Significant complications with withholding tax. Beneficial owner - seemingly small change of colossal significance
Significant complications with withholding tax.
One of the key changes, coming into force at the beginning of 2019, is the new withholding tax regulations.
These provisions introduce a change in the method of withholding tax collection in relation to receivables paid to the same taxpayer by the same remitter, if the total value of disbursements in a given year exceeds PLN 2 million. Until the amount of PLN 2 million is exceeded, the existing rules will apply. On the other hand, if it is exceeded, the remitter will be obliged to collect withholding tax using the basic rates (20% for interest and royalties, 19% for dividends) specified in the CIT Act. As a consequence, it will not be possible to apply automatically the exemptions or reduced rates resulting from the CIT Act itself or from double tax treaties. In such situations it will be possible to apply for a tax refund. In any event, the tax payer will be required to declare in writing that he has met the conditions for exemption with respect to the obtained amounts and is the beneficial owner of them.
The tax refund procedure, once the tax has been collected, gives rise to considerable practical questions. The entity eligible to apply for a refund will be the taxpayer (or the remitter, but only if it incurred an economic burden of the tax as a result of e.g. the application of a contractual gross-up clause regarding the amount paid). As a rule, the refund period will be 6 months. However, I am afraid that this term will be an illusion in practice.
Pursuant to the added Article 28b(8) of the CIT Act, upon receipt of a refund application, the tax office, for the purpose of its verification, immediately undertakes actions consisting in particular in submitting a request for tax information to a competent authority of another state, inter alia, in order to confirm that the conditions for the tax refund are met. This provision seems to oblige tax offices to do so in every single case, and not only to offer the possibility in justified cases. As we know, in practice, this type of information sharing between tax authorities of different countries takes months, and often years. Of course, the legislator has protected itself by referring to Article 139(4) of the Tax Ordinance, according to which the 6-month deadline will not include the deadlines provided for in the tax law for certain actions, including also the need to submit a request to the competent authorities of other countries. It is interesting in this context how to understand Article 28b(10) of the amended CIT Act, according to which - if the tax refund application does not raise any doubts - the tax authority shall immediately refund the amount indicated in the application without issuing a decision. Unfortunately, probably the correct understanding is that the situation of no doubts may occur only after receiving information from the tax authorities of the country where the taxpayer is established, so even in the clearest situations one should not expect to receive the refund within 2 weeks.
The revised rules provide for two simplifications, which are intended to allow exemptions or preferential rates to be applied already at the time of payment, even if the aforesaid quota threshold is exceeded. The first is that the taxpayer submits to the tax authority an appropriate statement confirming that the conditions for benefiting from the preferential withholding tax rate have been met. It is important that statements addressed to tax authorities will be submitted under pain of penal and fiscal liability and sanctions in the form of an additional tax liability of 10% (of the amount of payment, not the amount of tax!). Such declarations should therefore be made with due diligence, which does not seem to be easy. It is worth noting that the declaration concerns such critical issues as the fact that the taxpayer - recipient of payments is the beneficial owner of the payments and conducts real economic activity in the country where it is established. It is therefore extremely difficult from the perspective of the remitter to determine this state of affairs. What attracts my particular attention is the wording of the new Article 26(7b) of the Act, which specifies the persons who are to make such a declaration (read: sign it). It is to be the manager of the entity within the meaning of the Accounting Act. According to this Act, the manager of the entity is a member of the management board or other managing body, and if the body is composed of more than one person - members of this body, excluding proxies appointed by the entity. In a word, this applies to all members of the Management Board, as is the case for signing the annual financial statements. Why am I surprised? This is probably the only provision in the entire tax law system that imposes such strict requirements as to the way in which a taxpayer expresses his declaration. For the effectiveness of all other activities, including submission of tax returns, including annual returns, it is sufficient to submit a statement in accordance with the principles of representation resulting from the Commercial Companies Code, and in many cases the powers are delegated even lower, for example - pursuant to Article 80a of the Tax Ordinance - to proxies from accounting departments. In my opinion, this is intended to introduce a kind of informal barrier to discourage remitters from using such declaration. It is known that in the case of multi-person boards there is a division of competences. While it is easy to imagine a statement signed by the President (theoretically responsible for all spheres of activity) and the CFO, one can expect at least internal discussions or, in extreme cases, perhaps even a lack of consensus on signing the statement by a member of the management board responsible for sales or, let's say, HR.
An alternative solution for filing such a declaration is to obtain an opinion from the tax authority on the application of withholding tax exemption by the remitter. However, the opinion can only concern those payments for which preferential tax treatment stems from EU directives. The cost of such an opinion, binding for 3 years, is to be PLN 2,000, and the tax office will have 6 months for issuing it (counting from the date of filing the application).
The changes also concern, among others, the extension of the "beneficial owner" clause. A foreign entity obtaining receivables from Poland will have to demonstrate that the specific conditions are met with respect to, among other things:
- the receipt of the amount of receivable for one's own benefit;
- bearing the economic risk of loss of the receivable;
- pursuing genuine business activity.
In determining whether the recipient of the payment is engaged in a genuine business activity, account shall be taken, in particular, of whether:
- the registration of a foreign company is linked to the existence of a company within the framework of which the company actually pursues activities representing a business activity, including in particular whether the company has premises, qualified personnel and equipment used in its business activity;
- the foreign company does not create a structure functioning in isolation from economic reasons;
- there is a commensurate relationship between the scope of activity conducted by the foreign company and the premises, personnel or equipment actually owned by that company;
- the agreements concluded are consistent with economic reality, have an economic rationale and are not manifestly contrary to the general economic interests of the company;
- the foreign controlled company performs its basic economic functions independently, using its own resources, including managers present on site.
This seemingly minor change is in fact a revolution that may require even some changes in existing ownership and holding structures.
The new withholding tax collection rules generally enter into force on 1 January 2019, but the Ministry of Finance has decided to give taxpayers some more time to adapt to the new solutions. On 31 December 2018 the Minister of Finance issued Regulation on exclusion or limitation of the application of Article 26(2e) of the Corporate Income Tax Act, which provides, among others, for the following exclusions from the application of the new provisions:
- for payments of receivables from dividends and other revenues (income) from participation in profit of legal persons – until 30 June 2019,
- for payments of certain receivables (e.g. for the use of or the right to use industrial equipment) to non-residents – indefinitely.
The above exclusions are additionally conditioned by the existence of a legal basis for the exchange of tax information with the country of establishment or management of such taxpayers.
What is extremely important, the possibility of applying deferred deadlines under the Regulation of 31 December 2018 depends on the satisfaction of the conditions for not collecting the tax. Therefore, rthe Regulation does not in any way imply that the deadline for verifying whether the recipient of the payment is the beneficial owner of the payment is postponed.
The forms of the application for an opinion on the eligibility for tax collection exemption, the remitter's declaration, as well as the tax refund application are also specified in the relevant regulations of the Minister of Finance. These documents can be submitted electronically only.
© 2022 KPMG Sp. z o.o., a Polish limited liability company and a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved.
For more detail about the structure of the KPMG global organization please visit Governance page.