is active in a given country (conducts actual economic activity). The intention behind it is to update the idea of a permanent establishment to reflect the modern digital economy. The effect of this change in approach is to tax income in the country where it is actually generated, despite the absence of traditional (physical) assets. This understanding of the concept of economic presence is reflected in the solutions developed under BEPS, according to which the existence of a connection between an entity and the source country is determined by certain thresholds (revenue, costs, etc.).

In Polish practice of examining withholding tax settlements, the concept of "substantial economic presence" has appeared relatively recently. Importantly, it is referred to when verifying the application of exemptions/preferential rates and examining the beneficial owner criterion. In this context, the concept of "economic presence" is understood differently, i.e. it is associated with the existence of assets and personnel in the country of residence/business activity and its adequacy to the profile of economic activity.

The concept’s origins in OECD works

A significant part of the conceptual framework used in withholding tax practice has its origins in the work of the OECD. This is also the case with the concept of substantial economic presence, which emerged along predictions that the existing understanding of a permanent establishment was not keeping pace with the dematerialisation of business models and the digital revolution in the economy. This idea (understood in various ways) appeared in both doctrine’s and the OECD’s studies, and was finally established while developing BEPS.

Ultimately, the criterion of "economic presence" did not appear directly in the OECD model convention, but some member states expressed interest in modifying Article 5 of their double taxation agreements on their own. The OECD itself took into account the concept of economic presence in Pillar I of BEPS by developing thresholds for the presence of an entity in a given jurisdiction. This shows a shift away from the concept of a permanent establishment (physical presence) towards economic impact (economic presence).

Theory and practice

As was said before, the term "economic presence" refers to the concept of permanent establishment. The practical expression of this concept is a set of economic indicators developed under Pillar I to capture the real economic involvement of an entity in a given country.

In Polish judicial practice, this concept has taken on a different meaning. In administrative court rulings, the term "substantial economic presence" was first mentioned at the end of 2023 (PAC in Lublin judgement of 15th December 2023, case I SA/Lu 583/23), in the context of examining the existence of the “personal and asset substance” of receivables recipient. In rulings relating to this concept, the courts apply two complementary criteria:

  • real economic activity – having the necessary elements to conduct business (office premises, personnel, equipment, assets, etc.) and
  • substantial economic presence – the proportionality of held resources to the type and scale of business activity.

This approach is mainly evident in the examination of holding companies, which (due to their specific nature), should be analysed differently than manufacturing or service companies, as their personnel and asset requirements should be lower. The Supreme Administrative Court has not yet explicitly used this concept, which emphasises that it is only just taking root in practice. However, its presence at the Provincial Administrative Court level signals that it should be taken into account.

Importantly, this criterion appeared indirectly in the Ministry of Finance tax explanations of 3rd July 2025. Although there is no explicit mention of substantial economic presence, this criterion (as presented in case law) has been clearly emphasised by stating that the measure of economic substance should be differentiated so that the assessment is adequate to the characteristics of the reviewed entity.

Summary

The concept of "substantial economic presence" has been present in discussions on WHT for a long time. However, the practical understanding of this concept differs between OECD works and Polish case law. In administrative court rulings, substantial economic presence accompanies the analysis of beneficial owner status when examining the property and personal substrate. This criterion is understood as a verification of whether the taxpayer's resources are commensurate with their economic activity. This concept has only recently appeared in case law, but it may gain in importance.