Withholding tax and double taxation avoidance rules

13 March 2023 | Knowledge, News, Tax Focus, The Right Focus

Are you operating in Poland and buying services from foreign companies? Have you transferred your business from Ukraine to Poland, but continue to use Ukrainian contractors? Have you received an interest-bearing loan from a foreign entity or are you paying dividends to a foreign shareholder?

If so, you may be required to deduct withholding tax.

What is WHT

Withholding tax (“WHT”) is applicable to taxable persons paying both PIT and CIT, and applies to monies paid to foreign entities.

The responsibility for the settlement of this tax lies with the entity paying the remuneration (as the remitter) and not with the receiver of the remuneration. As a result, the tax is withheld in the source country, i.e. that from where the payment is made, and not in the country of the payee.

However, not every payment to a foreign counterparty will give rise to an obligation to remit WHT.

Types of payment subject to WHT

The PIT and CIT Acts contain a list of payments that are subject to WHT.

These include payments in respect of:

  • Interest
  • Royalties
  • Dividends
  • So-called intangible services.

While the identification of interest or dividend payments made to foreign entities is usually relatively straightforward, situations involving royalty payments or intangible services are in practice much less obvious.

The list of intangible services subject to WHT includes consultancy, accounting, legal, advertising, management and auditing, data processing, HR and other similar services. It is precisely such a vague reference to ‘similar services that makes it difficult to precisely determine whether we have a WHT obligation in a particular case.

The same is true in relation to royalties, which include payments for:

  • Copyright or related rights
  • Rights to inventive designs
  • Trademarks
  • Know-how.

The above list is illustrative, so it is up to the purchaser (remitter), potentially obliged to withhold tax, to determine what the payment they are making relates to, within the meaning of the tax legislation.

Withholding tax – determining the rate

If it is determined that a particular payment is subject to WHT, this means that the entity making the payment (the remitter) must determine the appropriate tax rate at which it will deduct WHT.

Under Polish tax legislation, intangible services, interest and royalties are taxed at a rate of 20%, while dividends are taxed at a rate of 19%.

Double Taxation Treaties

Importantly, Polish regulations requiring CIT and PIT taxable persons to settle WHT should be applied taking into account any changes arising from double taxation treaties (“DTT”).

These are agreements concluded between individual states to eliminate double taxation of the same income. Notably, DTT provisions have priority in a situation of contradiction with Polish regulations, owing to the status of DTTs as ratified international agreements.

Thus, if the recipient of a payment has its registered office or place of residence in a state with which Poland has concluded a DTT, the provisions of the applicable DTT may modify the types of payments subject to WHT, enable the application of a reduced tax rate or allow the tax not to be withheld at all.

Application of DTT is not sufficient by itself

Individual DTTs do not provide for any additional conditions to be met in order to benefit from the preferential treatment provided for therein. Nevertheless, in such cases the established practice of the Polish tax authorities is to also apply the requirements stemming from Polish regulations.

Consequently, to use the opportunities provided for in the DTT (such as the application of a reduced WHT rate) in such a way as to satisfy the requirements of the Polish tax authorities, the entity making the payment (remitter) is required to:

  • Obtain a tax residency certificate from the counterparty (recipient of the payment)
  • Exercise due diligence in verifying the conditions for the application of the reduced WHT rate (or tax exemption, or the non-withholding of tax).

A residency certificate is a document showing the taxable person’s residence (for legal entities) or domicile (for individuals) and stating in which state the taxable person will pay tax.

By having the counterparty’s tax residency certificate, the remitter may be exempt from the obligation to withhold tax wherever the relevant DTT provides for such a possibility.

And when assessing the exercise of due diligence, the remitter should, in accordance with Polish law, take into account the nature and scale of its business and the personal or corporate relationship between the remitter and the recipient of the payment.

What is not subject to WHT

As a general rule, in accordance with DTTs, the types of income that are not subject to WHT include in particular business profits, i.e. income generated in the course of business activities which does not fall within other categories of services/provisions covered by the relevant DTT (e.g. they do not constitute remuneration for a licence).

This means that, when paying remuneration from a B2B contract, to a counterparty who is a trader, obtaining its tax residency certificate may bypass the requirement for WHT to be deducted altogether in certain situations.

Interpretative doubt

What, on the surface, could be regarded as corporate profits, is not always so, as shown by the numerous and often contradictory views of tax authorities and administrative courts. Certainly, we will not be dealing with business profits where the payment falls into other categories of income, for which the DTT provides for different taxation rules.

Consequently, the remitter should each time analyse the nature of a specific type of performance, and not only on the basis of Polish law and DTT, but also taking into account the most up-to-date practice of tax authorities and case law.

Examples of the application of DTT and withholding tax provisions

Remuneration paid to a counterparty for its software development services is normally treated by the Polish tax authorities as payments outside the scope of WHT or business profits under the respective DTT. However, the situation becomes significantly complicated if the agreement between the parties includes a transfer or granting of the right to use the author’s economic rights to the software. In that case, there is a risk of the payment being qualified as royalties, which would change its tax treatment.

The situation is similar for computer software licences, which are generally subject to WHT as royalties. An exception to this, however, are licences granted to the end user, which are not treated as royalties.

Tax withholding is not all: IFT-1/IFT-1R

WHT remitters are not only obliged to deduct the tax, but they also have notification obligations. Regardless of whether you withhold WHT or have exercised the option to not withhold it, you are still obliged, as a remitter, to prepare a IFT-1/IFT-1R notification (these are two separate notifications, on one form).

The IFT-1R notification is submitted by the end of February of the year following the tax year, to the head of the tax office competent for taxation of foreign persons, while the IFT-1 is prepared at the request of the counterparty and sent within 14 days to both the counterparty and the head of the tax office.

Depending on whether the tax withheld was PIT or CIT (according to the counterparty’s status), a PIT-8AR or CIT-10Z return, as the case may be, is required to be filed by the end of January of the year following the year in which the tax was withheld. The PIT-8AR return is filed with the Tax Office competent for the remitter, while the CIT-10Z is filed with the Tax Office competent for taxation of foreign persons.

Summary

Ambiguous tax regulations combined with the frequently contradictory and changing positions of tax authorities, make the correct determination of WHT-related obligations often a real challenge for Polish businesses.

Therefore, the verification of these obligations should always be preceded by a detailed review of the provisions of the particular commercial contract and an examination of its subject matter. It is also worth ensuring that appropriate WHT clauses are included in contracts, which will warn the counterparties of Polish companies that WHT may be deducted and that their remuneration will be paid after such deduction. This will certainly avoid misunderstandings when dealing with business partners in the event of a tax settlement in Poland.

From the WHT perspective, it is also important to determine the tax residency of the counterparty and obtain a residency certificate from the counterparty.

Questions? Contact us

Jakub Dittmer

Sławomir Wnuczek

 


See other Tax Focus issues
Polish Deal 3.0 – CIT and PIT | Tax Focus
Troublesome withholding tax exemption | Tax Focus

 

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