November saw the issue of two important general rulings on withholding tax. The first concerns certain conditions for dividend exemptions and the second, conditions for interest and royalties. In addition, some notable tax clarifications are expected to appear by the end of the year. We take a closer look at the Ministry’s general rulings and their possible implications.
Payment of dividends and interest and royalties – same regulations, different rulings
Pursuant to Article 21(3c) of the CIT Act, revenues from interest and royalties may be exempt from tax, provided that the company receiving them “does not enjoy an exemption from income tax on all its income, regardless of its source”.
Pursuant to Article 22(4) of the CIT Act, the payment of dividends is exempt from tax if the company receiving the dividend “does not enjoy an exemption from income tax on all its income, regardless of its source”.
Although the aforementioned conditions for the tax exemption of dividends and interest and royalties sound the same, the Ministry of Finance interprets each of them differently.
Dividend exemptions
In the general ruling issued on 15 November, according to the Ministry of Finance, a recipient of dividends from another EU or EEA Member State who enjoys an objective tax exemption on received dividends (on the basis of tax legislation implementing the provisions of the PS Directive into national legislation) is not in breach of the condition of “not enjoying the exemption from income tax on all its income, regardless of its source”.
According to the general ruling, a taxpayer may benefit from the CIT exemption (Article 22(4)(4)) even when:
- A dividend in the EU/EEA chain of companies is not taxed one time and is owned by a non-EU/EEA company
- The non-payment of tax is due to the individual situation of the company (e.g. a tax loss)
Although the document includes a reservation that the above may form grounds for the so-called small anti-abuse clause to be applied, it generally meets the expectations of taxpayers.
This is due to the crucial nature of the condition of not enjoying the exemption referring to the status of the entity and not to the individual payment or the individual situation of the taxpayer.
The general ruling is of major importance, because, so far, the tax authorities have taken a pro-fiscal position, unfavourable to taxpayers. There have also been discrepancies on this issue in court rulings.
Exemptions from the taxation of interest and royalties
In light of the above favourable general ruling, the other tax ruling, concerning the exemption of interest and royalties from withholding tax, comes as an unpleasant surprise.
Despite the identical wording of the legislation, on this occasion, the Ministry of Finance has chosen to interpret this differently, and to the disadvantage of taxpayers.
This is because, the Minister of Finance pointed out that the condition of not enjoying the exemption from income tax on all one’s income, regardless of its source, should mean that the recipient of such interest or royalties:
- Does not enjoy, in the country of its tax residence, an exemption from income tax either on all its income or on certain categories of income, or
- Special income tax rules for income from interest and/or royalties received by the entity.
A different general ruling concerning identical regulations in the same act, and even within the same chapter, undoubtedly raises objections and contradicts the provisions of the IR Directive referred to by the Minister of Finance.
As a result, in Poland, it will not be possible to apply the withholding tax exemption for interest paid to a foreign company that already benefits from such exemption in its country of origin.
Furthermore, in the opinion of the Minister of Finance, the status of the recipient in respect of payments received should be assessed not only on the basis of foreign tax legislation, but also
in the context of decisions issued to that taxpayer.
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