Poland’s new withholding tax (WHT) rules have significantly overhauled its existing system. Most of these changes took effect from 1 January 2019 onwards — except for the new WHT mechanism for payments exceeding Polish zloty (PLN) 2 million that was postponed from 1 June 2019 to 1 January 2020.
The key changes that have already impacted or will impact Luxembourg investment funds include:
1. New WHT mechanism
Poland currently applies a relief-at-source mechanism in respect of the appropriate WHT rate. But under the new WHT rules, income will be subject to WHT at general domestic tax rates even if a reduced rate applies — for example, due to domestic exception, applicable tax treaties or EU law provisions. The investment fund may then apply for a WHT refund in excess of the reduced tax rate through a special refund procedure (known as “withholding and refund”).
The new WHT mechanism only applies to payments made by the same WHT agent to the same recipient that exceeds PLN2 million in a tax year.
The new WHT mechanism is subject to two specific exceptions from applying standard WHT rates, namely by:
1. Obtaining a tax clearance opinion — which does not apply to portfolio investments of investment funds.
2. Obtaining a WHT statement issued by the WHT agent — which could be applied upon confirmation regarding foreign investment funds — that states:
The WHT agent’s statement is only valid until the end of the second month after the month in which it was made.
2. Standard of “due care”
Since 1 January 2019, WHT agents must comply with a newly-imposed standard of due care when applying any reduced WHT rate or exemptions, regardless of whether payments to the same investment fund exceed the PLN2 million threshold. They must verify that the investment fund is the beneficial owner of the income and, when necessary, collect supporting documents. Before the payment is made, WHT agents must check that all statements and documents received from the taxpayer (fund) are correct and accurate. Fulfillment of these requirements may be subject to a tax audit.
Taking the Ministry of Finance’s draft guidelines into account, the level of due care required depends, amongst other things, on the amounts in question. Stricter requirements will be levied on taxpayers/WHT agents who pay the largest amounts. In these cases, according to the guidelines, the fulfillment of the due care standard may be demonstrated by an independent auditor or tax advisor report.
If the WHT agent does not exercise due care, it may be restricted from applying any tax exemptions or double tax treaties. It may also be subject to additional tax liabilities or penalties and the responsible individuals subject to financial or penal liabilities.
The implementation of these new Polish rules will result in different WHT procedures being applied, depending on the amount paid to the same recipient:
In this case, the relief-at-source procedure would apply to amounts under the PLN2 million threshold while the new withholding and refund mechanism would apply to amounts over this threshold. As a result, it may be necessary to file two separate reclaim procedures.
Regarding Luxembourg investment funds, the exception that depends on the WHT agent’s statement will probably only be available to corporate funds (e.g. SICAVs). This is because contractual funds (e.g. FCPs) would not be able to obtain a tax residency certificate from the Luxembourg tax authorities. In this case, WHT reclaim proceedings would have to be initiated to recover Polish taxes.
We expect that, in many cases, WHT agents are likely to refuse to issue WHT statements due to the additional difficulties and burdens involved. If this happens, investment funds may seek a “confirmatory letter” from Polish certified tax advisors that confirms they satisfy the reduced WHT rate/exemption requirements. Based on the Ministry of Finance’s draft guidelines, the “confirmatory letter” should be seen as an additional argument (rationale) proving the entity meets the ‘due care’ requirement — which would consequently encourage the WHT agent to issue the WHT statement to apply the exemption at source.
The way forward:
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The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.