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Doubts over the classification of the payments made to non-residents for withholding tax (‘WHT’) purposes

Doubts of the payments made to non-residents (WHT)

In 2019 WHT has been one of the most frequently discussed topics among the entrepreneurs making payments to the foreign contractors.


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The amended definition of beneficial owner, introduction of the obligation to exercise due care when verifying conditions for the application of the preferential WHT rates or, finally, the envisaged entry of new mechanism for WHT collection as of 1 January 2020 mean that the entities making such payments are required to review their methodologies in respect of WHT. This is even more important given the sanctions for incorrect WHT settlements, including penalty interest, the additional tax obligation or penalties imposed under the Criminal Tax Code. The first step required to settle WHT correctly is to identify all payments to be subject to WHT under Polish domestic law. The question and doubts around proper classification of a given payment for WHT purposes is not new, what may be demonstrated by the number of individual tax rulings issued by the Ministry of Finance.

Insurance as a service of similar nature to a guarantee

It is a common business practice to acquire insurance policies either directly from a foreign insurance company or an agent (intermediary) or from a Group entity which concludes an insurance policy with the insurer at the central level on behalf of and for related companies and then recharges its costs.

Almost until the end of 2016, tax authorities did not recognize similarities between an insurance and a guarantee to such an extent which would lead to a conclusion that insurance might be treated as services of similar nature and thus subject to WHT (cf. the tax ruling of Tax Chamber in Katowice, dated on 5 October 2015, no. IBPB-1-3/4510- 385/15/AW; the tax ruling of Tax Chamber in Poznań dated on 8 March 2013, no. ILPB4/423-433/12-2/MC).

However, as it appears from the currently forming line of interpretation, insurance is regarded as being of similar nature to a guarantee, thus subject to WHT under the CIT Act (e.g. the tax ruling of NTI Director dated on 15 June 2018, no. 0114-KDIP2-1.4010.164.2018.1.PW, the judgement of Administrative Court in Rzeszow dated on 11 April 2017, ref. no. I SA/Rz 119/17 (final, no written justification available). According to that approach, insurance service in terms of purpose and function is the same as a guarantee service, as the insurer somehow guarantees that the case defined in the insurance contract it will perform a certain service (the payment of compensation will occur).

In addition to many doubts as to whether insurance actually meets the criteria for being considered as similar to guarantee the question also arises as to whether the intention of the rational legislator was to impose withholding tax on insurance services. In the case of article 15e(1) of the CIT Act, which applies from 1 January 2018 and concerns the limitation of deductibility of expenses related to some services, insurance is expressly listed in this Article. It is worth mentioning that the wording of article 15e(1)(1) is analogous to the wording of article 21(1)(2a) of the CIT Act and the catalogue of listed services in both articles is very similar.

Hosting services

As part of their businesses, some taxpayers acquire hosting services in order to have specific volume of a computer server's storage capacity at their disposal, to store their databases, software etc.

In order for payments for such a service being properly classified for withholding tax purposes, a comprehensive assessment of the nature and scope of service is necessary. If the service involves only data storage, without any act of transforming of the input data to obtain the output data in a different, specified format, then - according to the tax authorities - such a service should not be considered as data processing.

However, there are numerous doubts concerning the classification of a server as an industrial equipment. For example, the tax authorities seem to interpret the term of an industrial equipment very broadly as they understand the word industrial as indicating that the equipment is to be used commercially in production, trading or scientific activities, i.e. regardless of its use in industrial production (the tax ruling of NTI Director from 8 April 2019, no.: 0114-KDIP2-1.4010.23.2019.1.PW, the tax ruling of the NTI Director from 14 February 2019, no.: 0114-KDIP2- 1.4010.534.2018.1.AJ). However, a different understanding is presented by some administrative courts in their judgments, where the term industrial equipment is understood as equipment which is used for mass production purposes e.g. the judgment of Administrative Court from 6 February 2019, I SA/Go 537/18 (not final), the judgement of the Supreme Administrative Court from 10 April 2019, II FSK 1120/17 (written justification is not available yet). Thus, a conclusion may be drawn that the definition of industrial equipment will not be fulfilled in the case of a server rental if it is not associated with a strictly industrial device involved in the production process. 

Fees for the rental of storage containers, shipping containers and pallets

As part of their international business transactions, Polish taxpayers often make payments to foreign recipients for rental of shipping containers, pallets and other facilities for storage or transportation of products.

Unfortunately, also here the differences in the understanding of the term industrial equipment do not help to correctly classify them for WHT purposes. For example, a shipping container that is used as storage space for tools or by workers to protect themselves from rain will not be considered as industrial equipment (e.g. the Supreme Administrative Court's judgment dated on 5 June 2018, II FSK 1477/16). However, containers designed to be used for transportation and storage purposes meet the definition of industrial equipment (e.g. the Supreme Administrative Court's judgment dated on 24 August 2018, II FSK 2151/16). In turn, some tax authorities define an industrial equipment by focusing more on the set of mechanism that constitutes such a device and consider that if a rented container used to provide appropriate storage and/or transport does not contain any mechanical and/ or electrical components, e.g. such as a gearbox, then the container will not be classified as industrial equipment (e.g. the tax ruling of NTI Director dated on 16 June 2019, no. 0111-KDIB1- 1.4010.200.2019.2.NL).


As the above examples show, the first step in the process leading to correct withholding tax settlements may be very difficult on the practical side. The situation is even more difficult due to changing or inconsistent interpretations of specific terms by the tax authorities. To make sure that the withholding tax settlements are correct, taxpayers have no choice but to identify all the uncertain areas and prepare relevant arguments to support their approach (taking into account previous individual tax rulings and court judgments) or to apply for an individual tax ruling, even if the dispute with tax authorities over the classification of payments may need to be resolved by an administrative court.

Renata Pilarska, Senior Manager in the International Tax Team at KPMG in Poland

Anna Dziedzic, Supervisor in the International Tax Team at KPMG in Poland

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