Withholding Tax in Poland – a stern gaze through the magnifying glass: what may 2021 bring?
2019 brought an unprecedent reform of the withholding tax regime in Poland. It imposed the obligation on Polish tax remitters to apply WHT relief after conducting due diligence analysis, it introduced a new definition of the beneficial owner (BO) of payment, also covering “economic substance”, but most importantly – it switched the WHT relief system to a WHT “pay and refund” mechanism.
As there has been many recent developments in terms of WHT related issues, below we summarize some of the key points.
- Suspension comes to an end – the application of the “WHT pay and refund” mechanism was suspended till 31 December 2020 (provisions concerning tax remitters’ due diligence and a new BO definition are already binding as of 1 January 2019). It is likely that the suspension will not be extended, especially given that the Ministry of Finance already proposed amendments to the WHT regime. The necessity of the changes was strongly supported by businesses (CRIDO was leading among those discussions).
What does it mean?
- As of 1 January 2021, the Polish tax remitter will be obliged to collect the standard WHT rate (19% or 20%, rarely 10%) on any passive (dividends, royalties, interest) and certain services’ payments exceeding PLN 2 m per recipient per year. Even with the probable amendments to the regime in place, passive payments to the related parties will rather remain in its scope.
- WHT relief for such payments will not be possible, unless board members of a Polish company making the payment sign a specific statement, or a specific advanced tax ruling is obtained. A false statement is associated with severe fiscal and penal sanctions.
- The obligation is irrespective if the recipient is a related or unrelated party, and irrespective of the double tax treaty provisions, or implemented EU Directives.
- WHT refund will be possible under a special procedure and tax authorities will have six months for such refund.
Climate - As we all know the planet is getting hotter. And this is no less different with respect to WHT. We are already aware of several litigations in the area of WHT. We have also noticed an increasing number of tax payers being selected to provide detail information on payments made abroad as a pre-control stage, and an increased number of cross-border exchange of information between Polish and foreign tax authorities with respect to BO status specifically. Moreover, it seems that the tax authorities will expect a “post-2019 level of due diligence” also for payments made before 2019.
New WHT law already tested through tax rulings – and it is quite clear that maintaining a safe level of due diligence will not be easy. The positions taken by the tax authorities and administrative courts sometimes differ (with the courts taking a more rational approach), but at the authorities’ level there is a tendency to expect a very broad scope of due diligence from Polish tax remitters. As a result, tax remitters may be rather willing to collect WHT than to, e.g. expose themselves to potential fiscal responsibility.
The Polish narrative (also expressed at the EU level) surrounding the payments made from Poland abroad is quite stern. The Polish Economic Institute (PEI), a think-tank close to government, recently published a report indicating that there is an increasing CIT loophole in Poland, which is mainly driven by outbound payments made through so-called “EU tax heavens” – Luxembourg, the Netherlands, Malta, Ireland, Belgium, Cyprus, and Switzerland. PEI indicated a need for coordinated action within EU countries to counteract tax avoidance which - in their view - is happening with the use of the abovementioned jurisdictions. It worth noting that similar expressions have been made by other EU countries as well.
It may be worth checking your WHT 2021 readiness, especially in the area of management of potential questions from tax authorities (which may be the first but - if properly managed - also the final stage of interaction), so that the new WHT regime does not turn into a “WHT pay and not refund” regime.
This may require internal verification of payments made during 2019 and 2020 (but also earlier), and a proper discussion on sensitive payments along with defense file preparations.
For more details on the planned WHT reform please check our comments >>here